Background
Tom James Company, a Franklin, Tennessee-based vertically integrated custom clothing manufacturer with subsidiaries across the United States, Chile, the United Kingdom, and Canada, suffered significant financial losses when COVID-19 pandemic restrictions forced its locations to close or limit operations beginning in April 2020. Tom James submitted claims to its commercial property insurer, Zurich American Insurance Company, seeking coverage under the policy’s “Time Element” provision, which pays for business income losses sustained during a period of suspended operations. Zurich denied the claims and filed a declaratory judgment action in Williamson County Chancery Court, asserting that the policy required “direct physical loss of or damage to property” — a threshold Tom James’s pandemic-related losses could not satisfy.
Tom James counterclaimed for a declaration of coverage and alleged breach of contract. The chancery court denied Zurich’s motions to dismiss and for judgment on the pleadings, concluding that both parties’ competing definitions of “direct physical loss” were reasonable and that the term was therefore ambiguous. Applying the rule that ambiguous insurance language must be construed in favor of the insured, the trial court found that Tom James’s allegations of inability to access its facilities were sufficient to state a covered claim. The trial court also declined to apply Zurich’s asserted policy exclusions — the “Contamination” exclusion and the “Law or Ordinance” exclusion — on the ground that the government orders were preemptive rather than responsive to actual viral presence, and that it was unclear whether a layperson would treat an executive order as a “law or ordinance.” Zurich obtained certification for an interlocutory appeal under Tenn. R. App. P. 9, and the Court of Appeals granted permission.
This litigation had been stayed for several years pending a parallel Indiana action, which was ultimately dismissed for lack of personal jurisdiction over Zurich. After the stay was lifted in 2024, Tom James filed an amended counterclaim, prompting Zurich to renew its motions. The chancery court again denied relief, and the certified interlocutory appeal followed.
The Court’s Holding
The Court of Appeals reversed the trial court’s central ruling, holding that the phrase “direct physical loss” in the Zurich policy is unambiguous under Tennessee law. Drawing on dictionary definitions — “direct” means immediate and free from extraneous influence; “physical” means relating to tangible, material things; “loss” means a failure to maintain possession — the court concluded that the provision requires either (1) a distinct, demonstrable physical alteration or destruction of property, or (2) a complete physical dispossession, such as theft. Mere loss of access or loss of use, without any physical change to the property, does not satisfy the “physicality” requirement. The court expressly agreed with the Sixth Circuit, the Alaska Supreme Court, the California Supreme Court, and federal district courts applying Tennessee law, all of which had reached the same conclusion in COVID-19 coverage cases. Because Tom James’s ownership and possession of its properties were never altered — only its ability to access and use them was affected — the counterclaim failed to allege facts sufficient to invoke coverage under the Time Element provision.
The court also rejected Tom James’s argument that the policy’s international “Period of Liability” clause — which, unlike the domestic clause, lacked “repair or replace” language — created ambiguity or suggested coverage without physical alteration. Both periods of restoration begin with “direct physical loss,” the court reasoned, and the absence of repair-or-replace language in one clause does not override the policy’s unambiguous threshold requirement. The court similarly rejected Tom James’s analogy to theft, finding that while a government closure order renders property inaccessible, it does not dispossess the owner of possession or title, which is the hallmark of theft-type physical loss.
Despite reversing on the coverage question, the court affirmed the trial court’s denial of the motion to dismiss, concluding that Tom James’s counterclaim adequately stated a claim for declaratory judgment sufficient to survive dismissal. However, because the pleadings had not yet closed when the trial court ruled on Zurich’s motion for judgment on the pleadings, that ruling was procedurally premature. The court therefore vacated that portion of the order and remanded for further proceedings consistent with its opinion.
Key Takeaways
- “Direct physical loss” under a commercial property policy requires either physical alteration, contamination, or destruction of the insured property, or a complete physical dispossession akin to theft — loss of use or loss of access caused by government orders is insufficient as a matter of Tennessee law.
- The term “direct physical loss” is unambiguous; the fact that parties disagree about its meaning does not render a provision susceptible to two plausible interpretations, and courts may not apply the pro-insured construction rule unless genuine ambiguity exists.
- Structural differences between domestic and international coverage clauses in the same policy (e.g., the presence or absence of “repair or replace” language) do not alter the plain-meaning analysis of the policy’s threshold coverage trigger.
- A motion for judgment on the pleadings is premature under Tennessee procedure if the pleadings have not yet closed at the time of the ruling; such an order must be vacated even if the substantive legal analysis favors the moving party.
- Tennessee state appellate courts have now aligned with the overwhelming weight of authority from federal courts and other state supreme courts holding that COVID-19 business losses do not satisfy “direct physical loss” requirements in standard commercial property policies.
Why It Matters
This decision is the first definitive ruling from a Tennessee appellate court on the “direct physical loss” question in the COVID-19 business interruption context, resolving an issue that had previously been addressed only by federal courts applying Tennessee law. By holding the term unambiguous and adopting the physical-alteration-or-dispossession standard, the court closes the door on pandemic business interruption claims under standard commercial property policies in Tennessee and aligns the state with the national consensus. Insurers defending similar Tennessee claims — and there remain pending cases — now have binding intermediate appellate authority to support dismissal at the pleadings stage.
The decision is also notable for its procedural holding: the vacatur of the judgment-on-the-pleadings ruling on the ground that pleadings had not closed serves as a reminder that Tennessee courts will enforce procedural prerequisites even when the substantive merits favor the moving party. For coverage litigants in Tennessee, this means the timing of dispositive motions relative to the close of pleadings must be carefully managed.