595 F.Supp.3d 973
D. Nev.2022Background
- WP6 Restaurant Management Group, LLC operates Wolfgang Puck restaurants and related businesses across multiple states and earns income from dependent locations.
- Zurich issued an Edge Policy (effective Jan 1, 2020–Jan 1, 2021) that insures against "direct physical loss of or damage" from a Covered Cause of Loss and includes Time Element, Civil or Military Authority, and Contingent Time Element coverages.
- The Policy excludes coverage for losses arising from "loss of use."
- WP6 alleged COVID-19 and various governmental Stay-at-Home orders caused physical loss or damage and sought coverage for business interruption and related losses; Zurich denied coverage and moved to dismiss.
- The district court granted Zurich’s motion to dismiss, concluding WP6 failed to plead physical alteration or causation required by the policy, the loss-of-use exclusion barred recovery, and bad-faith claims failed as derivative of nonexistent coverage; dismissal was with prejudice and leave to amend was denied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether COVID-19 closures constitute "direct physical loss of or damage" to insured property | COVID-19 contaminants on surfaces and resulting orders rendered premises unsafe, causing physical loss or damage | "Direct physical loss or damage" requires a demonstrable physical alteration; COVID-19 causes economic loss or temporary contamination, not physical alteration | Denied — plaintiff failed to plausibly allege physical alteration required for coverage |
| Whether civil authority orders triggered Civil or Military Authority coverage | Orders prohibiting access (Stay-at-Home) were issued in response to COVID-19 and therefore triggered coverage | The provision requires the order to result from physical loss/damage to other nearby property; orders here were prophylactic and not tied to physical damage at other premises | Denied — orders were not shown to be issued due to physical damage to nearby third-party property |
| Whether Time Element (business interruption) coverage applies | Business suspensions were caused by COVID-19 and the governmental closures, so time element losses are covered | Time Element coverage requires suspension due to direct physical loss/damage to insured property and a Period of Liability tied to repair/replace; no such physical loss was alleged | Denied — plaintiff failed to allege causation from physical loss/damage or a cognizable Period of Liability |
| Whether bad-faith and unfair-claims claims survive absent coverage | Zurich acted without proper cause in denying claims; investigation/denial supports extra-contractual claims | Bad-faith requires an underlying obligation to pay under the policy; absent coverage, bad-faith claims fail | Denied — extra-contractual claims dismissed as derivative of failed coverage claims |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (pleading must state a plausible claim)
- Ashcroft v. Iqbal, 556 U.S. 662 (court need not accept conclusory allegations)
- Mudpie, Inc. v. Travelers Cas. Ins. Co., 15 F.4th 885 ("direct physical loss" requires physical alteration)
- Circus Circus LV, LP v. AIG Specialty Ins. Co., 525 F. Supp. 3d 1269 (applying physical-loss requirement to COVID-19-related claims)
- Fed. Ins. Co. v. Coast Converters, 339 P.3d 1281 (Nevada Supreme Court discussing physical damage in coverage context)
- Farmers Home Mut. Ins. Co. v. Fiscus, 725 P.2d 234 (coverage where flooding physically damaged property)
- Powers v. United Servs. Auto. Ass'n, 962 P.2d 596 (bad-faith refusal to pay requires insurer's obligation to pay)