A federal court in Virginia recently broke new ground when it denied an insurer’s motion to dismiss a spa owner’s COVID-19 “business interruption” coverage lawsuit, notwithstanding a virus exclusion in the “all risk” policy and no claim that coronavirus was present at the premises. The court’s decision in Elegant Massage, LLC v. State Farm Mut. Auto. Ins. Co., No. 2:20-CV-265, 2020 WL 7249624, (E.D. Va. Dec. 9, 2020), provides a roadmap for other business owners seeking business interruption coverage.

First, the court declined to interpret “direct physical loss” to require actual structural damage, as insurers invariably argue and several courts have held. The court relied on pre-COVID cases interpreting “direct physical loss” to mean the property had become “uninhabitable, inaccessible, or dangerous to use because of intangible, or non-structural, sources.” The court found it “plausible”—the standard applied at the motion to dismiss stage—that the spa owner experienced a direct physical loss due to a government shut-down order that deemed recreational businesses at high risk of spreading “an invisible but highly lethal virus.”

The court also found the policy’s virus exclusion inapplicable because the spa owner’s loss was caused not by coronavirus at the premises, but rather by the government shut-down order. The court rejected the insurer’s position that COVID-19 was the ultimate cause of the shut-down order (an argument several federal courts had previously accepted), declining to block coverage without “a direct connection between the exclusion and the claimed loss.” If followed, the ruling could unlock coverage for the many business owners whose policies contain a virus exclusion.