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Law360 (April 13, 2021, 4:26 PM EDT) -- A Texas federal magistrate judge has recommended tossing a lighting and production design company's COVID-19 business interruption suit against Cincinnati Insurance Co., saying the policy doesn't cover economic losses without property damage.
In a Monday report, U.S. Magistrate Judge Susan Hightower said ILIOS Production Design LLC failed to allege that the coronavirus was ever physically present on its premises, and that even if the virus were there, it would not have caused property damage because it can be cleaned and eliminated with disinfectant.
Judge Hightower also recommended the court not allow the company to amend its complaint, saying it's clear there should not be coverage for the company under Cincinnati's policy.
"While the court is not unsympathetic to plaintiff's financial losses, the unambiguous terms of the policy do not provide coverage for solely economic losses unaccompanied by physical property loss or damage to their property," the judge said.
ILIOS, which bought a two-year commercial property policy from Cincinnati in 2018, said it was forced to remain closed from last March to June due to government shutdown orders. ILIOS filed an insurance claim to Cincinnati, and the insurer denied coverage last April, asserting the policyholder did not show a direct physical loss — a precondition for coverage — and that the policy's pollution exclusion precludes the company's losses.
The production design company then sued the carrier in Texas state court before Cincinnati removed it to federal court. ILIOS has argued that the pandemic and its related civil authority closure caused "direct physical loss to the use" of its premises.
On Monday, Judge Hightower said that the policy defines loss as "accidental physical loss or accidental physical damage," but ILIOS failed to show its revenue loss was triggered by any property damage. The judge sided with Cincinnati, saying that a direct physical loss requires a "distinct, demonstrable, physical alteration of the property" under Texas state law.
Although the Fifth Circuit has not ruled on whether the pandemic and government closure orders can cause physical loss or damage that'd be covered by property policies, "district courts in this circuit have determined that they do not," she said. And although the policy does not define "direct physical loss" as ILIOS has pointed out, the Fifth Circuit has stated that "property insurance coverage is triggered by some threshold concept of physical loss or damage," which requires not merely financial losses, she added.
Additionally, the policy's civil authority coverage is not triggered because the government closure order did not result in any tangible change of ILIOS' property, and the company could not show that its inability to use its space is a direct physical loss covered by the policy, the judge said.
Representatives for the parties could not be immediately reached for comment.
ILIOS is represented by Roger E. Gordon of the Law Office of Roger Gordon.
Cincinnati is represented by Matthew D. Walker of Litchfield Cavo LLP.
The case is ILIOS Production Design LLC v. The Cincinnati Insurance Co. Inc. et al., case number 1:20-cv-00857, in the U.S. District for the Western District of Texas.
--Editing by Adam LoBelia.
For a reprint of this article, please contact reprints@law360.com.
