Case Information
*1 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION
DINO DROP, INC., et al.,
Plaintiffs, Case No. 20-12549 vs. HON. MARK A. GOLDSMITH CINCINNATI INSURANCE COMPANY,
Defendant.
_______________________________/
OPINION & ORDER GRANTING DEFENDANT’S MOTION TO DISMISS (Dkt. 16) AND
GRANTING DEFENDANT’S MOTION FOR LEAVE TO FILE SUPPLEMENTAL AUTHORITY (Dkt. 26)
This matter is before the Court on Defendant Cincinnati Insurance Company’s motion to dismiss (Dkt. 16) and its motion for leave to file supplemental authority (Dkt. 26). The motion to dismiss has been fully briefed, and no opposition to the motion for leave to file supplemental authority was filed. Because oral argument will not assist in the decisional process, the motions will be decided based on the parties’ briefing. See E.D. Mich. LR 7.1(f)(2); Fed. R. Civ. P. 78(b).
For the reasons discussed below, the Court grants Cincinnati’s motion to dismiss and its motion for leave to file supplemental authority.
I. BACKGROUND
This action involves Cincinnati’s denial of property insurance coverage for financial losses allegedly sustained by Plaintiffs Dino Drop Inc., Buccaroo LLC, DM Bach Enterprises LLC, Bucaroo Too LLC, and 45 Degree Hospitality Inc. during the COVID-19 pandemic. Plaintiffs are owners and operators of restaurants that were forced to suspend or reduce their operations pursuant to civil orders enacted to stem the spread of COVID-19. Second Amended Complaint (SAC) ¶ 13 (Dkt. 14). Beginning in March 2020, Michigan’s governor and the Michigan Department of Health *2 and Human Services (DHHS) issued a series of civil orders that either closed restaurants to on-site dining or significantly restricted restaurants’ on-site dining capacities. Id. ¶¶ 71–77. Government directives also required essential businesses such as restaurants to increase the frequency of cleaning, reduce hours, install new protective barriers, and provide personal protective equipment to employees. Id. ¶ 76. Additionally, the Governor issued an executive “Stay Home Stay Safe” order temporarily requiring Michigan residents to remain at home except as necessary to perform essential activities such as purchasing groceries, take-out food, medical supplies, or other necessary items. Id. ¶ 71. As a result of COVID-19 and these civil orders, Plaintiffs suspended or reduced their operations, causing them to sustain substantial financial losses. Id. ¶¶ 79–80. For the period between August 28, 2019, and August 28, 2020, Plaintiffs maintained a commercial property insurance policy with Cincinnati. Id. ¶ 16. The policy covered loss of business income and extra expenses incurred as a result of a suspension of business operations under circumstances delineated in the policy. Id.; see also Policy at PageID.1527–1528 (Dkt. 16- 1). Plaintiffs submitted a timely claim to Cincinnati requesting payment of insurance benefits for their financial losses, and on June 22, 2020, Cincinnati denied coverage. Id. ¶¶ 95, 97. In its denial letter, Cincinnati maintained that coverage was unavailable under the business income, extra expense, and civil authority provisions of the policy because Plaintiffs did not sustain direct physical loss to their property. Denial Letter at 1–3, 7 (Dkt. 14-1).
In the complaint, Plaintiffs assert claims for declaratory and injunctive relief and for breach of contract under the policy’s business income, extra expense, and civil authority provisions (Counts I–VI). Additionally, Plaintiffs assert claims for appraisal (Count IX) and violation of the Michigan Uniform Trade Practices Act, Mich. Comp. Laws § 500.2001, et seq. (Count X) stemming from Cincinnati’s allegedly improper denial of its insurance claim. Finally, Plaintiffs *3 assert claims for declaratory and injunctive relief and for breach of contract pertaining to an unrelated electrical fire that allegedly occurred in August 2020 (Counts VI and VIII).
In its motion, Cincinnati maintains that Plaintiffs’ pandemic-related claims must be dismissed because they have not plausibly alleged that they sustained direct physical loss, as required under the policy. Mot. to Dismiss (MTD) at 1 (Dkt. 16). It further contends that the fire- related claims must be dismissed because they do not meet the amount in controversy necessary to sustain diversity jurisdiction. Id. at 4 n.2.
II. STANDARD OF DECISION
On a motion to dismiss pursuant to Rule 12(b)(6), “[t]he defendant has the burden of
showing that the plaintiff has failed to state a claim for relief.” Directv, Inc. v. Treesh, 487 F.3d
471, 476 (6th Cir. 2007). To survive a Rule 12(b)(6) motion, the plaintiff must allege sufficient
facts to state a claim to relief above the speculative level, such that it is “plausible on its face.”
Bell Atl. Corp. v. Twombly,
Evaluating a complaint’s plausibility is a “context-specific task that requires the reviewing
court to draw on its judicial experience and common sense.” Iqbal,
III. ANALYSIS
The parties agree that Michigan law governs the present dispute. See MTD at 8; Resp. at
10 (Dkt. 19). The Michigan Supreme Court has held that “insurance policies are subject to the
same contract construction principles that apply to any other species of contract.” Rory v.
Continental Ins. Co.,
The rules of contract interpretation apply to the interpretation of insurance contracts. The language of insurance contracts should be read as a whole and must be construed to give effect to every word, clause, and phrase. When the policy language is clear, a court must enforce the specific language of the contract. However, if an ambiguity exists, it should be construed against the insurer. An insurance contract is ambiguous if its provisions are subject to more than one meaning. An insurance contract is not ambiguous merely because a term is not defined in the contract. Any terms not defined in the contract should be given their plain and ordinary meaning, which may be determined by consulting dictionaries.
McGrath v. Allstate Ins. Co.,
*5 A. Business Income and Extra Expense
The policy provides coverage for certain lost business income: We will pay for the actual loss of “Business Income” . . . you sustain due to the necessary “suspension” of your “operations” during the “period of restoration”. The “suspension” must be caused by direct “loss” to property at a “premises” caused by or resulting from any Covered Cause of Loss.
Policy at PageID.1527 (emphasis added). The policy also provides coverage for extra expenses:
We will pay Extra Expense you sustain during the “period of restoration”. Extra Expense means necessary expenses you sustain . . . during the “period of restoration” that you would not have sustained if there had been no direct “loss” to property caused by or resulting from a Covered Cause of Loss.
Id. at PageID.1528 (emphasis added). As relevant to the present action, the policy defines a “covered cause of loss” as a “direct ‘loss’ unless the ‘loss’ is excluded or limited in in this Coverage Part.” Id. at PageID.1514. A “loss,” in turn, is defined as “accidental physical loss or accidental physical damage.” Id. at PageID.1547.
Courts interpreting identical policy language have found that coverage for business income
and extra expense is contingent on an insured sustaining direct physical loss or damage, a premise
the parties do not dispute. See, e.g., Brown Jug, Inc. v. Cincinnati Ins. Co., No. 20-CV-13003,
*6 Plaintiffs allege that they sustained direct physical loss or damage to their property due to the presence of COVID-19 at the premises and the restrictions imposed under the civil orders. SAC ¶¶ 62–64, 96. The parties, however, differ in their interpretations of the requirement that loss or damage to property be “physical.” According to Cincinnati, “physical loss” or “physical damage” requires tangible, concrete destruction of or alteration to property. MTD at 8–9. Citing a multitude of recent cases holding that similar policies provide no coverage for income lost during pandemic-related business closures, Cincinnati maintains that neither COVID-19 nor the civil orders caused tangible harm to Plaintiffs’ property. Id. at 9–12. Plaintiffs, by contrast, argue that “physical loss” is broad enough to encompass an inability to use or possess property. Resp. at 13. They cite several cases adopting this interpretation and finding that similar insurance policies cover income lost during pandemic-related business closures. Id. at 14–15.
Noting the lack of Michigan authority interpreting the phrases “physical loss” or “physical
damage,” the Sixth Circuit has recognized the existence of out-of-state authorities supporting both
Plaintiffs’ and Cincinnati’s competing interpretations. See Universal Image Prods., Inc. v. Fed.
Ins. Co.,
1. Tangible Harm
According to a leading treatise on insurance law, policy language requiring that loss or
damage be “physical” is “widely held to exclude alleged losses that are intangible or incorporeal
and, thereby, to preclude any claim against the property insurer when the insured merely suffers a
*7
detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of
the property.” Steven Plitt, et al., 10A Couch on Ins. § 148:46 (3d ed. 1998). Thus, for example,
where a business suspended its operations due to mold and bacteria contamination, but sustained
no lasting tangible harm to its property that could not be remedied by cleaning, the Sixth Circuit
found that the losses were purely economic and were not covered under the insurance policy.
Universal,
In recent months, hundreds of opinions have analyzed whether property insurance policies similar or identical to the policy at issue here extend coverage to business income lost by virtue of pandemic-related closures and restrictions. The overwhelming tide of courts across the nation have answered the question in the negative. Finding that “physical” loss or damage requires tangible or concrete harm to property causing an alteration in appearance, shape, color or in other material dimension, these courts, including Michigan federal courts, have held that neither COVID-19 nor the civil orders limiting business operations meet this physicality requirement.
Many courts holding that a claimant must show tangible harm to property have reasoned
that this interpretation comports with the plain meaning of “direct physical loss.” For instance, a
court within this district evaluated the plain meaning of the phrase “direct physical loss to
*8
property,” finding that the term “physical,” defined in the dictionary as “having material
existence,” modified the term “loss” which was defined as “destruction, ruin,” or “the act of losing
possession.” Turek Enters., Inc. v. State Farm Mut. Auto. Ins. Co.,
Similar rationales have been applied where courts construed policies identical to the one at
issue here. See Dukes Clothing, LLC v. Cincinnati Ins. Co., No. 7:20-cv-860,
To be sure, other courts have reasoned that an interpretation that requires tangible harm
conflates “physical loss” with “physical damage,” thereby rendering those phrases redundant. See
Derek Scott Williams PLLC v. Cincinnati Ins. Co., No. 20 C 2806,
Applying the “tangible harm” interpretation to the present action, Plaintiffs have failed to
plausibly allege that the civil orders caused physical loss or damage to their property. Plaintiffs
do not contend that the civil orders had a tangible impact on their property—only that the orders
resulted in a temporary loss of use, an argument addressed in the next section. See SAC ¶¶ 71–
83. In any event, courts have held that government orders limiting operations, at most, cause
limited loss of use rather than tangible harm to property. See, e.g., Dukes,
Nor have Plaintiffs plausibly alleged that COVID-19 caused physical loss or damage to their property. Though not expressly argued in their responsive briefing, Plaintiffs allege in their complaint that COVID-19 physically impacted their property. Specifically, Plaintiffs allege that the COVID-19 virus can linger in the air and survive on surfaces for several hours to several weeks and that the virus caused physical alteration to Plaintiffs’ property by adhering to objects and surfaces at the restaurants. SAC ¶¶ 29–46, 44, 58–64. Plaintiffs further allege that they have sustained losses as a result of this physical damage, including the loss of use of their restaurants, *10 the costs of cleaning and disinfecting their property, and the costs of remodeling and reconfiguring physical spaces. Id. ¶¶ 65–66.
Contrary to Plaintiffs’ argument, “[t]he mere presence of the virus on the physical structure
of the premises does not amount to direct physical loss,” as “coronavirus does not physically alter
the appearance, shape, color, structure, or other material dimension of the property.” See Café La
Trova LLC v. Aspen Specialty Ins. Co., No. 20-22055,
This analysis further comports with policy language limiting coverage to business income
lost during a “period of restoration,” which in this case begins at the time of the loss and ends on
the earlier of “[t]he date when the property at the ‘premises’ should be repaired, rebuilt or replaced
with reasonable speed and similar quality” or “[t]he date when business is resumed at a new
permanent location.” Policy at PageID.1547–1548. Plaintiffs have not alleged that the presence
of the virus required them to move to new permanent locations, but they have alleged that they
cleaned and disinfected their property, as well as remodeled and reconfigured physical spaces.
SAC ¶¶ 65–66. In cases involving similar policy language, however, courts have held that
cleaning, rearranging furniture, or installing partitions cannot reasonably be considered repairing,
rebuilding, or replacing. See Dukes, 2021 WL 1791488, at *4; L & J Mattson’s, 2021 WL
1688153, at *6 n.3; Café La Trova,
Therefore, Plaintiffs have failed to plausibly allege physical loss or physical damage stemming from COVID-19 or the civil orders that meets the “tangible harm” interpretation.
2. Loss of Use
As touched on above, another line of cases has held that intangible sources such as bacteria,
odor, smoke, or noxious gases may cause physical loss or damage where insured property has been
rendered uninhabitable or substantially unusable for its intended purpose. See, e.g., Port Authority
of New York & New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002)
*12
(establishing a “higher threshold” for coverage for asbestos contamination and other sources of
contamination unnoticeable to the naked eye); Or. Shakespeare Festival Assoc. v. Great Am. Ins.
Co., No. 1:15-cv-01932,
A minority of COVID-19-related insurance cases have followed this line of authority in
holding that “direct physical loss” could plausibly encompass a loss of use resulting from
pandemic-related business closures. Elegant Massage, LLC v. State Farm Mut. Auto. Ins. Co.,
No. 2:20-cv-265,
This Court disagrees with the conclusion that COVID-19 rendered Plaintiffs’ property uninhabitable or substantially unusable for their intended purpose. Assuming that the virus was present at the premises and contaminated surfaces and the air, this did not impact the functionality of Plaintiffs’ property. Tables, chairs, kitchen equipment, and the buildings remained functional as such, as any contamination could be removed simply by disinfecting surfaces. And Plaintiffs have not alleged—as was the case in Oregon Shakespeare or Gregory Packaging—that a toxic substance prevented staff members from entering the buildings to perform their duties. The Court agrees with Cincinnati’s assessment that the presence of COVID-19 at the premises is analogous to the presence of virus particles causing influenza or the common cold. See Reply at 5 n.10 (Dkt. 19). Though each virus can be harmful and potentially deadly, no reasonable person would assert that their presence renders property uninhabitable or substantially unusable.
Nor do Plaintiffs plausibly allege that the civil orders limiting business operations rendered
their property substantially unusable. In the complaint, Plaintiffs specifically take issue with
Executive Orders 2020-04, 2020-09, and 2020-21. SAC ¶¶ 71–73. Although Executive Order
2020-09 closed restaurants and other places of public accommodation to “ingress, egress, use, and
occupancy by members of the public” for on-site dining, it did not prohibit restaurants from
operating. In fact, the order expressly permitted access by employees and encouraged restaurants
to “offer food and beverage using delivery service, window service, walk-up service, drive-through
service, or drive- up service[.]” And while Executive Order 2020-21 directed Michigan residents
*14
to remain in their homes, it also permitted residents to leave their homes to purchase groceries and
take-out food.
[7]
Subsequent orders enacted by DHHS limited indoor dining services but did not
prevent delivery or pickup services.
[8]
Accordingly, the civil orders did not render Plaintiffs’
property substantially unusable for business purposes. See St. Julian,
The Court, therefore, concludes that Plaintiffs have failed to plausibly allege physical loss or physical damage based on a loss of use of their business premises as a result of COVID-19 or the civil orders. Because Plaintiffs have not plausibly alleged physical loss or physical damage as required under the policy, they are not entitled to coverage for business income or extra expense, and those claims must be dismissed.
*15 B. Civil Authority
Plaintiffs also claim that they are entitled to coverage under the policy’s civil authority provision. Resp. at 21. Coverage for business income and extra expense is expanded under a civil authority provision:
When a Covered Cause of Loss causes damage to property other than Covered Property at a “premises”, we will pay for the actual loss of “Business Income” and necessary Extra Expense you sustain caused by action of civil authority that prohibits access to the “premises”, provided that both of the following apply: (1) Access to the area immediately surrounding the damaged property is prohibited by a civil authority as a result of the damage; and (2) The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.
Policy at PageID.1528.
Under this language, civil authority coverage applies only if there is a covered cause of
loss that causes damage to property other than the insured’s property, meaning physical loss or
damage to property other than Plaintiffs’ property. See Sandy Point,
Plaintiffs contend that the Michigan Court of Appeals held in Sloan v. Phoenix of Hartford
Ins. Co.,
Plaintiffs also contend that Studio 417 held that civil authority coverage applied because
the plaintiffs had plausibly alleged that access to their properties was restricted to such a degree as
to trigger civil authority coverage. Resp. at 23. Studio 417 did indeed hold that the plaintiffs
adequately alleged that their access was prohibited where hair salons were required to suspend all
operations and restaurants were precluded from offering indoor seating to customers. 478 F. Supp.
*17
3d at 803–804. Again, this case is an outlier. Most courts have determined, even outside the
COVID-19 context, that “reduction to partial access does not suffice to trigger business income
coverage under the Civil Authority provisions.” 1 S.A.N.T.,
This majority view is more consistent with the ordinary meaning of the terms “prohibit”
and “access,” which are not defined by the policy. “Prohibit” is defined in a leading dictionary as
“to forbid by authority,” while “access” is defined as “permission, liberty, or ability to enter,
approach, or pass to and from a place” or “freedom or ability to obtain or make use of something.” The civil orders plainly did not forbid Plaintiffs from entering or making use of the insured
premises. Adopting Plaintiffs’ interpretation would impermissibly rewrite the policy by
substituting the phrase “restricts access to the ‘premises’” in place of “prohibits access to the
‘premises.’” See Erickson v. Citizens Ins. Co.,
Because Plaintiffs are unable to plausibly allege physical loss or damage to other property or that they were prohibited from accessing their own property by virtue of a civil order, the civil authority provision under the policy does not apply. Accordingly, the claims premised on the civil authority provision must be dismissed.
*18 C. Virus Exclusion
Though not expressly addressed in the responsive briefing, the complaint suggests that Plaintiffs’ COVID-19-related losses are covered because the policy does not contain a virus exclusion. See SAC ¶¶ 98–102. Specifically, the complaint notes that in 2006, the Insurance Services Office (ISO)—an organization that provides policy writing services to insurers— “announced the submission of an ‘exclusion of loss due to disease-causing agents such as viruses and bacteria.’” Id. ¶ 99 (quoting ISO Circular at 1 (Dkt. 14-2)). Plaintiffs further allege that, despite the availability of a specific exclusion for virus-related losses, the policy at issue here does not contain such an exclusion. Id. ¶ 102.
This argument lacks merit. Michigan law provides that courts must first determine if the
policy provides coverage to the insured; if it does, only then do courts “ascertain whether that
coverage is negated by an exclusion.” Heniser v. Frankenmuth Mut. Ins. Co.,
D. Fire-Related Claims
As indicated above, Plaintiffs also bring claims alleging that Cincinnati improperly denied coverage for losses sustained as a result of an electrical fire. Plaintiffs concede in the complaint that “the amount in controversy for those claims is less than $75,000.00.” SAC ¶ 11. Because Plaintiffs’ COVID-19-related insurance claims must be dismissed for the reasons discussed above, the amount in controversy at issue in the remaining fire-related insurance claims is insufficient to *19 sustain diversity jurisdiction under 28 U.S.C. § 1332(a). Consequently, because the Court lacks subject-matter jurisdiction, the fire-related insurance claims must be dismissed without prejudice.
E. Supplemental Authority
Cincinnati has filed a motion for leave to file supplemental authority. Whether to permit
parties to file notices of supplemental authority is a matter left to the Court’s discretion. Brintley
v. Belle River Cmty. Credit Union, No. 17-13915,
IV. CONCLUSION
For the reasons stated above, Plaintiffs have not plausibly alleged that Cincinnati breached the terms of the policy by improperly denying their claim. Nor does the Court have jurisdiction over the remaining fire-related insurance claims. Accordingly, all of Plaintiffs’ claims must be dismissed. Cincinnati’s motion to dismiss (Dkt. 16) and its motion for leave to file supplemental authority (Dkt. 26) are both granted.
SO ORDERED. Dated: June 21, 2021 s/Mark A. Goldsmith Detroit, Michigan MARK A. GOLDSMITH
United States District Judge
Notes
[1] Because both forms contain substantially identical language, the Court will refer to the Building and Personal Property Coverage Form.
[2] In deciding a Rule 12(b)(6) motion, courts are generally confined to considering the allegations
in the complaint, matters of public record, orders, the record of the case, and exhibits attached to
the complaint. Amini v. Oberlin College, 259 F.3d 493, 502 (6th Cir. 2001). Additionally,
“[d]ocuments that a defendant attaches to a motion to dismiss are considered part of the pleadings
if they are referred to in the plaintiff’s complaint and are central to her claim.” Weiner v. Klais &
Co., Inc.,
[3] See, e.g., Brown Jug,
[4] Plaintiffs correctly note that the court concluded in Turek that coverage was negated under an
exclusion for losses that would not have occurred but for a virus, bacteria, or microorganism. Resp.
at 24 (citing Turek,
[5] In Derek Scott, the court rejected the argument that interpreting “physical loss” as requiring tangible harm was consistent with the provision defining a “period of restoration.” 2021 WL 767617, at *4. The court reasoned that the term “repair” is not “inherently physical; one need only consider common references to repairing a relationship or repairing one’s health.” Id. As noted by another court, however, this strained interpretation “contort[s] these provisions far beyond their ordinary meaning.” Tria WS LLC v. Am. Auto. Ins. Co., No. 20-4159, 2021 WL1193370, at *7 n.5 (E.D. Pa. Mar. 30, 2021).
[6] Office of the Governor, Executive Order 2020-09: Temporary restrictions on the use of places of public accommodation, https://www.michigan.gov/whitmer/0,9309,7-387-90499_90705-521789- -,00.html [https://perma.cc/E26L-U2RZ].
[7] Office of the Governor, Executive Order 2020-21: Temporary requirement to suspend activities that are not necessary to sustain or protect life, https://www.michigan.gov/whitmer/0,9309,7-387- 90499_90705-522626--,00.html [https://perma.cc/3URY-6JDX].
[8] See, e.g., Gathering Prohibition and Face Covering Order (Oct. 9, 2020), https://www.michigan.gov/coronavirus/0,9753,7-406-98178_98455-541962--,00.html [https://perma.cc/XYL5-NU7Q]; Gatherings and Face Mask Order (Nov. 15, 2020), https://www.michigan.gov/coronavirus/0,9753,7-406-98178_98455-545136--,00.html [https://perma.cc/X94A-V23Y].
[9] Merriam-Webster, “Prohibit,” https://www.merriam-webster.com/dictionary/prohibit [https://perma.cc/5MBM-SUKL]; Merriam-Webster, “Access,” https://www.merriam- webster.com/dictionary/access [https://perma.cc/Z34E-TE35].