Out West Restaurant Group Inc. v. Affiliated FM Insurance Company, 527 F.Supp.3d 1142

Background:

Plaintiffs Out West Restaurant Group and related entities purchased an AFM policy (Feb 15–Dec 1, 2020) insuring against “all risks of physical loss or damage.”
Plaintiffs allege COVID-19 contamination (virus on surfaces and in the air) and government closure orders rendered their restaurants unusable, causing business interruption and cleanup expenses.
Plaintiffs seek coverage under Business Interruption, Extra Expense, Civil/Military Authority, Ingress/Egress, Supply Chain, and related provisions; they also assert breach of the implied covenant of good faith.
AFM moved for judgment on the pleadings under Rule 12(c), arguing the policy requires physical loss or damage, COVID-19/government orders do not cause such loss as a matter of law, and virus/contamination exclusions bar coverage (while reserving communicable disease claims).
The court applied California contract and insurance law, concluding plaintiffs failed to plausibly allege “direct physical loss of or physical damage to” property and granted judgment for AFM.
The complaint was dismissed with prejudice; the court did not reach the virus-exclusion issue and left AFM’s handling of communicable-disease claims for separate consideration.

Issues:

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether plaintiffs alleged “direct physical loss of or physical damage to” property under the policy	Presence of COVID-19 on surfaces/air physically transformed property, making it unsafe and unfit	Policy requires a distinct, demonstrable physical alteration; pandemic or temporary loss of use is economic, not physical	Plaintiffs failed to plausibly allege direct physical loss/damage; claim dismissed
Whether SARS‑CoV‑2 (the virus) or government closure orders constitute a physical force causing property damage	Virus presence and closure orders rendered premises unusable and thus caused physical loss	Virus and orders do not cause physical alteration; many courts hold temporary closure/use restrictions do not equal physical loss	Court followed majority view: virus/orders do not constitute physical loss as a matter of law
Whether contamination/virus exclusions bar coverage	Plaintiffs disputed the applicability of AFM’s contamination exclusion (arguing exceptions or different coverages)	AFM argued contamination/virus-related exclusions apply to bar coverage for plaintiffs’ losses	Court did not decide exclusion scope because no covered physical loss was alleged; exclusion analysis unnecessary
Whether amendment would be permitted	Plaintiffs could plead additional facts (e.g., actual virus presence) to cure pleading defects	AFM argued amendment would be futile given policy language and governing law	Court refused leave to amend as futile and dismissed with prejudice

Key Cases Cited

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (establishes federal plausibility pleading standard)
Ashcroft v. Iqbal, 556 U.S. 662 (applies plausibility standard to pleadings)
Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1 (insurance-policy interpretation governed by contract principles under California law)
Bank of the W. v. Superior Court, 2 Cal.4th 1254 (contract interpretation rules; clear terms control)
Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025 (12(c) standard: pleadings construed favorably to nonmoving party)
Chavez v. United States, 683 F.3d 1102 (Rule 12(c) appropriateness when no material facts in dispute)
Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047 (Rule 12(c) is functionally identical to Rule 12(b)(6))
MRI Healthcare Ctr. of Glendale v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766 (California cases requiring a demonstrable physical alteration for “direct physical loss”)
Stanford Ranch, Inc. v. Maryland Casualty Co., 89 F.3d 618 (no need to reach exclusions where insuring clause does not provide coverage)
Glavinich v. Commonwealth Land Title Ins. Co., 163 Cal. App. 3d 263 (coverage is defined by the insuring clause; exclusions cannot expand coverage)