A federal district court in Virginia has refused to dismiss a COVID-19-related business interruption lawsuit filed by a spa against a State Farm Mutual Insurance Co. unit despite its policy’s virus exclusion.

The U.S. District Court in Alexandria, Virginia, held the virus exclusion does not apply because COVID-19 was not present at the plaintiff’s property and was not the basis for the income loss, according to the Dec. 9 ruling in Elegant Massage, LC d/b/a Light Stream Spa v. State Farm Mutual Automobile Insurance co. and State Farm Fire and Casualty Co.

Elegant Massage, which operates Stream Spa in Virginia Beach, Virginia, had obtained an all-risk commercial property policy from State Farm effective through July 22, 2020, according to the ruling.

Elegant voluntarily closed the spa on March 16 and remained closed through May 15, according to the ruling. On March 23, the governor ordered the closure of certain businesses, including spas and massage parlors.

State Farm denied the business interruption claim because the spa had voluntarily closed, there was no civil order to close the business,  there was no known damage to the business space or property resulting from COVID-19, and the loss of income coverage excluded coverage for loss caused by the virus, according to the ruling.

The spa filed suit in May, charging breach of contract, and later added a bad faith claim.

The ruling said the virus exclusion deals particularly with the virus’ growth and proliferation. Furthermore, it does not provide coverage for the virus’ remediation or removal. “This supports that the Virus Exclusion applies where a virus has spread throughout the property,” the ruling said.

“Here, plaintiff is neither alleging that there is a presence of a virus at the covered property nor that a virus is the direct cause of the property’s physical loss,” the ruling said, in holding the exclusion does not apply to the claim.

The court also refused to dismiss the case on the basis the spa had not suffered a direct physical loss. While the spa was not structurally damaged, it is plausible the plaintiff “experienced a direct physical loss when the property was deemed uninhabitable, inaccessible, and dangerous to use by the Executive Orders because of its high risk of spreading COVID-19,” the ruling said.

The court refused to dismiss the spa’s bad faith claim.  “Although coverage is pre-requisite to a claim for bad faith, the Court has found that Plaintiff has pleaded sufficient facts, which if proved, would fall within the Policy’s coverage,” the ruling said in permitting the litigation to proceed.

State Farm said in a statement, “We respectfully disagree with the ruling and will be considering all of our options as we continue with this litigation. State Farm is confident we have honored the terms of our customer’s contract. We do not collect premiums to protect against losses resulting from viruses.”

The spa’s attorneys did not respond to a request for comment.

More insurance and risk management news on the coronavirus crisis here.