NEW ORLEANS – A federal appellate court has upheld a lower court’s decision that a nonprofit health system’s insurance policy did not cover business interruption losses caused by the COVID-19 pandemic.
In a 2-1 ruling, U.S. Court of Appeals for the Fifth Circuit judges Jennifer Walker Elrod, Kyle Duncan and Irma Carrillo Ramirez chose to affirm a dismissal of Baylor Scott & White Holdings’ lawsuit versus Factory Mutual Insurance Company, initially brought in the U.S. District Court for the Eastern District of Texas.
Ramirez wrote the Court’s opinion in this case.
“Appellant Baylor Scott & White Holdings (BSW) is the largest nonprofit health system in Texas. It purchased a ‘specialized commercial property insurance policy’ (the Policy) from appellee Factory Mutual Insurance Co. (FM) ‘to cover its facilities for the period from Nov. 1, 2019 to Nov. 1, 2020.’ Under the ‘all risk’ Policy, ‘recovery is allowed for fortuitous losses’ within the coverage terms ‘unless the loss is excluded by a specific policy provision.’ The Policy covers two general types of claims – ‘Property Damage’ and ‘Time Element’ claims. Except for certain exclusions, the Policy covers these types of claims if there is ‘physical loss or damage,” Ramirez said.
“The Policy excludes coverage for the following, ‘unless directly resulting from other physical damage not excluded by the Policy’: ‘Contamination, and any cost due to contamination including the inability to use or occupy property or any cost of making property safe or suitable for use or occupancy. If contamination due only to the actual not suspected presence of contaminant(s) directly results from other physical damage not excluded by this Policy, then only physical damage caused by such contamination may be insured.’ The Policy defines ‘contamination’ as ‘any condition of property due to the actual or suspected presence of any foreign substance, impurity, pollutant, hazardous material, poison, toxin, pathogen or pathogenic organism, bacteria, virus, disease causing or illness causing agent, fungus, mold or mildew.’ The Policy additionally excludes coverage for “loss of market or loss of use.’ There are also exclusions applicable only to the Time Element coverage in addition to the Policy’s general exclusions.”
Ramirez added the Policy contains ‘Additional Coverages’, two of which are pertinent in this case – the Communicable Disease Response Extension and the Interruption by Communicable Disease Extension.
The Communicable Disease Response Extension “covers the reasonable and necessary costs incurred by [BSW]…with the actual not suspected presence of communicable disease” for (1) “cleanup, removal and disposal of the actual not suspected presence of communicable diseases from insured property,” and (2) “actual costs of fees payable to public relations services or actual costs of using [BSW]’s employees for reputation management resulting from the actual not suspected presence of communicable diseases on insured property.”
According to the Policy, a “communicable disease” is “a disease which is…transmissible from human to human by direct or indirect contact with an affected individual or the individual’s discharges.”
The Interruption by Communicable Disease Extension “covers the Actual Loss Sustained and EXTRA EXPENSE incurred by [BSW]…with the actual not suspected presence of communicable disease.” The parties agree that “physical loss or damage” is not required to trigger coverage under either Additional Coverage, and these additional coverages are also subject to the Policy’s exclusions.
The Policy further caps the “annual aggregate” to which BSW may be entitled under either or both of these Additional Coverages at $5 million, i.e. these Additional Coverages have a combined annual aggregate limit of $5 million. The parties agreed that this limit has been paid out in full for the implicated policy year.
“On or about June 16, 2021, BSW submitted a claim under the Policy ‘for [BSW’s] business interruption losses as a result of COVID-19 totaling over $192 million.’ BSW’s claim was predicated ‘on the physical loss and/or physical damage to property caused by, among other things, the presence of COVID-19’ at BSW’s facilities. FM denied the claim on July 16, 2021, stating that ‘the only coverage under the Policy for losses arising from COVID-19’ came from the Communicable Disease Response Extension and the Interruption by Communicable Disease Extension, which had already been ‘exhausted.’ BSW initially sued FM on Feb. 23, 2022, and it amended its complaint on March 4, 2022,” Ramirez said.
“On May 3, 2022, FM moved to dismiss the amended complaint for failure to state a claim. It argued, among other things, that (i) BSW had suffered no ‘physical loss or damage’ under the Policy as a result of COVID-19; (ii) the Contamination Exclusion and Loss of Use Exclusion barred coverage under the Policy; and (iii) only the Communicable Disease Response Extension and the Interruption by Communicable Disease Extension provided coverage for BSW’s submitted claim. On March 31, 2023, the District Court granted FM’s motion to dismiss. It found that (i) given existing circuit precedent, BSW had not plausibly alleged ‘physical loss or damage’ under the Policy, and (ii) the Contamination Exclusion and Loss of Use Exclusion barred BSW’s recovery under the Policy. The District Court denied BSW’s motion to alter or amend the judgment on May 30, 2023. BSW appealed the District Court’s dismissal order on June 28, 2023.”
On appeal to the Fifth Circuit, BSW contends the District Court erred in dismissing its complaint given (i) the Policy’s “unique language,” and (ii) the “great scientific detail” BSW alleged explaining how COVID-19 “physically altered the surfaces of its property.
“BSW characterizes the Policy’s language as unique because it ‘covers ‘physical loss or damage’ caused by communicable disease,’ which makes the coverage ‘broader than a typical policy.’ But as stated, we have held that COVID-19 does not physically harm property. BSW does not adequately distinguish our precedent. The alleged uniqueness of the Policy’s language does not change that we have determined, as a matter of law, COVID-19 does not cause physical loss or damage to property. Absent a decision to the contrary by the Supreme Court of Texas or our en banc court, existing circuit precedent controls,” Ramirez said.
“BSW also contends that its complaint was wrongly dismissed because ‘no other case’ previously before us ‘included specific factual allegations of demonstrable, measurable and tangible alteration of property’ caused by COVID-19. The rule of orderliness still forecloses this contention. We have already determined – as a matter of law – that COVID-19 does not affect property in a ‘physical’ way. For these reasons, we affirm the decision of the District Court.”
In a three-page dissent, Elrod contended that the plaintiff had indeed shown “tangible alteration or deprivation of [the insured’s] property”, which would trigger coverage by the Policy.
“Here, appellant’s pleadings allege precisely how COVID-19 has tangibly altered the physical condition of its property. Specifically, appellant alleges that the ‘spike proteins’ on the outside of the COVID-19 virus attach to metallic surfaces, such as stainless steel, and bond with oxygen-containing surfaces such as wood, cotton or glass to physically alter the roughness of those surfaces and to make the surfaces more likely to repel water. The amended complaint cites to research from peer-reviewed scientific journals such as Nature and Virology Journal in support of this allegation. Appellant further alleges that the physical alterations to the property caused harm because the ‘mere cleaning and disinfecting of the surfaces of the property could not repair or remediate the physical and tangible alteration to [the] property,’ and therefore it had to ‘incorporate extensive engineering and administrative measures to aid in the containment, remediation, and treatment of the physical loss and damage caused by COVID-19,” Elrod said.
“Again, the amended complaint provides citation to scientific research to support appellant’s allegations. Thus, we cannot say that COVID-19 cannot physically harm property as a matter of law. If COVID-19 can tangibly alter property – which is a factual question – it may be able to cause physical harm as a matter of law, as has been pleaded here with particularity. For the purposes of a 12(b)(6) analysis, we must take appellant’s detailed and specific allegations that COVID-19 did tangibly alter its property as true. Whether the virus actually altered appellant’s property is a question that requires scientific, factual inquiries, and this case should proceed past the 12(b)(6) stage for those inquiries to be made. I respectfully dissent.”
U.S. Court of Appeals for the Fifth Circuit case 23-40395
U.S. District Court for the Eastern District of Texas case 3:21-cv-00198
From the Southeast Texas Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com