543 F.Supp.3d 528
E.D. Ky.2021Background
- LexFit, a Lexington, Kentucky fitness center, was ordered to cease in-person operations by a state COVID-19 closure order issued March 17, 2020.
- LexFit submitted a claim to its commercial property insurer, West Bend, for business income loss and extra expenses incurred during the suspension.
- West Bend denied the claim, stating no "direct physical loss of or damage to property" occurred and citing a virus exclusion.
- LexFit sued in Kentucky state court for declaratory relief, bad faith, violation of the Insurance Code, and breach of contract; West Bend removed and moved for judgment on the pleadings.
- The policy provides business-income coverage only when a "Covered Cause of Loss" causes "direct physical loss of or damage to" the described premises; it also includes a civil-authority sublimit tied to nearby property damage.
- The district court evaluated whether the closure and resulting economic losses constitute a "direct physical loss" or otherwise trigger civil-authority coverage under Kentucky law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the COVID-19 closure and lost income qualify as a "direct physical loss" under the policy | Closure-created suspension and loss of net income are a covered "direct physical loss"; "Covered Cause of Loss" language is broad | "Direct physical loss" requires tangible, physical alteration/damage to insured property; pure economic loss or loss of use is not enough | Court: Economic losses and loss of goodwill do not constitute "direct physical loss"; coverage not triggered |
| Whether civil-authority coverage applies because the Closure Order prohibited access and harmed nearby businesses | The Closure Order both prohibited access and caused damage to surrounding businesses, triggering civil-authority coverage | Civil-authority coverage requires property damage (a non-excluded direct physical loss) to nearby property that prompted the authority action; the order did not respond to such property damage | Court: Civil-authority coverage not triggered; the order was not the type of response-to-damage the policy contemplates |
| Whether West Bend is entitled to judgment on the pleadings | LexFit: complaint plausibly alleges coverage under the policy | West Bend: complaint fails to allege a non-excluded direct physical loss; motion for judgment on the pleadings should be granted; virus exclusion likely applies | Court: Granted West Bend's motion for judgment on the pleadings; did not decide virus exclusion but noted it likely bars recovery |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard: accept well-pleaded facts and test for plausibility)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (legal standard for pleading plausibility)
- Ziegler v. IBP Hog Market, Inc., 249 F.3d 509 (6th Cir. 2001) (Rule 12(c) judged under Rule 12(b)(6) standard)
- Kemper Nat. Ins. Co. v. Heaven Hill Distilleries, Inc., 82 S.W.3d 869 (Ky. 2002) (insurance-contract interpretation is a question of law; exclusions subtract from coverage)
- Fryman v. Pilot Life Ins. Co., 704 S.W.2d 205 (Ky. 1986) (contract terms interpreted according to ordinary usage and in insured's favor when ambiguous)
- Liberty Corp. Capital Ltd. v. Sec. Safe Outlet, Inc., 937 F. Supp. 2d 891 (E.D. Ky. 2013) (applying state law to interpret insurance contract)