Team 44 Restaurants LLC v. The American Insurance Company, 2:21-cv-00404

Background

Plaintiff Team 44 Restaurants LLC owned multiple restaurant locations and purchased “all risks” policies from American Insurance Co. and Greenwich Insurance Co., which covered "direct physical loss or damage." Plaintiffs claim COVID-19 closures and mandated on-site changes prevented use and altered the premises.
Defendants denied coverage; plaintiffs sued for breach of contract and declaratory relief. Defendants moved to dismiss arguing "physical loss or damage" requires actual physical harm.
The court previously dismissed loss-of-use claims with prejudice but granted limited leave to amend to allege how alleged physical alterations caused actual physical loss or damage.
In the proposed First Amended Complaint, plaintiffs added allegations about an unnamed independent broker who allegedly used defendants’ materials and induced plaintiffs’ expectations of coverage under Arizona’s reasonable expectations doctrine.
Plaintiffs also detailed specific alterations (plexiglass, table rearrangements, disposable menus, sanitizer stations, social-distancing measures) and argued those alterations caused physical loss/damage.
The court applied Rule 15/12(b)(6) standards, found the FAC futile because (1) broker statements were not shown to be attributable to the insurers and thus did not trigger reasonable-expectations relief, and (2) the alleged alterations did not allege actual physical loss or damage; the court denied leave to amend and closed the case.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the reasonable expectations doctrine applies based on broker statements	Broker used insurers' materials and told plaintiffs they had coverage for closures/loss of use, inducing reasonable expectations	Broker was independent and unaffiliated; plaintiffs fail to allege broker was authorized or that insurers knew of broker's promises	Denied: plaintiffs failed to allege facts showing broker's conduct was reasonably attributable to defendants, so doctrine does not apply
Whether an average insured would read "direct physical loss or damage" to include loss of use/access	Phrase reasonably includes loss of access or curtailment of use	Ordinary meaning requires actual, tangible physical harm to property	Court held ordinary lay reading requires actual physical damage; loss-of-use is insufficient
Whether plaintiffs lacked full and adequate notice of the policy term	Plaintiffs (via broker) did not receive a definition and would not have purchased if they had known defendants' interpretation	Policy language is plain and provided to plaintiffs; term is prominently located	Court found plaintiffs had full and adequate notice; usual definition of the term is implied
Whether COVID-19–mandated alterations (plexiglass, menus, sanitizer, rearrangement) constitute physical loss or damage	Physical alterations to premises caused physical loss/damage	Alterations affected business operations but did not physically damage or materially alter the property itself	Court held alleged alterations do not amount to actual physical loss or damage; claims based on alterations fail

Key Cases Cited

Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir. 2021) (interpreting "direct physical loss or damage" to require a demonstrable physical alteration)
Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 682 P.2d 388 (Ariz. 1984) (articulating reasonable expectations doctrine under Arizona law)
Gordinier v. Aetna Cas. & Sur. Co., 742 P.2d 277 (Ariz. 1987) (narrowing and outlining four scenarios for reasonable expectations relief)
Vencor Inc. v. Nat’l States Ins. Co., 303 F.3d 1024 (9th Cir. 2002) (addressing what constitutes "full and adequate notice" of policy terms)
Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard — plausibility requirement)
Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (pleading standard for plausible claims)
Foman v. Davis, 371 U.S. 178 (1962) (standards for leave to amend — futility, prejudice, etc.)
Barahona v. Union Pac. R.R. Co., 881 F.3d 1122 (9th Cir. 2018) (amended complaint is futile if no set of facts would state a valid claim)
Promotional Headwear Int’l v. Cincinnati Ins. Co., 504 F. Supp. 3d 1191 (D. Kan. 2020) (COVID-19 closure cases holding physical loss requires tangible harm)
10E, LLC v. Travelers Indem. Co. of Conn., 483 F. Supp. 3d 828 (C.D. Cal. 2020) (COVID-19 restrictions did not materially alter property; no physical damage)