501 F.Supp.3d 699
D. Ariz.2020Background
- Plaintiff Border Chicken AZ LLC (franchisee) purchased a businessowners policy effective Jan 1, 2020–Jan 1, 2021 covering, among other things, "Civil Authority" losses.
- Arizona executive orders in March 2020 required restaurants to cease on-site dining and implement distancing measures in response to COVID-19; Plaintiff limited operations to pickup/drive-thru and suffered business-income losses.
- Plaintiff sought coverage under the Civil Authority provision; Allied denied coverage relying on a Policy "Virus or Bacteria" exclusion that bars loss "caused directly or indirectly" by any virus.
- Plaintiff raised an ISO Circular in its response (but not in the operative complaint) to argue the exclusion should not apply to pandemic shutdowns.
- The court treated the FAC allegations as controlling, found the Virus Exclusion unambiguous and applicable to losses tied to COVID-19 (directly or indirectly), and granted Defendant’s motion to dismiss with prejudice.
- The court denied leave to amend as futile and allowed Defendant to seek attorneys’ fees under Arizona law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does the Virus Exclusion bar Civil Authority coverage? | The Governor's order, not the virus, caused the loss — so exclusion should not apply. | The exclusion bars loss "directly or indirectly" caused by a virus; COVID-19 was an indirect cause. | Exclusion applies; it unambiguously bars coverage for losses tied to COVID-19. |
| Is the policy ambiguous or subject to extrinsic evidence (ISO materials)? | ISO Circular and standardized form usage create ambiguity requiring extrinsic evidence. | Policy language is clear; plaintiff cannot manufacture ambiguity via extrinsic materials. | Policy unambiguous; extrinsic evidence not considered to create coverage. |
| Does plaintiff have a "reasonable expectation" of coverage? | Purchase of the policy and insurer representations gave a reasonable expectation of shutdown coverage. | No prior negotiations or representations support such an expectation; Darner limits expectation claims. | No reasonable-expectation basis pleaded; argument fails. |
| Should plaintiff be granted leave to amend? | (Implied) Plaintiff could add allegations about ISO/regulatory process to cure defects. | Amendment would be futile because exclusion plainly applies. | Leave denied as amendment would not cure the pleading defects. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standards; legal conclusions not presumed true)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for complaints)
- Lopez v. Smith, 203 F.3d 1122 (9th Cir. 2000) (leave to amend before dismissal; futility exception)
- Hadley v. Sw. Props., Inc., 570 P.2d 190 (Ariz. 1977) (contract interpretation is a question of law)
- Millar v. State Farm Fire & Cas. Co., 804 P.2d 822 (Ariz. Ct. App. 1990) (rejecting efficient proximate cause; enforcing concurrent-cause exclusion)
- Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 682 P.2d 388 (Ariz. 1984) (reasonable-expectation doctrine limited to inducements/representations)
- Depositors Ins. Co. v. Ubrina, 411 F. Supp. 3d 454 (D. Ariz. 2019) (contract terms construed as written; express limitations control)
- Balistreri v. Pacifica Police Dep’t, 901 F.2d 696 (9th Cir. 1990) (12(b)(6) grounds: legal theory or insufficient facts)
- Cousins v. Lockyer, 568 F.3d 1063 (9th Cir. 2009) (pleading factual allegations taken as true)
- In re Cutera Sec. Litig., 610 F.3d 1103 (9th Cir. 2010) (legal conclusions insufficient at pleading stage)