Aggie Investments, L.L.C. owns and operates a tea and spice gift shop in McKinney, Texas. Like many companies, Aggie Investments suffered a loss of revenue during the covid-19 pandemic when Texas civilian authorities imposed restrictions on non-essential companies. Aggie Investments then sought coverage from its commercial property insurance which covers losses "caused by direct physical loss of or damage to property in the premises described."
I Aggie Investments, L.L.C. v. Continental Casualty Company No. 21-40382, United States Court of Appeals, Fifth Circuit (January 26, 2022), the Fifth Circuit Court of Appeal joined almost every court that has considered the matter and demanded evidence of direct physical loss in order to coverage shall apply.
Faced with a claim for lost business as a result of an order to suspend covid-19 from the city, the insurer, Continental Casualty Co., denied the claim and in response, Aggie Investments sued. The district court dismissed Aggie Investments' claim because Aggie Investments did not allege a direct physical loss of property – which the district court defined as a material property change.
Continental sold insurance for commercial properties to Aggie. Investments. The insurance provides coverage for loss of business income in the BI / EE designation Business Income and Extra Expense. That provision states:
We will pay for the actual loss of business income you suffer due to the necessary "suspension" of your "activities" during the "recovery period." The suspension must be caused by direct physical loss of or damage to property in the described premises. The loss or damage must be caused by or stem from a covered cause of loss.
THE ALLEGED LOSS
In March 2020, the covid-19 pandemic prompted authorities to issue orders to address the ongoing threat from the virus. The city of McKinney issued an on-site protection order. Aggie Investments followed the orders, closed its store and suffered a reduction in sales and loss of business income.
Aggie Investments filed a claim for coverage under the BI / EE provision.
In a case where the plaintiff apply for insurance coverage, if the insurance excludes recovery under the terms themselves, the termination is correct.
In Terry Black & # 39 ;s Barbecue, LLC v. State Automobile Mutual Insurance Co. Fifth Circuit already considered that according to Texas law, a "direct physical loss of property" in a similar commercial property policy entails a significant change or deprivation of property. As in that case, Aggie Investments has not claimed a covered loss as they are only complaining about lost revenue due to the closure of their store. During the entire pandemic, Aggie Investments also had ownership of and access to its property even if it could not open its store for normal business.
Since Aggie Investments had to close its business completely, it tries to separate its case from Terry Black & # 39 ;s where restaurants were only prevented from providing dinner services. However, this distinction makes no difference.
Whether a company is called upon to cease one type of service or all of its services, that order is not a material change or deprivation of property . Nothing significant happened to Aggie Investment's property.
Before an interpretation of an insurance contract is adopted before another, the court must first determine that there is more than a reasonable interpretation of the insurance language, ie. that it is ambiguous. [ See RSUI Indemnity Co. v. The Lynd Co. 466 SW3d 113, 118 (Tex. 2015)] If both constructions provide reasonable interpretations of the language of the policy, the court must conclude that the policy is ambiguous. The language is only ambiguous if, after application of the design rules, it remains subject to two or more reasonable interpretations.
For several reasons, physical property loss cannot reasonably be interpreted as loss of use. At first, that interpretation would make the adjective "physical" meaningless. A loss of use, as Aggie Investments says, would not necessarily be a physical (or tangible) loss. Since Aggie Investment's interpretation would cover a loss that does not require conversion, repair or replacement, its interpretation makes no sense to the provision's 'recovery period'. As there was no ambiguity in the language of the policy, the Fifth Circuit concluded that the "direct physical loss of property" of the BI / EE provision unequivocally requires a significant change or deprivation of property.
A "direct physical loss of property" as stated in the BI / EE provision requires a significant change or deprivation of property. Aggie Investments, which has failed to claim such a loss, is thus not covered by the insurance. Therefore, the Fifth Circuit concluded that the district court upheld the Continental's request for a denial.
Companies continue to seek coverage for business interruptions as a result of state or local government orders requiring the closure of their businesses. The policies clearly and unequivocally required actual, direct, physical losses of the property that caused the closure and loss of business. Without damage, there is no coverage. The lawsuits seem to be brought against the wrong entity – the insurance does not cover – but the order took "property" for the plaintiff who has the right to recover under the Fifth Amendment of the US Constitution for a takeover of the property. No one, as far as I know, has tried to sue the city or state for such taking and continue to pursue insurance companies.
© 2022 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his internship to the position of insurance consultant specializing in insurance coverage, handling insurance claims, bad faith and insurance fraud almost equally for insurance policyholder.
He practiced law in California for more than 44 years as an attorney for insurance coverage and claims management and more than 54 years in the insurance industry.
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