Affiliated FM does not have to pay most COVID-19-related losses at the Treasure Island resort and casino in Las Vegas, but the communicable disease provision in its policy, which had a much lower limit, may still apply, a federal appeals court ruled Tuesday.

In Treasure Island LLC v. Affiliated FM Insurance Co., the 9th U.S. Circuit Court of Appeals in San Francisco affirmed a lower court’s ruling in favor of the FM unit on the casino’s business interruption claim but reversed the ruling on the communicable disease coverage provision.

The court held that “direct physical loss or damage” was required to trigger business interruption coverage under the main policy wording and that the presence of COVID-19 in the air or on surfaces does not meet that standard.

The resort sought coverage for property damage and business interruption after closing during the pandemic under a policy with $850 million in property damage limits and $327 million in business interruption limits. However, the policy’s communicable disease endorsement included a $100,000 sublimit for both property damage and business interruption.

The appeals court found that the lower court erred in granting summary judgment to the insurer on the communicable disease provisions. Treasure Island produced evidence that two employees contracted COVID-19 during the policy period, and an expert concluded with “99.99% certainty” that the virus was present on the property before the policy expired, creating a factual dispute over whether the disease triggered coverage.

The case was remanded to the district court for further proceedings on the communicable disease coverage claims.