Add State Farm to the list of insurers battling in court to keep from paying businesses who lost income during the government-ordered shutdowns of last spring.
A federal judge in Norfolk, Va., on Dec. 9 rejected the Bloomington-based insurance giant’s motion to dismiss a class-action lawsuit by a spa in Virginia Beach that asserted State Farm improperly denied its business-interruption claim.
The two sides now will make their arguments in court about what is and isn’t covered in State Farm’s policy. They also will address whether other businesses insured by State Farm should be covered under the litigation.
U.S. District Judge Raymond A. Jackson reached his decision despite language in State Farm’s policy covering Elegant Massage LLC (which does business as Light Stream Spa) that appeared to exclude coverage in a case like the COVID pandemic. Excluded in the policy were losses due to property damage from “fungi, virus or bacteria.”
In his order, Jackson wrote that State Farm’s virus exclusion appeared written to pertain to the spread of a virus or contamination in the property itself, rather than a government order to close in response to a pandemic. The legal standard at this stage of a lawsuit is to assume the policy covers a loss like this where there’s ambiguity about the policy language, the judge said.
“While some businesses could continue operating despite the COVID-19 social distancing guidelines, the executive orders specifically classified plaintiff’s type of property, a spa, as a hotspot for COVID-19 and, thus, selectively ordered that it be closed as a preventative health measure,” Jackson wrote.
In cases around the country where State Farm has been sued under similar circumstances, judges have granted the company’s motion to dismiss three other times. The Virginia case so far is the only one State Farm has lost, according to the University of Pennsylvania Carey Law School, which has been tracking the litigation nationwide.
Nationwide, in 99 cases where judges have ruled on insurers’ motion to dismiss, the insurers have lost just 22 times so far, according to the university.
“We respectfully disagree with the ruling and will be considering all of our options as we continue with this litigation,” a State Farm spokeswoman wrote in an email. “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.”
Elegant Massage paid State Farm $475 for its annual policy, according to the ruling.
State Farm is better known for insuring the cars and homes of consumers. It’s the largest personal-lines insurer in the U.S. But it also provides property coverage for retail businesses like Elegant Massage.
Business interruption losses due to government lockdowns has emerged as one of the hottest legal issues in years to hit the insurance industry. Litigation affecting many of Chicago’s best-known restaurants, many of which have argued they’ll go out of business without relief, is before a federal judge in Chicago. Chicago-based CNA Financial, a major business insurer, is defending a number of such lawsuits around the country.
The industry argues that property insurance was never designed to cover an event like a pandemic, which essentially affects an unusually large array of businesses negatively to one degree or another. If policies covered such massive losses, they would have to be priced far higher and would be unaffordable for many business owners, the industry says.
Industry leaders have called on the federal government to provide a national solution similar to federal coverage of flood damage in coastal areas.
In the meantime, the meaning of various clauses in insurance policies and the interpretation of conflicting legal precedents is proceeding in courtrooms around the country, with billions potentially at stake.