In Salon XL Color & Design Group LLC v. West Bend Mutual Insurance Co., Case No. 2:20-cv-11719 (USDC, ED MI, February 4, 2021), the District Court denied West Bend?s motion to dismiss and allowed the plaintiff hair salon’s COVID-19 insurance suit to proceed. The Court distinguished between the policy’s virus exclusion which bars business interruption coverage, and the policy’s communicable disease provision which may extend coverage for the salon’s losses. The hair salon was forced to close due to government closure orders issued in response to the pandemic. Salon XL sued West Bend in June after the insurer refused to pay for its COVID-19-related losses, alleging breach of contract and a violation of Michigan’s Uniform Trade Practices Act and seeking a declaration that its losses are covered by the policy.
U.S. District Judge Sean F. Cox rejected West Bend Mutual Insurance Co.’s motion to dismiss under the communicable disease provision in its policy, despite his agreement that the policy’s virus and “consequential losses” exclusions preclude business interruption and civil authority coverage for the salon. Although “[t]he virus or bacteria exclusion precludes coverage for the business income, extra expense, and civil authority coverages, but it does not preclude the communicable disease coverage,” Judge Cox said. “A special grant of coverage for communicable diseases followed by an exclusion for virus or bacteria cannot plausibly exist in the same policy.”
West Bend failed to demonstrate that Salon XL cannot obtain communicable disease coverage because the salon has shown “a causal nexus” between COVID-19 at its premises and the government shutdown orders, the judge said. The insurer was wrong in claiming that the state closure orders were not issued due to “dangerous physical conditions resulting from the damage,” he added.
“Salon XL has plausibly alleged that the COVID-19 particles have infected their property, exposed their staff and patrons,” and the business has lost the use of its property, the judge noted. “This is enough to survive a motion to dismiss when the policy … does not define ‘loss’ or ‘damage’ to exclude loss of use.” The policy language here regarding “damage” and “loss” is indeed ambiguous, and the proper interpretation of the terms will be determined at the summary judgment stage, the judge said.
As for the policy’s “consequential losses” exclusion, Judge Cox found that it bars coverage for Salon XL’s loss of the ability to use its premises under the business interruption and civil authority coverages but does not preclude communicable disease coverage.