Baylor Scott & White Holdings (BSW), the largest not-for-profit health system in Texas, sued insurer Factory Mutual Insurance Company in February 2021 for denying claims for business interruption losses totaling more than $192 million due to COVID-19. BSW said its claims were based on physical losses and/or physical property damage caused, among other things, by the presence of COVID-19 on its premises.
The insurance that BSW purchased from Factory Mutual covered two common claim types: property damage and time element claims. The insurance does not cover contamination, or costs resulting from the contamination, including the inability to use or occupy property, or the costs of making property safe or suitable for use or occupancy.
The policy includes additional coverage including an Epidemic Response Extension and an Epidemic Disruption Extension. With this extension, the policy provides coverage up to $5 million for the costs of cleaning, removal, and disposal of the presence of a communicable disease, as well as public relations services or reputation management resulting from the presence of a communicable disease. Both parties agree that the $5 million limit has been paid in full for the relevant policy year.
In March 2023, the district court granted Factory Mutual's motion to dismiss BSW's lawsuit for business interruption losses. The court found that, given existing circuit court precedent, BSW had not plausibly alleged “physical loss or damage” under its insurance policy and that the pollution exclusion and loss of use exclusion barred coverage under BSW's insurance policy. BSW appealed the district court's order.
In a 2-1 decision, the Fifth Circuit affirmed the district court’s ruling, holding that in the context of previous COVID-19 commercial insurance coverage disputes, COVID-19 does not cause physical damage to property within the plain meaning of “physical.”
BSW argues that its insurance policy is unique because it covers “physical loss or damage” caused by a communicable disease, making it broader than typical insurance policies. BSW further argues that its claims were wrongfully dismissed because no other lawsuits to date “contain specific factual allegations of provable, measurable and tangible property alterations” due to COVID-19.
The commission found that BSW had provided a “very scientifically detailed” explanation for why COVID-19 had physically altered, but not moved, the surfaces on its properties.
“The assertion that the policy language is original does not change the fact that, as a matter of law, we have determined that COVID-19 does not cause physical loss or damage to property,” Justice Irma Carrillo Ramirez wrote in the majority opinion.
But Judge Jennifer Walker Elrod dissented, arguing that BSW had sufficiently demonstrated that COVID-19 had caused a tangible change or deterioration to its property.
BSW explained how the spike protein on the outside of the COVID-19 virus attaches to metal surfaces and binds to oxygen-containing surfaces like wood, cotton and glass “physically altering the roughness of those surfaces, making them more likely to repel water,” Elrod wrote in his dissent.
BSW cited peer-reviewed scientific journal studies to back up its claims.
Elrod wrote that the case serves as an example showing that the court's holding that COVID-19 does not cause physical damage to property in the plain sense of “physical” should not be understood as a legal rule but rather as “an explanation for why mine-run COVID-19 insurance policy litigation fails.”
Elrod wrote that the lawsuit is unique because BSW “alleged specific changes to the property rather than merely conclusively alleging 'physical damages.'”