637 F.Supp.3d 865
E.D. Cal.2022Background:
- Plaintiffs operate Golden 1 Center (arena), an adjacent hotel, and a shopping center and lost substantial revenue after COVID-19 and related government restrictions canceled events and reduced occupancy.
- Plaintiffs’ insurer, Factory Mutual, issued an “all risks” policy covering losses from "physical loss or damage," with separate "Additional Coverages for insured physical loss or damage" including a Communicable Disease provision (costs for cleanup, PR, etc.) and time-element coverage for loss caused by civil or military orders.
- The policy defines "communicable disease" and separately contains a broad Contamination exclusion (excluding losses from viruses among other contaminants) and a Loss-of-Use exclusion unless otherwise stated.
- Plaintiffs submitted claims for pandemic-related losses and incurred remediation and business-interruption costs; Factory Mutual denied coverage and moved to dismiss the complaint asserting (1) no "physical loss or damage," (2) contamination exclusion, and (3) loss-of-use exclusion.
- The court found the policy reasonably susceptible to an interpretation that treats the presence of a communicable disease as "physical loss or damage" because the Communicable Disease provision is stated as an additional coverage "for insured physical loss or damage," creating ambiguity to be construed for the insured.
- Because that ambiguity was resolved in plaintiffs’ favor and the exclusions did not unambiguously bar coverage, the court denied the insurer’s motion to dismiss the breach, declaratory relief, and bad-faith claims.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs’ losses arise from "physical loss or damage" required by the policy | The Communicable Disease and related time-element provisions are expressly "for insured physical loss or damage," so the presence of a communicable disease can satisfy that requirement | COVID-related losses are not "physical loss or damage" and many courts have held pandemic closures do not meet that requirement | The court held a reasonable interpretation exists that treats communicable-disease presence as "physical loss or damage," creating ambiguity resolved for the insured; claim survives dismissal |
| Whether the Contamination exclusion bars coverage for virus-related losses | The Contamination exclusion permits coverage when contamination "directly results from other physical damage not excluded," and the policy can be read to treat communicable disease as insured physical damage | The contamination exclusion excludes virus-related losses except as narrowly provided in the communicable-disease subcoverages | The court held the contamination exclusion does not unambiguously bar coverage given the reasonable insured-favoring reading of the policy |
| Whether the Loss-of-Use (loss of market/use) exclusion bars plaintiffs’ claims | The policy expressly provides communicable-disease and time-element coverages for the claimed losses, so the loss-of-use exclusion does not apply "if otherwise stated" | The exclusion negates coverage for diminished use or market regardless of pandemic-related closures | The court held the loss-of-use exclusion does not clearly negate coverage under the policy language at issue |
| Whether declaratory relief and bad-faith claims should be dismissed | These claims derive from the contract claim; if coverage plausibly exists, derivative claims survive | Dismiss these derivative claims because no coverage as a matter of law | The court denied dismissal of the declaratory and bad-faith claims as derivative of the surviving contract claim |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (establishes pleading plausibility standard for motions to dismiss)
- Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025 (choice-of-law principle; California law applies)
- Godecke v. Kinetic Concepts, Inc., 937 F.3d 1201 (standards for Rule 12(b)(6) review)
- AIU Ins. Co. v. Superior Ct., 51 Cal.3d 807 (ambiguous policy language resolved in favor of insured)
- MacKinnon v. Truck Ins. Exch., 31 Cal.4th 635 (coverage construed broadly; exclusions construed narrowly)
- Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1 (insurance contract interpretation rules under California law)
- Bank of the West v. Superior Court, 2 Cal.4th 1254 (contract terms interpreted in context and by intended function)
- Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir.; contrasting authority holding COVID-closure losses not physical loss)