On Dec. 9, 2020, the U.S. District Court for the Eastern District of
Virginia issued a favorable ruling for policyholders related to COVID-19
business interruption claims. The case is Elegant Massage, LLC v. State Farm Mutual Auto. Ins. Co., __ F. Supp. 3d __, 2020 WL 7249624 (E.D. Va. Dec. 9, 2020).
In Elegant Massage, the court denied State Farm’s motion to
dismiss and allowed the insured’s claim to proceed to discovery. In making
its ruling, the court issued two notable holdings that provide a basis for
COVID-19 insurance recovery claims to proceed to discovery under Virginia
First, the court held that Virginia law required the finding that “direct
physical loss” is ambiguous and can be interpreted to cover a variety of
losses, including no requirement for tangible structural damage.
Second, the court held that the virus exclusion contained in the policy at
issue was inapplicable because an executive order required the shutdown
resulting in the plaintiff’s recoverable losses.
Virginia Law: Physical Loss or Damage
As the court articulated, the “first key issue [was] what constitutes a
‘direct physical loss’ in context of the Policy and Plaintiff’s
With no definition in the policy, the court turned to whether it was
In Virginia, as the plaintiff argued, “direct physical loss ha[d] not been
consistently interpreted to require structural or tangible damage to the
property.” In reviewing the case law, the court agreed, finding that it had
“been subject to a spectrum of interpretations in Virginia on a
At one end of the spectrum, Virginia courts had held that “direct physical
loss” covered “incidents that result in structural damage to the property
caused by ... fires, floods, hurricanes, and rainwater.”
At the other end of the spectrum, however, Virginia courts had “also found
physical loss when a plaintiff cannot physically use his or her covered
property, even without tangible structural destructions, if a plaintiff
cannot show a distinct and demonstrable physical alteration to the
property.” For example, in TRAVCO Ins. Co. v. Ward, 715 F. Supp.
2d 699, 708 (E.D. Va. 2010), aff’d, 504 F. App’x 251 (4th Cir.
2013), the court held that “physical damage to the property is not
necessary, at least where the building in question has been rendered
unusable by physical force.”
As for a third variation on the spectrum, Virginia courts (and other
courts) had held that direct physical loss included “incidents that make
the covered property uninhabitable, inaccessible, and dangerous to use ...
because of ... intangible and invisible noxious gasses or toxic air
Thus, with this spectrum of interpretations, the court held that “direct
physical loss” was ambiguous and should be construed in favor of coverage
and against the insurer. Further, the court noted that “if Defendants
wanted to limit liability of ‘direct physical loss’ to strictly require
structural damage to property, then Defendants, as the drafters of the
policy, were required to do so explicitly.”
The second notable issue that the court reviewed was whether the policy’s
virus exclusion applied.
The policy explicitly excluded losses from “(1) Growth, proliferation,
spread or presence of ‘fungi’ or wet or dry rot; or (2) Virus, bacteria or
other microorganism that induces or is capable of inducing physical
distress, illness or disease; and (3) We will also not pay for ... (a) Any
remediation of “fungi”, wet or dry rot, virus, bacteria or other
With no definition of “virus,” the court turned to the plain reading of the
virus exclusion taken together with the exclusion language as a whole.
Finding that the exclusion applies only to the “growth, proliferation,
spread or presence,” the court held the exclusion inapplicable. In this
case, “the Executive Orders specifically classified Plaintiff’s type of
property, a spa, as a hotspot for COVID-19 and, thus, selectively ordered
that it be closed as a preventative health measure.” The court found the
plaintiff’s losses are entirely distinguishable from any growth,
proliferation, spread or presence of COVID-19.
is an important decision for policyholders seeking coverage for COVID-19
losses under Virginia law. The decision is a potentially important
precedent that will support claims by Virginia policyholders to collect
business interruption insurance claims arising from COVID-19.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.