On Wednesday, a federal judge in Texas denied Factory Mutual’s Rule 12(c) motion for judgment on the pleadings, finding that the plaintiffs adequately alleged that the presence of COVID-19 on their property caused covered physical loss or damage in the case of Cinemark Holdings, Inc. v. Factory Mutual Insurance Co., No. 4:21-CV-00011 (E.D. Tex. May 5, 2021). This is the third COVID-19-related business interruption decision from Judge Amos Mazzant since March, but the first in favor of a policyholder. Taken together, the three decisions have two key takeaways and provide a roadmap for policyholders in all jurisdictions.

First, the Cinemark decision recognizes that the alleged presence of COVID-19 viral particles that physically altered the policyholder’s property is sufficient under federal pleading standards and controlling state law. In its motion, FM relied on Judge Mazzant’s recent decision in Selery Fulfillment, Inc. v. Colony Insurance Co., No. 4:20-CV-853, 2021 WL 963742 (E.D. Tex. Mar. 15, 2021), which dismissed a lawsuit alleging that the policyholder’s losses were caused by government orders that closed its business, rather than from the actual presence of the virus on its property. The Court held that government orders alone do not constitute physical loss or damage, and declined to rule on whether the physical presence of the virus does. Judge Mazzant reached the same conclusion weeks later in Aggie Investments, L.L.C. v. Continental Casualty Co., No. 4:21-CV-0013, 2021 WL 1550479 (E.D. Tex. Apr. 20, 2021).

In Cinemark, however, the Court distinguished its prior ruling in Selery: “Here, Cinemark alleges a different harm and is governed by different contract terms. Unlike Selery, Cinemark alleges that COVID-19 was actually present and actually damaged the property by changing the content of the air.” (emphasis added). Judge Mazzant’s three decisions illustrate the facts policyholders need to develop in their approach to COVID-19 claims. Actual loss or damage caused by a physically present virus should be sufficient to meet the threshold requirement that the insured sustain some physical loss or damage to property.

The decision demonstrates the value for plaintiffs to detail in the complaint exactly how COVID-19 viral particles attach to and change their property, and even to retain expert witnesses before filing a complaint. While other courts have dismissed lawsuits where the plaintiff merely made a conclusory statement that COVID-19 was present on their property, Cinemark—which is represented by Hunton Andrews Kurth LLP—made detailed allegations in a 330-paragraph complaint explaining the damage that COVID-19 caused to its property. As the Court noted, Cinemark squarely alleged that COVID-19 “damaged the property by changing the content of the air.” This, along with Cinemark’s other factually-specific allegations, were sufficient to defeat the insurer’s Rule 12 motion.

Second, the Cinemark decision recognizes that insurance policies with explicit “communicable disease” coverage should respond to COVID-19 losses. FM’s policies contain explicit coverage for a “communicable disease,” which FM admits includes COVID-19 by definition. To evade implication of the policy’s Time Element coverage, which is triggered by any physical loss or damage “of the type insured” under the policy, FM argued that the communicable disease coverage does not require loss or damage. But, as the Court recognized, “[t]he Policy contemplates that communicable diseases can cause loss or damage by excluding ‘loss or damage caused by or resulting from terrorism’ from the Communicable Disease Coverages.” Thus, the Court concluded that “Cinemark’s Policy . . . expressly covers loss and damage caused by ‘communicable disease.’”

This marks the second recent decision in federal court denying a motion for judgment on the pleadings filed by FM in a COVID-19 case. As previously reported, in Thor Equities, LLC v. Factory Mutual Insurance Co., No. 20 Civ. 3380 (AT), 2021 WL 1226983 (S.D.N.Y. Mar. 31, 2021), the Southern District of New York found that FM’s contamination exclusion was ambiguous and thus did not apply to losses caused by COVID-19. The Cinemark decision does not address the contamination exclusion explicitly, but FM raised the same contamination exclusion arguments in Cinemark that it had raised in Thor Equities and the Court, apparently, did not consider them to be materially valid.