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No Business Interruption Coverage for COVID-19 Losses, Judge Rules

A federal judge in San Antonio has ruled that several small businesses seeking business interruption coverage for losses sustained due to the coronavirus economic shutdown do not have valid claims.

The claims were from barbershops which, because they were classified as non-essential, had to close their doors in March 2020 when state and local authorities ordered COVID-19-related shutdowns. Their insurance carrier, State Farm, denied them business interruption insurance benefits for losses sustained during the shutdown.

State Farm’s stated reasons for denial were that the insurance policies:

  1. Did not provide coverage for business interruption unless there was direct physical damage to the business
  2. Contained a virus exclusion that barred coverage of any losses caused by the pandemic

For their part, the barbershops maintained that government-mandated closures, not the virus itself, caused direct physical damage and therefore the virus exclusion clause did not apply.

Ruling in a declaratory judgment action, Senior U.S. District Judge David Ezra in San Antonio found that both of State Farm’s grounds for denial were correct. “State Farm cannot be held liable to pay business interruption insurance on these claims as there was no direct physical loss, and even if there were direct physical loss, the Virus Exclusion applies to bar Plaintiffs’ claims,” he wrote. While the virus may not have been present in the barbershops, “it was the presence of COVID-19 in Bexar County” that caused the government-ordered business closures, and therefore the virus exclusion applies.

Hundreds of similar lawsuits are in progress across the country, with hundreds if not thousands more on the way. The results have been mixed so far. Judges in Michigan and Washington, D.C., for example, have dismissed cases against insurers, ruling that the COVID-19 shutdowns weren’t covered by business interruption policies. On the other hand, a Missouri judge decided on August 12 that a group of hair salons and restaurants could proceed with their lawsuit, although he did not rule on the merits of the case itself.

The takeaway appears to be that small businesses could be facing an uphill battle when making claims for business interruption stemming from government-required COVID-19 shutdowns. Business owners should speak with highly qualified business law practitioners before filing a claim to make sure the claim is as strong as possible from the start.

If you have insurance questions related to the impact of COVID-19 on your Texas business, the lawyers of Hayes, Berry, White & Vanzant, LLP are here to help. Whether you are thinking about making a business interruption claim or have already done so, you can discuss the situation with us and learn about your options. Please call 940-230-2386 or contact us online. For your convenience, we have offices in Denton, Flower Mound, Gainesville and Celina.

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