In latest edition of The Wright Toolbox:
- An “Elegant” Solution to a Messy Problem: Federal Court Finds a Covered Loss under Virginia Law for COVID Losses Despite Virus Exclusion and Anti-Concurrent Causation Clause – read now
- Maryland General Assembly Provides New Opportunities and Guidelines for Government Contractors – read now
An “Elegant” Solution to a Messy Problem: Federal Court Finds a Covered Loss under Virginia Law for COVID Losses Despite Virus Exclusion and Anti-Concurrent Causation Clause
Virginia business owners seeking insurance coverage for Covid-related losses may be encouraged by the recent decision of the United States District Court for the Eastern District of Virginia, Norfolk Division, in Elegant Massage, LLC v. State Farm Mut. Auto. Ins. Co., __ F. Supp. 3d __, 2020 WL 7249624 (E.D. Va. Dec. 9, 2020). The plaintiff owned a spa in Virginia Beach that provided therapeutic massages. In 2019, it purchased an “all risk” commercial property policy which covers all loss or damage to the premises other than those expressly excluded by the policy. The policy covered loss of business income as a result of suspension of business operations from action of a civil authority that prohibits access to the business property, but also excluded any loss which would not have occurred in the absence of “fungi, virus or bacteria,” regardless of whether other causes acted concurrently to cause the loss. The “Fungi, “Virus, or Bacteria” exclusion contained additional language appearing to relate to losses particular to the property itself, such as rebuilding, tearing down, or interference at the premises.
On March 20, 2020, in response to the emerging Covid-19 pandemic, Governor Northam declared a public health emergency restricting the number of patrons in fitness centers to ten or less, followed by Executive Order No. 53, which ordered the closure of recreational businesses, including massage parlors, on March 23. On May 15, 2020, restrictions began to ease and such business were allowed to reopen with occupancy limited to 50%, six-feet social distancing requirements, and hourly cleaning and disinfection. The plaintiff closed its business from March 16, 2020, through May 15, 2020, and submitted a claim on its policy for the complete loss of income it experienced. The insurer denied the claim on three grounds: (1) the plaintiff voluntarily closed its business shortly before the Governor’s restrictions went into effect, (2) the business space or property was not damaged by the pandemic, and the policy specifically excluded losses caused by virus. The plaintiff filed a declaratory judgment action seeking coverage, and the insurer filed a motion to dismiss.
The Court first found that the policy covered all fortuitous direct physical losses unless explicitly excluded. In this context, a fortuitous loss can be generally described as one dependent on chance or an accident, rather than some inherent defect in the property, wear and tear, or intentional misconduct. In response to the insurer’s argument that direct physical loss meant actual, tangible structural damage, the Court found that “direct physical loss” should be given an expansive definition to include instances where the property is uninhabitable, inaccessible, or dangerous to use because of intangible or non-structural sources. Because the plaintiff suffered a direct physical loss when its property was deemed inaccessible and dangerous to use by the Governor, it plausibly alleged the existence of a direct physical loss covered by the policy. With this finding, under Virginia law the burden shifted to the insurer to show that a particular exclusion was sufficient to deny coverage.
Relying on the Virus Exclusion and the anti-concurrent causation clause in the policy, the insurer maintained that Covid-19 could not be the basis for coverage because it is at the heart of the Governor’s closure orders and the exclusion applies to any loss where a virus is anywhere in the chain of causation. Although some courts have applied the anti-concurrent causation clause to bar coverage where an exclusion arguably applied to part of the causal chain, the Court rejected this argument, finding that Virginia has never established the “anti-concurrent theory” as law. Rather, under Virginia’s policy interpretation principles, the exclusion relied on by the insurer had to conspicuously, plainly and clearly set forth the limitation on coverage to be enforceable.
The Court reviewed the references to “virus” in the policy and found that it received treatment similar to that given to “fungi or wet or dry rot,” all of which involved growth of those issues at the particular premises and remediation of such growth. Therefore, when applying the Virus Exclusion, there must be a “direct connection between the exclusion and the claimed loss and not…a tenuous connection anywhere in the chain of causation.” In other words, the circumstances covered by the exclusion must be the “immediate cause in the chain.” The direct cause of the loss was the government closure orders, not the proliferation of the virus at the property. Because the plaintiff did not allege that the virus was ever present on the insured property or the direct cause of physical loss, the Virus Exclusion did not apply and the plaintiff was permitted to pursue its claim.
One final point must be made about the Elegant Massage ruling. Notwithstanding the analysis above, the Court found that the seven-day period between the plaintiff’s voluntary closure of its business on March 16, 2020, and the Governor’s mandatory closure of the business on March 23, 2020 was not covered due to the Consequential Loss Exclusion, which barred coverage for delay, loss of use or loss of market. That the plaintiff voluntarily closed as a result of waning business resulting from the pandemic was insufficient to give rise to coverage for the period of time before it was forced to close.
The Elegant Massage ruling may provide a ray of hope to Virginia small businesses that had no choice but to close their doors in the face of government orders in 2020. Even though “virus” exclusions and anti-concurrent causation clauses in policies seem to deny coverage by their plain language, at least one court has taken a narrow view of the former and refused to apply the latter, resulting in the rule that an exclusion must be an “immediate cause” of the loss rather than simply appearing somewhere in the causal chain. That said, the result may be different depending which jurisdiction’s law was applied, as was the case in a recent decision from the Richmond Division of the Eastern District of Virginia. If you have a question about policy exclusions and Covid-19 in Virginia, West Virginia, Maryland, or the District of Columbia, please call Tom Moran or any of Wright, Constable & Skeen’s other experienced insurance attorneys.
 See Bituminous Cas. Corp. v. Sheets, 239 Va. 332, 389 S.E.2d 696 (1990).
 See Tuepker v. State Farm Fire & Cas. Co., 507 F.3d 346, 351, 354 (5th Cir. 2007); Metro Brokers, Inc. v. Transportation Ins. Co., 603 Fed. Appx 833, 836 (11th Cir. 2015).
 Skillets, LLC v. Colony Ins. Co., No. 3:20cv678-HEH, 2021 WL 926211, at *6 (E.D. Va. Mar. 10, 2021) (describing Elegant Massage as “well-reasoned” but reaching a different result under Florida law)).
Maryland General Assembly Provides New Opportunities and Guidelines for Government Contractors
Maryland Emergency Procurement
During the COVID-19 pandemic, State agencies were challenged to acquire pandemic-related resources, including personal protective equipment and COVID-19 test kits. To expedite procurement when needed resources became available, State procurement officers relied more frequently on emergency procurement methods, which lack the procedural safeguards and the normal review required for traditional competitive procurements. To address concerns related to the limited oversight of emergency procurement, Senate Bill 829/House Bill 1091 (both passed) establish a statutory definition of “emergency” for the purpose of deciding when to use an emergency procurement and further require, under specified circumstances, that emergency procurements be approved in advance by the chief procurement officer (CPO) at the Department of General Services (DGS). Prior approval by CPO is not necessary if delaying an emergency procurement by up to 48 hours would likely result in imminent harm. CPO must approve or disapprove the request within 48 hours; if CPO does not respond within 48 hours, the request is considered to be approved.
The bills also require the Special Secretary of the Governor’s Office of Small, Minority, and Women Business Affairs (GOSBA), in consultation with the Secretary of Transportation and the Attorney General, to establish guidelines for each State agency to consider when determining the appropriate minority business enterprise (MBE) participation goal and outreach for an emergency procurement contract.
Additionally, the measures codify and expand reporting requirements related to emergency procurements. Among the changes, they require that within 15 days after awarding a contract or modification by emergency procurement that exceeds $50,000, an agency must submit to the Board of Public Works (BPW) and the appropriate control agency specified information about the procurement, including the justification for the use of the emergency procurement procedure.
Minority Business Enterprise Program
The State’s MBE program requires that a statewide goal for MBE contract participation be established biennially through the regulatory process under the Administrative Procedure Act. The biennial statewide MBE goal is established by the Special Secretary of GOSBA, in consultation with the Secretary of Transportation and the Attorney General. The current goal is 29% of the total value of contracts awarded, with applicable subgoals for women- and minority-owned businesses.
Senate Bill 689 (passed) expands the duties of the Special Secretary to include (1) establishing a mentoring program in which large and established MBEs mentor start-up and small MBEs; (2) conducting a feasibility study for providing one-on-one assistance to MBEs in submitting competitive and successful bids and proposals for procurement contracts; (3) providing training and educational opportunities for nonminority prime contractors regarding their duties under the State’s MBE program; and (4) establishing an annual awards program to recognize localities that demonstrate the highest excellence in MBE support.
Under current law, a firm that is owned by a woman (or women) who is also a member of a racial or ethnic minority may be certified as both a woman-owned MBE and a minority-owned MBE. However, for the purpose of meeting MBE goals on a specific contract, a dually certified firm may be counted as either a woman-owned firm or a minority-owned firm, but not both. Senate Bill 697 (passed) alters this by allowing a business that is certified as a woman-owned business and as a business owned by a member of an ethnic or racial minority to be counted as a business owned by both (1) a woman (or women) and (2) a member of an ethnic or racial minority.
Senate Bill 909 (passed) requires GOSBA – prior to the release of funds to a recipient of a State capital grant of $3.0 million or more from a miscellaneous grant program, a House of Delegates initiative, or a Senate initiative – to review the project for subcontracting opportunities under the State’s MBE program and, if practicable, establish MBE subgoals for the project. If GOSBA establishes MBE subgoals for a capital project, the recipient must (1) certify to DGS that the recipient expects to achieve the subgoals or (2) request a waiver of all or part of the subgoals from GOSBA. GOSBA must review each request for a waiver and report the revised subgoals to DGS. The bill also establishes oversight and reporting requirements for GOSBA and DGS. The application of MBE subgoals to grant recipients takes effect July 1, 2022.
Small Business Reserve Program and Veteran-owned Small Business Reserve Program
Senate Bill 598/House Bill 790 (Chs. 78 and 79) repeal the statewide goal that at least 1% of the value of procurement contracts be made to veteran-owned small business enterprises (VSBE) and instead require the Special Secretary of GOSBA to adopt a statewide goal by regulation. The Acts also specify that contract goals for VSBEs must be based on both prime contracting and subcontracting opportunities for VSBEs, as determined through an analysis of the scope of work presented in the solicitation documents. The Acts include provisions to align management of the VSBE preference program with existing preference program management structures. They also specify that verification of a business owner’s prior active military service does not have to come only from the Maryland Department of Veteran Affairs.
Finally, the measures establish an Advisory Committee on VSBEs within GOSBA. The committee must (1) review GOSBA’s annual report to LPC on the VSBE program to identify areas for improvement and recommend actions to achieve those improvements and (2) ensure that a continuous oversight and improvement structure exists for the program.
Contractors and subcontractors working on eligible public works projects in Maryland must pay their employees the prevailing wage rate. “Public works” are structures or works, including a bridge, building, ditch, road, alley, waterwork, or sewage disposal plant, that are constructed for public use or benefit or paid for entirely or in part by public money. Any public works contract valued at less than $500,000 is not required to pay prevailing wages. Prevailing wages are wages paid to at least 50% of workers in a given locality who perform the same or similar work on projects that resemble the proposed public works project. The State Commissioner of Labor and Industry is responsible for determining prevailing wages for each public works project and job category based on annual surveys of contractors and subcontractors working on both public works and private construction projects.
Senate Bill 35/House Bill 37 (Chs. 57 and 58) expand the applicability of the State’s prevailing wage law to include (1) a public work project contract with a value of $250,000 or more (instead of $500,000 or more) and (2) a public work project for which State funds constitute at least 25% of the construction costs (instead of at least 50% of construction costs). The Acts apply only to a public work project contract executed on or after October 1, 2021. Legislative bond initiatives that receive State funds in the capital budget are exempt from the Acts’ requirements. On April 8, 2021, the Governor vetoed the bills, citing concerns about increasing the cost of doing business with the State and the continued economic impact of the COVID-19 pandemic. The General Assembly overrode both vetoes before the end of the 2021 session.
MD Public Information Act
Maryland’s Public Information Act (PIA) establishes that all persons are entitled to have access to information about the affairs of government and the official acts of public officials and employees. Each governmental unit that maintains public records must identify a representative whom a member of the public may contact to request a public record. Public records are any records that are made or received by a covered public agency in connection with the transaction of public business. The scope is broad, and all “records” possessed by an agency generally fall within the definition of “public records.” However, some records are not subject to public inspection due to exceptions provided for in the law. Examples of these protected records include an individual’s medical information, records used for security procedures, and a contractor’s trade secrets.
House Bill 183 (passed) makes various revisions to the PIA, including (1) expanding the duties and jurisdiction of the Public Information Act Compliance Board (PIACB) to include additional types of PIA disputes; (2) modifying provisions pertaining to the filing of written complaints to PIACB and modifies the timelines and procedures for the review and resolution of complaints; (3) expanding the duties of the Office of Public Access Ombudsman; (4) requiring a custodian to adopt a specified proactive disclosure policy; and (5) establishing staffing requirements for the Office of the Attorney General. The bill states that it may not be applied or interpreted to have any effect on or application to any exceptions to disclosure requirements under PIA.
House Bill 23 (passed) modifies the PIA to require an officer, an employee, an agent, or a contractor of the State or a political subdivision to deny inspection of records that contain specified personal information, and deny inspection using facial recognition searches, by any federal agency seeking access for the purpose of enforcing federal immigration law unless provided with a valid warrant. In addition, a person who receives specified personal information under PIA may not disclose the information to a federal agent or federal agency for the purpose of federal immigration enforcement unless presented with a valid warrant.