Out of the 1,199 (and counting) trial court rulings addressing Covid business interruption lawsuits, only one of them resulted in a victory for the policyholder. Back in 2022, Baylor College of Medicine won $12 million from one of its insurers after persuading a Houston jury that it suffered nearly $50 million in lost business income during the Covid pandemic. (Baylor recovered only a fraction of its losses because the insurer provided a 25% quota share.)  

Sadly, that victory was wiped away last week by the Texas Court of Appeals.

The court's decision raises one of the central questions underlying so many aspects of insurance law: “who decides?" As I like to remind my insurance law students, sometimes it is a jury (as with the trial here), sometimes it is judges, sometimes it is the legislature (which some in California tried to do during the Covid pandemic), and sometimes it is decided by the parties themselves (for example, when they knowingly agree to a contract that unambiguously disclaims coverage for pandemic-related losses). 

In Baylor's case, a jury of twelve heard three days of testimony and then was asked, “Did COVID-19 cause direct physical loss of, or damage to, Baylor's property?” They unanimously answered “yes.”  But that was not good enough for the three-judge appellate panel, which decided that no “'reasonable and fair-minded'" person could reach the same conclusion as the twelve jurors.

Like so many other courts addressing these issues, the appellate court grounded its conclusion on the notion that direct physical loss or damage “requires a tangible alteration or deprivation of the property.” As the court openly admitted, it was “striving for uniformity with other jurisdictions that have applied identical or similar policy language.”  

Uniformity is a laudable goal, but following the pack isn't always a terribly satisfying explanation—particularly when the pack hasn't provided a great explanation for why a virus categorically cannot cause property loss.  

The weakness in these courts' reasoning is particularly troubling when thinking about the now-pressing issue of wildfire smoke. It seems self-evident that smoke is a covered type of loss. The Nevada Supreme Court described it as one of the “classic cases” of physical loss, along with fire and water damage.

Yet I haven't been able to find a particularly compelling explanation about why there is insurance coverage for one invisible irritant (smoke) but not another (the coronavirus). Indeed, as a Louisiana Supreme Court Justice put it in a refreshingly short 2-paragraph dissent addressing a Covid claim: “Like smoke from a fire next door that did no physical damage to the premises, but caused the business to be closed until the odor could be removed and the business cleaned, a physical loss occurred.” It really is that easy.

One of the early California decisions addressing Covid did grapple a little with the smoke analogy, and its discussion highlights why Baylor's claim was stronger than so many other Covid business interruption cases. The California court was addressing a claim that did not “allege that the presence of the COVID-19 virus on its premises is what caused the premises to be uninhabitable or unsuitable for their intended purpose.” The insured was unable to use its property because of government orders, not the physical presence of the virus at its property.

Baylor hospital, in contrast, claimed to be injured by the virus's physical presence on its property, not from government shut-down orders. And the jury agreed that the virus caused Baylor tens of millions of dollars of losses.

It is unfortunate that the appellate court did not acknowledge that Covid business interruption cases sometimes involve questions of degree—exactly the type of fact-bound questions that juries are well-situated to make. We can only hope that the Texas Supreme Court takes up the case and reinstates the jury's assessment of the evidence.