537 F.Supp.3d 1282
N.D. Ala.2021Background
- Ascent Hospitality owned hotels/restaurants insured under an "all-risks" Wausau policy that covers losses caused by "direct physical loss or damage"; policy includes a Contamination Exclusion defining "contaminant" to include viruses.
- In March 2020 Ascent alleged COVID-19 was present on its properties and that state ‘‘stay-at-home’’ orders and the virus’s presence forced closures, causing >$40 million in losses.
- Ascent submitted a claim; defendants issued a Reservation of Rights within 48 hours and denied the claim in April 2020. Ascent amended its complaint asserting breach of contract, declaratory relief, bad faith, fraudulent misrepresentation, and fraudulent suppression.
- Prior to this motion the court dismissed several claims against Liberty and limited fraud claims; remaining claims included breach, declaratory relief, bad faith, and fraud against Wausau and a fraud claim against Liberty.
- Defendants moved for judgment on the pleadings; the court accepted Ascent’s factual allegations as true for the Rule 12(c) posture.
- The court concluded (as a matter of law) the policy does not cover COVID-19 losses and the Contamination Exclusion applies, and therefore dismissed all remaining claims with prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether "direct physical loss or damage" includes loss of use from virus contamination or government closures | "Physical loss or damage" includes property rendered unusable by a virus or by government closure orders | Phrase requires tangible, physical alteration or actual damage; mere presence of virus or loss of use is not "physical loss" | The term requires an actual physical change/alteration; cleaning/disinfection (or closure orders) do not constitute "repair/replace"able physical loss — no coverage |
| Whether the policy's Contamination Exclusion bars recovery for COVID-19 losses | Exclusion targets traditional environmental/industrial pollution and should not be read to bar pandemic losses | Exclusion expressly defines "contaminant" to include viruses; contamination from COVID-19 is excluded unless it "directly resulted from a covered loss" | Contamination Exclusion applies because COVID-19 is a defined contaminant and was the alleged cause of loss; exclusion bars coverage |
| Choice of law: enforceability of New York choice-of-law provision | New York choice-of-law provision is unenforceable; Georgia law should govern breach claim | Policy contains an enforceable New York choice-of-law provision | Ascent waived the argument by not timely challenging the provision; court also noted result is the same under New York or Georgia law |
| Viability of tort claims (bad faith, fraudulent misrepresentation) given denial | Denial, inadequate investigation, and reservation of rights support bad faith and fraud claims | No coverage exists; therefore bad faith (which requires a covered loss) fails; representations about prompt payment were not false given a reasonable coverage denial | Bad faith dismissed (no covered loss); fraudulent misrepresentation dismissed because denial was justified and statements were not shown to be false |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (pleading standard requires plausibility)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standards; legal conclusions vs. factual allegations)
- Roundabout Theatre Co. v. Continental Cas. Co., 751 N.Y.S.2d 4 (N.Y. App. Div. 2002) (interpreting "direct physical loss or damage" to require physical damage for business-interruption coverage)
- Mama Jo’s, Inc. v. Sparta Ins. Co., [citation="823 F. App'x 868"] (11th Cir. 2020) ("direct physical loss" requires actual physical loss; cleaning restores property and does not qualify)
- Olin Corp. v. Am. Home Assurance Co., 704 F.3d 89 (2d Cir. 2012) (contract terms should be read to avoid surplusage)
- AFLAC, Inc. v. Chubb & Sons, Inc., 581 S.E.2d 317 (Ga. Ct. App. 2003) (Georgia precedent treating "direct physical loss or damage" as requiring actual physical change)