On January 5, 2022, the Fifth Circuit handed down yet another win for insurers, joining the Second, Sixth, Seventh, Eighth, Ninth, Tenth and Eleventh circuits in interpreting a “physical loss of property” to require a tangible alteration or deprivation of property. In Terry Black’s Barbecue, LLC v. State Automobile Mutual Insurance Company, Case No. 21-50078, the insured owner of two barbecue dine-in restaurants in Austin and Dallas argued it suffered a business income loss due to the suspension of operations when the Texas governor issued an executive order directing people to avoid eating or drinking in restaurants. 

The subject policy provided coverage for business income and extra expense (BI/EE) loss “[incurred] due to the necessary suspension of [the insured’s] operations during the period of restoration.” This coverage was triggered when the suspension of operations was “caused by direct physical loss of or damage to property at the premises.” The policy further defined the “period of restoration” to begin at the time of loss or damage and end when the property was “repaired, rebuilt or replaced” or when operations were resumed at a new location. 

The Fifth Circuit’s Reasoning

The Fifth Circuit concluded that the insured’s suspension of dine-in services did not meet the insurance policy’s requirement of a direct physical loss of property for BI/EE coverage. While the court noted that the term “direct physical loss” was not defined by the policy, those words were previously interpreted by Texas courts. 

The court first examined the term “physical.” The Fifth Circuit noted that Texas courts have interpreted “physical” to mean “tangible.” While the insured conceded it had no physical damage to its property, it argued it suffered a “loss of” its property and that the use of the disjunctive “or” in the policy requires a distinction be made between the terms “damage” and “loss.” While pointing out that some courts have interpreted “loss” and “damage” to be synonymous, the Fifth Circuit acknowledged that Texas law requires policy language to be interpreted consistent with rules of grammar and common usage, and thus the court concluded that “loss” and “damage” must have distinct meanings. However, as the insured only argued that it suffered a “loss,” not “damage,” the court construed only the former. Citing a 2005 Texas court of appeals case, the court noted that “‘[loss]’ as used in an insurance policy ‘means a state or fact of being lost or destroyed, ruin or destruction.’” 

The court noted that the insured failed to allege any tangible alteration or deprivation of its property. “Nothing physical or tangible happened to [the insured’s] restaurants at all. In fact, [the insured] had ownership of, access to, and ability to use all physical parts of its restaurants at all times. And importantly, the prohibition on dine-in services did nothing to physically deprive [the insured] of any property at its restaurants.” Thus, the court concluded the insured failed to meet the plain meaning of “physical loss.” 

The court also commented that its interpretation was further supported by context in that the BI/EE coverage applied to a “period of restoration.” As this period turned on the time needed to repair, rebuild or replace lost or damaged property, it “necessarily contemplates a tangible alteration to the property that requires repair, rebuilding, or replacement.” Notably, the governor’s order prohibiting dine-in services did not require the insured to repair, rebuild or replace any property, and the insured’s economic loss “did not have any tangible effect on the property.” 

The Decision

The court was unpersuaded by the insured’s argument that the policy was ambiguous and that the insured had suffered a loss of use of the “physical space” at its restaurants. The court noted that the term “physical space” was found nowhere in the policy. Moreover, the insured was not deprived of its “physical space,” as it always had access to and the use of its dining rooms, despite being limited in how it could use them. The policy insured the “loss of property, not the loss of use of property.” 

The policy also provided a “restaurant extension endorsement” (REE) that extended coverage for “the suspension of [the insured’s] operations at the described premises due to the order of a civil authority … resulting from the actual or alleged … exposure of the described premises to a contagious or infectious disease.” The Fifth Circuit also concluded that the insured was not entitled to REE coverage because the civil authority orders did not result from the insured property’s exposure to COVID-19. The “resulting from” phrase in the REE provision requires causation. The Texas governor’s orders “‘resulted from’ the global pandemic and the need to take measures to contain and prevent the spread of COVID-19.” Because there was no causal connection alleged between the civil authority’s orders and the insured property’s exposure to COVID-19, there was no trigger for this coverage.