In another decision stemming from the COVID-19 pandemic, the Houston [14th] Court of Appeals has reversed a Harris County trial court judgment in favor of an insured who sued several carriers under an all-risks policy for damage caused by the virus.

Lloyd’s Syndicate 1967 Subscribing to Policy B0180PG1922227, et al. v. Baylor College of Medicine (No. 14-22-00925-CV; January 28, 2025) arose from Baylor’s claim that its insurers breached an all-risks policy by denying coverage for business interruption and other losses associated with the pandemic. A jury found that the virus caused covered loss to Baylor’s property. The trial court accordingly signed a judgment for more than $12 million in damages and attorney’s fees. The insurers appealed.

In an opinion by Justice Wise, the court of appeals reversed and rendered judgment for the insurers. The court commenced with an analysis of Baylor’s expert testimony, proffered by, among others, Dr. Peter Hotez, a Baylor virologist who you may recall frequently appeared on news broadcasts during the pandemic. Dr. Hotez testified that the virus “alters the environment, even if you cannot see it,” primarily by its spread through droplets when people cough and sneeze. Hotez further testified that “people on Baylor’s insured property were shedding viral matter from the beginning of the pandemic through the end of the coverage period.” Other testimony focused on Baylor’s efforts to mitigate the virus by limiting access to the buildings, disinfecting and cleaning, and installing filters and Plexiglass barriers, but, as Dr. Hotez averred, these measures did not prevent the virus from damaging Baylor’s property by making it “less usable” and reducing the property’s value. Dr. Hotez, however, acknowledged that other flu viruses can have the same effect, and that the damages caused by COVID was “physical” but not “structural,” that is, did not change the “molecular structure of the property.”

Turning to the insurer’s sole issue, the court concluded that there was legally insufficient evidence to support the jury’s finding. Under the policy language, direct physical loss or damage requires a “tangible alteration of, injury to, or deprivation of property.” As the court observed, “courts across the country have overwhelmingly held that COVID-19 has no such physical effect on property as a matter of law.” This court reached the same conclusion based on the plain meaning of the policy language, referring to dictionary definitions of “damage” and “physical.” In US Metals, Inc. v. Liberty Mut. Group, Inc., 490 S.W.3d 20, 24-25 (2015), SCOTX determined that “a ‘physical’ injury had to be ‘one that is tangible.’” In the same vein, the U.S. 5th Circuit Court of Appeals concluded that the “Texas Supreme Court would interpret a direct physical loss of property to require a tangible alteration or deprivation of property” (Terry Black’s Barbecue, L.L.C. v. State Farm Auto. Mut. Ins. Co., 22 F.4th 450, 458 (5th Cir. 2022).

Turning to the sufficiency of the evidence of “a tangible alteration or deprivation of property,” the court, the court reasoned that although the virus “physically attaches to property, [t]he presence of COVID-19 on property, though physical itself, and creating a physical bond to property, did not cause a physical loss of or damages to the property” (citations to numerous federal and state decision omitted). Baylor’s testimony, while it demonstrated that the virus made the property dangerous to other people (and, for a time, reduced the value of the property), “is no evidence of a tangible alteration or deprivation of property.” Moreover, Baylor did not allege that repeated cleaning of the property caused physical loss or damage or that the property, if left to itself until the virus became inactive, did not return to its original, undamaged condition.

Pardon the ridiculous pun, but this is a wise decision all the way around, and one that should put the business interruption issue permanently to bed in Texas courts.

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