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Court rules virus exclusion bars COVID-19 cover for waxing salon

covid closure

A federal court in California on Tuesday ruled the virus exclusion in a property policy bars coverage for coronavirus-related business interruption claims and labeled as “nonsense” the policyholder’s argument that civil authority cover should kick in regardless of the exclusion.

The ruling adds to the tally of pro-insurer rulings in COVID-19 business interruption cases, although policyholders have also had a few court victories in the litigation filed in courts nationwide.

Ruling in Franklin EWC Inc. et al. v. The Hartford Financial Services Group Inc. U.S. Magistrate Judge Jacqueline Scott Corley of the Northern District of California noted that the business owners policy for Fresno, California-based waxing salon Franklin EWC Inc. contained an exclusion for virus-related losses.

The salon, which had about 30 employees, closed during government-mandated lockdowns imposed in March aimed at curbing the spread of COVID-19. The owner filed a lost income claim with a unit of Hartford Financial Services Group Inc., but the claim was denied.

In a lawsuit seeking to force the insurer to pay the claim, Franklin EWC argued that the coronavirus caused “direct physical damage and loss” triggering coverage under the policy.

The virus exclusion in the policy, however, bars coverage for damage caused by the “presence, growth, proliferation, spread or any activity of ‘fungi’, wet rot, dry rot, bacteria or virus,” the ruling states.

The exclusion applies to the business interruption losses, the court ruled.

“The complaint repeatedly alleges that the virus caused and continues to cause the risk of direct physical loss required for a Covered Cause of Loss. Thus, as the loss was caused directly or indirectly by the virus, the Virus Exclusion applies under its plain and unambiguous language,” the ruling states.

The policyholder argued that the salon is owed coverage under the civil authority provision in the policy, which covers losses when access to property is barred by government order, notwithstanding the virus exclusion, court papers say.

“Thus, under Plaintiffs’ theory, the loss is created by the Closure Orders rather than the virus, and therefore the Virus Exclusion does not apply. Nonsense,” the ruling states.

The civil authority provision in the policy applies when access is prohibited as a direct result of a covered loss, the ruling states.

An attorney for Franklin EWC sid the policyholder will be filing an amended complaint.

Hundreds of businesses have sued their insurers for pandemic-related business interruption losses, and Tuesday’s decision is one of about a dozen early rulings that have favored insurers, however, most of the other rulings have centered on the issue of whether the policyholders suffered a “direct physical loss” to their properties. 

In at least three of the COVID-19 cases courts have ruled in favor of policyholders.

More insurance and risk management news on the coronavirus crisis here