517 F.Supp.3d 725
E.D. Mich.2021Background
- Salon XL, an Ann Arbor hair salon, closed due to Michigan Governor Whitmer’s COVID-19 executive orders and claimed business-interruption losses under a West Bend commercial property policy.
- The policy provided Business Income, Extra Expense, Civil Authority, and a separate Communicable Disease business-income coverage and also contained a Virus or Bacteria exclusion and a Consequential Losses (including "loss of use") exclusion.
- Salon XL submitted a claim; West Bend denied coverage and Salon XL sued for declaratory relief, breach of contract, and statutory trade-practices violations; matter removed to federal court on diversity jurisdiction.
- West Bend moved to dismiss the Amended Complaint under Fed. R. Civ. P. 12(b)(6); the court accepted Salon XL’s factual allegations as true for the motion-to-dismiss analysis.
- The court found Salon XL plausibly alleged direct physical loss/damage (contamination/exposure and loss of use) and a causal nexus between COVID-19 and the Governor’s orders for pleading purposes.
- The court held the Virus or Bacteria exclusion and the Consequential Losses (loss-of-use) exclusion bar coverage for Business Income, Extra Expense, and Civil Authority coverages, but the Communicable Disease coverage survived dismissal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether alleged COVID-19 contamination and resulting loss of use constitute "direct physical loss or damage" under the policy | Contamination/exposure and inability to use premises = direct physical loss/damage | Policy language excludes mere loss of use; loss of use is not covered | Allegations are plausible at pleading stage; terms "loss"/"damage" ambiguous, so claim survives initial pleading (but subject to exclusions) |
| Causation for Civil Authority coverage (executive orders) | Exec. orders were issued due to COVID-19 presence at or near insured premises, creating causal nexus | Orders were not issued in response to "dangerous physical conditions resulting from the damage" at insured premises | Alleged causal nexus is sufficient to survive 12(b)(6) pleading challenge, but ultimate coverage precluded by exclusions |
| Applicability of Virus or Bacteria exclusion to coverages | Communicable Disease coverage specifically grants coverage for communicable diseases; exclusion creates ambiguity and cannot negate that grant | COVID-19 is a virus; the Virus or Bacteria exclusion expressly excludes virus-related losses from Covered Causes of Loss for Business Income, Extra Expense, and Civil Authority | Virus or Bacteria exclusion precludes Business Income, Extra Expense, and Civil Authority coverages, but does not preclude the separate Communicable Disease coverage |
| Applicability of Consequential Losses ("loss of use") exclusion | Exclusion is ambiguous and would render coverage illusory when read against grant | Exclusion plainly bars claims based on mere loss of use; plaintiff alleges only loss of use | Consequential Losses exclusion bars Business Income, Extra Expense, and Civil Authority coverages to the extent plaintiff’s alleged injury is loss of use; it does not bar Communicable Disease coverage |
Key Cases Cited
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (plausibility pleading standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading must state a plausible claim)
- K.V.G. Properties, Inc. v. Westfield Ins. Co., 900 F.3d 818 (6th Cir.) (two-step insurance coverage analysis)
- Auto-Owners Ins. Co. v. Harrington, 455 Mich. 377 (Mich.) (Michigan law on determining insurance coverage)
- Frankenmuth Mut. Ins. Co. v. Masters, 460 Mich. 105 (Mich.) (ambiguities in insurance contract construed for insured)
- Henderson v. State Farm Fire & Cas. Co., 460 Mich. 348 (Mich.) (contract interpretation is question of law)