During the subsequent trial, multiple doctors who worked at Baylor testified that Covid-19 had damaged the property because microparticles of the virus had drastically reduced property’s utility and value. According to one doctor, the damage was not necessarily physical like it would have been had someone “tak[en] a sharp object to it or bang[ed] on it or burn[ed] it.” Instead, the physical damage lay in how Covid-19 droplets had made the property more “[d]angerous, therefore, less valuable, and, therefore, damaged.” For example, another doctor testified that refreshing an exam room between appointments took less than 20 seconds before Covid. After implementing safety measures to reduce the spread of Covid-19, the same preparations took more than an hour.

One expert witness for Lloyds “testified that viruses have mass and are ‘physical.’” If a person with Covid coughed or sneezed, their saliva would be "going to be pretty much everywhere." Another testified to the physical interaction between the particles of a virus and any surface they land on.

The trial court, over Lloyds’s objections to an alleged lack of physical evidence, ruled in favor of Baylor and entered monetary damages for more than $12 million. Lloyds appealed.

Requirements for Physical Damage

Lloyds argued there wasn’t enough evidence to conclude that Covid-19 caused actual physical damage to Baylor. The policy didn’t define the terms damage, loss, or physical, so the court turned first to the dictionary. A “loss” referred to the act of losing or the thing lost, while “damage” meant "[l]oss or injury to person or property” or "any bad effect on something." The term “physical” meant "pertaining to real, tangible objects” (emphasis added).

The Supreme Court of Texas had confronted what “physical injury” meant in the context of a CGL policy in U.S. Metals, Inc. v. Liberty Mut. Group, Inc., 490 S.W.3d 20 (Tex. 2015). In that case, damage had occurred due to the installation of impaired property at a refinery. Though the justices acknowledged how the impaired property had created an unsafe work environment and decreased the property’s value, “there was no ‘physical’ injury within the meaning of the policy until the subsequent repairs required destruction of parts of the covered property” (emphasis added).

As the judges pointed out, Baylor was certainly not the first policyholder to have a pandemic-related CGL claim denied for a lack of physical damage. State courts across the country made hundreds, if not thousands, of similar rulings, where Covid-related business claims fell short of the coverage trigger. Based on this pattern and the Supreme Court of Texas’s opinion, the court determined that, in order for Baylor’s claim to be covered, it was necessary to have “a tangible alteration” to the property.

Not Enough Evidence

The court acknowledged factual findings from other Covid-related cases. For example, in Julio & Sons Co. v. Continental Casualty Co., 692 S.W.3d 877 (Tex. Ct. App. 2024), a separate appellate court in Texas found that particles of Covid-19 did change any surface with which they came in contact, and the contaminated surfaces presented a very real danger of spreading Covid-19. However, just because Covid-19 had physical properties and had physical interactions with the surface of furniture or equipment did not mean it caused actual physical damage.

Though the physical particles of Covid-19 changed how Baylor used the property and decreased the property’s value, the particles had not caused any physical damage that would fall within the scope of the policy.

The decision of the trial court was reversed. The appellate judges entered an order that Baylor was owed nothing.

Editor’s Note: Insurance is primarily a matter of contract law. Insurance policies, like other contracts, are enforced according to their terms. When terms aren’t defined, courts turn to a standard desk reference. The doctors’ position that the presence of Covid-19 made the property less valuable is weak. Once cleaned, the property could be sold for the same amount as similar property without having to be cleaned to Covid-19 protocols. Covid-19 does not permanently alter the structure of any physical property it comes in contact with. Though the judges acknowledged that the physical particles of Covid-19 had caused damage by changing Baylor’s use of the property and reducing the property’s value, neither of these losses altered, as one witness put it, “the molecular structure of [Baylor’s] property."

Read More:

What is Physical Damage, and Does Covid-19 Cause Any?

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Insurer Prevails in COVID-19-Related Business Interruption Ruling

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