Many businesses carry commercial property insurance including coverage for damage to their building due to a covered cause such as a fire or flood. Some of these policies also include a business interruption provision which may cover loss of income, fixed costs or operating expenses, or additional expenses. If not included, business interruption insurance may be available as an add on.

When COVID-19 hit its peak in March 2020, hundreds of thousands of businesses were shut down, leaving those businesses in financial turmoil. In an attempt to seek relief, many businesses turned to their insurers for help under business interruption provisions. However, COVID-19 presented a new kind of business interruption – one which raised the question – does a business’ shut down due to a virus fall within business interruption coverage?

Generally, property insurance policies require a direct physical loss or damage to property to be covered under an insurance policy. This requirement has created a whirlwind of COVID-related litigation regarding what constitutes physical loss. Businesses argue that contamination from a virus physically infects the surface of materials is a direct physical loss. Insurers, however, assert that there need be a tangible injury, demonstrable or a physical alteration of the insured’s property to be covered under the standard business interruption provision. Many lawsuits have been filed to determine the issue, and for the most part, businesses have been left empty handed (until now).

According to the University of Pennsylvania’s COVID-19 litigation tracker,  intermediate or higher courts in ten states have held that COVID-19 is not covered under a business interruption clause requiring physical loss or damage. Thirty-four state courts, including Texas, have not yet addressed the issue in an intermediate or high court. Within Texas, few cases on this issue have made it to trial because most insurers have won in pre-trial stages based on the notion that COVID-19 does not cause physical loss. However, Baylor College of Medicine, has recently taken a win against several Lloyd’s of London syndicates in a Harris County District Court.

Baylor alleged that the pandemic forced it to dramatically reduce operations at its clinics and curtail its laboratory research and teaching programs. In a summary judgment motion, Lloyd’s of London argued that the policies at issue provided coverage for direct physical loss and argued that COVID-19 did not fall under the requirements to be covered. However, the judge decided that whether a virus such as COVID-19 causes direct physical loss or damage to property was a fact issue for the jury and sent the matter to trial. On August 31, 2022, the jury returned a $48 million verdict in favor of Baylor, finding that COVID-19 did cause physical loss to Baylor’s property. Baylor’s win is believed to be the first plaintiff win for a business seeking coverage for business interruption due to COVID-19.

Although the Baylor judgment seems to be a good sign for businesses affected by COVID-19, the district court’s decision is not binding on any other Texas court, and it’s uncertain how other judges would determine the issue. Although the judgment is not binding on any other court, it is likely that Lloyd’s will appeal the judgment, at which point a Texas Court of Appeals may finally determine the issue for the State.

While we watch to see what happens in the Baylor case, businesses should review their policies to determine whether they have appropriate coverage for the risks they face and whether the business had coverage for COVID related  losses.

To see the jury verdict and related pleadings, see Baylor College of Medicine v. XL Insurance America et al., in the 295^th Harris County District Court, No. 2020-53316.