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The largest nonprofit health system in Texas, Baylor Scott & White Holdings, will not receive coverage for COVID-19-related business interruption losses amounting to over $192 million, as per a Fifth Circuit decision. This ruling underscores prior circuit precedent that COVID-19 does not cause "physical loss or damage."

Texas Health System COVID-19 Suit: Case Background

A split three-judge panel on Thursday dismissed Baylor Scott & White's coverage suit against Factory Mutual Insurance Co. Baylor had contended that its policy was unique, covering "physical loss or damage" caused by communicable diseases. However, the court concluded that Baylor did not "adequately distinguish" its case from existing precedent.

"The alleged uniqueness of the policy's language does not change that we have determined, as a matter of law, COVID-19 does not cause physical loss or damage to property," wrote U.S. Circuit Judge Irma Carrillo Ramirez for the two-judge majority. "Absent a decision to the contrary by the Supreme Court of Texas or our en banc court, existing circuit precedent controls."

Policy and Claims

Baylor's commercial property policy with Factory Mutual included communicable disease provisions, offering up to $5 million for reasonable cleanup and public relations costs due to the presence of a communicable disease at its insured locations. The parties agreed that these provisions did not require "physical loss or damage" to be applicable, and Factory Mutual had already paid the $5 million limit.

In June 2021, Baylor submitted a claim for business interruption costs caused by COVID-19, totaling over $192 million. The subsequent lawsuit filed in February 2022 was dismissed by U.S. District Judge Sean D. Jordan in April 2022.

Texas Health System COVID-19 Suit: Appeal and Ruling

On appeal, Baylor argued that the contamination exclusion in the policy should not apply to COVID-19 as it would conflict with the communicable disease coverage. Judge Ramirez, however, referenced multiple Fifth Circuit decisions favoring insurers in pandemic coverage claims.

"The question at issue is not whether a communicable disease that causes 'physical loss or damage' triggers coverage under the policy, but rather whether COVID-19 causes such 'physical loss or damage,'" she emphasized.

Baylor's assertions that COVID-19 causes tangible alterations to property were also dismissed, with Judge Ramirez noting the circuit's consistent ruling that COVID-19 does not physically affect property under property insurance policies as a matter of law.

Dissenting Opinion

U.S. Circuit Judge Jennifer Walker Elrod dissented, stating that Baylor's detailed scientific allegations about COVID-19's impact on property were distinct from previous cases. "The amended complaint cites to research from peer-reviewed scientific journals such as Nature and Virology Journal in support of this allegation," she pointed out. Judge Elrod argued that the factual question of whether COVID-19 can tangibly alter property warrants further consideration.

Texas Health System COVID-19 Suit: Legal Representation

Baylor Scott & White is represented by Ernest Martin Jr., Natalie DuBose, and Andrew Guthrie of Haynes and Boone LLP. Factory Mutual is represented by Shannon Marie O'Malley of Zelle LLP and Jeffrey S. Levinger of Levinger PC.

A representative of Factory Mutual declined to comment, and representatives of Baylor did not respond to requests for comments on Friday.

Conclusion

The Fifth Circuit's affirmation that COVID-19 does not cause physical loss or damage to property sets a significant precedent for similar cases. This Texas health system COVID-19 suit highlights the ongoing legal challenges faced by policyholders seeking coverage for pandemic-related losses.