Fifth Circuit Again Concludes Direct Physical Loss Required for Business Interruption Coverage
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Posted on January 31, 2022 by Barry Zalma
Aggie Investments, L.L.C. owns and operates a tea and spice gift shop in McKinney, Texas. Like many businesses, Aggie Investments suffered a loss in revenue during the COVID-19 pandemic when Texas civil authorities placed limitations on the operations of nonessential businesses. Aggie Investments then sought coverage from its commercial property insurance policy which covers losses “caused by direct physical loss of or damage to property at the described premises.”
In 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 with almost every court that has considered the issue and required proof of direct physical loss for coverage to apply.
FACTS
Faced with a claim for lost business as a result of a covid-19 shut-down order from the city, he 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 tangible alteration to property.
THE INSURANCE
Continental sold a commercial property insurance policy to Aggie Investments. The policy provides coverage for the loss of business income in the Business Income and Extra Expense (BI/EE) endorsement. That provision states:
We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss.
THE CLAIMED LOSS
In March 2020, the COVID-19 pandemic caused authorities to issue orders to address the ongoing threat from the virus. The city of McKinney issued a shelter-in-place order. Aggie Investments complied with the orders, closed its shop, and suffered a reduction in sales and loss of business income.
Aggie Investments submitted a claim for coverage under the BI/EE provision.
DISCUSSION
In a case where the plaintiff seeks insurance coverage, if the insurance policy precludes recovery under its very terms, dismissal is proper.
In Terry Black’s Barbecue, L.L.C. v. State Automobile Mutual Insurance Co., the Fifth Circuit already held that, under Texas law, a “direct physical loss of property” in a similar commercial property policy means a tangible alteration or deprivation of property. Like in that case, Aggie Investments has not alleged a covered loss because it only complains of loss of revenue due to the closing of its shop. Throughout the pandemic, moreover, Aggie Investments had ownership of and access to its property even if it could not open its shop for normal business operations.
Because Aggie Investments was required to close its business entirely, it attempts to distinguish its case from Terry Black’s where the restaurants were only prevented from providing dine-in services. This distinction, however, makes no difference.
Whether a business is directed to cease one kind of service or all of its services, that order is not a tangible alteration or deprivation of property. Nothing tangible happened to Aggie Investments’ property.
Before adopting one interpretation of an insurance contract over another, the court must first determine there is more than one reasonable interpretation of the policy language, i.e., that it is ambiguous. [See RSUI Indemnity Co. v. The Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015)] If both constructions present reasonable interpretations of the policy’s language, the court must conclude that the policy is ambiguous. The language is only ambiguous if, after applying the rules of construction, it remains subject to two or more reasonable interpretations.
Physical loss of property cannot reasonably be interpreted to mean loss of use for several reasons. Initially, that interpretation would render the adjective “physical” meaningless. A loss of use, as Aggie Investments states, would not necessarily be a physical (or tangible) loss. Because Aggie Investments’ interpretation would cover a loss that does not require rebuilding, repair, or replacement, its interpretation gives no meaning to the provision’s “period of restoration.” There being no ambiguity in the language of the policy, the Fifth Circuit concluded the BI/EE provision’s “direct physical loss of property” unambiguously requires a tangible alteration or deprivation of property.
A “direct physical loss of property” as stated in the BI/EE provision requires a tangible alteration or deprivation of property. Aggie Investments, having failed to allege such a loss, is thus not covered by the policy. Therefore, the Fifth Circuit concluded the district court properly granted Continental’s motion to dismiss.
ZALMA OPINION
Businesses continue to attempt to obtain coverage for business interruption as a result of the state or local government orders that required the shut-down of their businesses. The policies clearly, and unambiguously, required actual, direct, physical loss to the property causing the shut-down and loss of business. Without damage there is no coverage. The suits seem to be brought against the wrong entity – insurance doesn’t cover – but the order took “property” the business of the plaintiff who has a right to recover under the Fifth Amendment of the U.S. Constitution for a taking of the property. No one, to my knowledge, has tried to sue the city or state for such taking and continue to pursue insurers.
© 2022 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.
He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.
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You can contact Mr. Zalma at https://www.zalma.com, https://www.claimschool.com, [email protected] and [email protected] . Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
You may find interesting the podcast “Zalma On Insurance” at https://anchor.fm/barry-zalma; you can follow Mr. Zalma on Twitter at; you should see Barry Zalma’s videos on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; or videos on https://rumble.com/zalma. Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims–library/ The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/
Notice of Claim Later than 60 Days After Expiration is Too Late
Post 5089
Injury at Massage Causes Suit Against Therapist
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Hiscox Insurance Company (“Hiscox”) moved the USDC to Dismiss a suit for failure to state a claim because the insured reported its claim more than 60 days after expiration of the policy.
In Mluxe Williamsburg, LLC v. Hiscox Insurance Company, Inc., et al., No. 4:25-cv-00002, United States District Court, E.D. Missouri, Eastern Division (May 22, 2025) the trial court’s judgment was affirmed.
FACTUAL BACKGROUND
Plaintiff, the operator of a massage spa franchise, entered into a commercial insurance agreement with Hiscox that provided liability insurance coverage from July 25, 2019, to July 25, 2020. On or about June 03, 2019, a customer alleged that one of Plaintiff’s employees engaged in tortious ...
ZIFL – Volume 29, Issue 11
The Source for the Insurance Fraud Professional
Posted on June 2, 2025 by Barry Zalma
Post 5087
See the full video at and at
Read the full article and the full issue of ZIFL June 1, 2025 at https://zalma.com/blog/wp-content/uploads/2025/05/ZIFL-06-01-2025.pdf
Zalma’s Insurance Fraud Letter – June 1, 2025
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ZIFL – Volume 29, Issue 11
The Source for the Insurance Fraud Professional
Read the full article and the full issue of ZIFL June 1, 2025 at https://lnkd.in/gTWZUnnF
Zalma’s Insurance Fraud Letter (ZIFL) continues its 29th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year by ClaimSchool and is written by Barry Zalma. It is provided FREE to anyone who visits the site at ...
No Coverage if Home Vacant for More Than 60 Days
Failure to Respond To Counterclaim is an Admission of All Allegations
Post 5085
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In Nationwide Mutual Insurance Company v. Rebecca Massey, Civil Action No. 2:25-cv-00124, United States District Court, S.D. West Virginia, Charleston Division (May 22, 2025) Defendant Nationwide Mutual Insurance Company's (“Nationwide”) motion for Default Judgment against Plaintiff Rebecca Massey (“Plaintiff”) for failure to respond to a counterclaim and because the claim was excluded by the policy.
BACKGROUND
On February 26, 2022, Plaintiff's home was destroyed by a fire. At the time of this accident, Plaintiff had a home insurance policy with Nationwide. Plaintiff reported the fire loss to Nationwide, which refused to pay for the damages under the policy because the home had been vacant for more than 60 days.
Plaintiff filed suit ...
ZIFL Volume 29, Issue 10
The Source for the Insurance Fraud Professional
See the full video at https://lnkd.in/gK_P4-BK and at https://lnkd.in/g2Q7BHBu, and at https://zalma.com/blog and at https://lnkd.in/gjyMWHff.
Zalma’s Insurance Fraud Letter (ZIFL) continues its 29th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year by ClaimSchool and is written by Barry Zalma. It is provided FREE to anyone who visits the site at http://zalma.com/zalmas-insurance-fraud-letter-2/ You can read the full issue of the May 15, 2025 issue at http://zalma.com/blog/wp-content/uploads/2025/05/ZIFL-05-15-2025.pdf
This issue contains the following articles about insurance fraud:
Health Care Fraud Trial Results in Murder for Hire of Witness
To Avoid Conviction for Insurance Fraud Defendants Murder Witness
In United States of America v. Louis Age, Jr.; Stanton Guillory; Louis Age, III; Ronald Wilson, Jr., No. 22-30656, United States Court of Appeals, Fifth Circuit (April 25, 2025) the Fifth Circuit dealt with the ...
Professional Health Care Services Exclusion Effective
Post 5073
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This opinion is the recommendation of a Magistrate Judge to the District Court Judge and involves Travelers Casualty Insurance Company and its duty to defend the New Mexico Bone and Joint Institute (NMBJI) and its physicians in a medical negligence lawsuit brought by Tervon Dorsey.
In Travelers Casualty Insurance Company Of America v. New Mexico Bone And Joint Institute, P.C.; American Foundation Of Lower Extremity Surgery And Research, Inc., a New Mexico Corporation; Riley Rampton, DPM; Loren K. Spencer, DPM; Tervon Dorsey, individually; Kimberly Dorsey, individually; and Kate Ferlic as Guardian Ad Litem for K.D. and J.D., minors, No. 2:24-cv-0027 MV/DLM, United States District Court, D. New Mexico (May 8, 2025) the Magistrate Judge Recommended:
Insurance Coverage Dispute:
Travelers issued a Commercial General Liability ...
A Heads I Win, Tails You Lose Story
Post 5062
Posted on April 30, 2025 by Barry Zalma
"This is a Fictionalized True Crime Story of Insurance Fraud that explains why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers. The story is designed to help everyone to Understand How Insurance Fraud in America is Costing Everyone who Buys Insurance Thousands of Dollars Every year and Why Insurance Fraud is Safer and More Profitable for the Perpetrators than any Other Crime."
Immigrant Criminals Attempt to Profit From Insurance Fraud
People who commit insurance fraud as a profession do so because it is easy. It requires no capital investment. The risk is low and the profits are high. The ease with which large amounts of money can be made from insurance fraud removes whatever moral hesitation might stop the perpetrator from committing the crime.
The temptation to do everything outside the law was the downfall of the brothers Karamazov. The brothers had escaped prison in the old Soviet Union by immigrating to the United...