The United States District Court for the Eastern District of Michigan concluded that Salon XL Color & Design Group LLC’s claim for insurance coverage arising from losses related to the COVID-19 pandemic could proceed based on the policy’s communicable disease provision and ambiguities with respect to what constitutes a “loss” or “damage” under the policy.
Salon XL, based in Ann Arbor, Michigan, was forced to close its doors pursuant to government orders issued in response to the COVID-19 pandemic. As a result, Salon XL submitted a claim for insurance coverage with its property insurer, West Bend Mutual Insurance Company. Salon XL subsequently filed a lawsuit against West Bend after the insurer denied coverage for its COVID-19-related losses.
The court held that the policy’s business interruption, extra expense and civil authority coverages were barred by the policy’s virus and bacteria exclusion, but rejected West Bend’s attempt to also dismiss the salon’s claim for insurance coverage under the policy’s communicable disease provision. The policy’s communicable disease provision is subject to a separate $50,000 sub-limit of insurance per occurrence.
In considering the policy’s communicable disease coverage in light of the virus exclusion, the court held that the exclusion did not apply to the communicable disease coverage, reasoning that a “special grant of coverage for communicable diseases followed by an exclusion for virus or bacteria cannot plausibly exist in the same policy." In other words, the communicable disease provision contained in the policy would be unnecessary if the virus or bacteria exclusion would bar coverage for losses related to communicable diseases.
The court also held that Salon XL sufficiently pled a “causal nexus” between the COVID-19 virus at its property and the government shutdown orders, including a showing that COVID-19 particles infected the salon’s property and exposed its staff and customers, causing the loss of use of its property. Based on these showings, coupled with the ruling that the policy’s definitions for “loss” and “damage” are ambiguous, the court held that Salon XL can pursue its claims against West Bend under the communicable disease coverage only.
If you have questions about your property insurance policy as it relates to the COVID-19 pandemic, please reach out to Kristina Araya, Jason Byrne, Brianna Richardson, Carly Zagaroli or any member of Warner’s Insurance Practice Group.