FROEDTERT HEALTH INC, еt al., Plaintiffs, v. FACTORY MUTUAL INSURANCE COMPANY, Defendant.
Case No. 21-cv-0713-bhl
UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WISCONSIN
August 9, 2022
ORDER GRANTING MOTION TO DISMISS
This is one of many recent cases concerning whether a plaintiff‘s insurance policy covers claims related to the COVID-19 pandemic. Froedtert Health Inc and its affiliates (collectively “Froedtert“) claim that Factory Mutual Insurance Company wrongfully denied coverage for COVID-19-related losses. ECF No. 18. Froedtert also claims the denial was made in bad faith. Id. at 28-29. It seeks declaratory relief and both compensatory and punitive damages. Id. at 26-29. Factory Mutual has moved to dismiss on
FACTUAL BACKGROUND1
In late 2019, the potentially deadly virus known as SARS-CoV-2 (hereinafter referred to as COVID-19, the disease it causes) began spreading around the world, transmitted from person to person via respiratory droplets. ECF No. 18 at 8-17. By March 2020, Wisconsin Governor Tony Evers had declared a public health emergency. Id. at 14-15. As a result of the pandemic, Wisconsin healthcare providers faced serious challenges that strained their resources. Id. at 16-20.
Froedtert Health Inc is a parent entity of a Milwaukee-based healthcare network including Froedtert Memorial Lutheran Hospital Inc, Froedtert & The Medical College of Wisconsin Community Physicians Inc, Community Memorial Hospital of Menomonee Falls Inc, St Joseph‘s Community Hospital of West Bend Inc, Froedtert Surgery Center LLC, Drexel Town Square Surgery Center LLC, Inception Health Services LLC, and West Bend Surgery Center LLC. Id. at 1-2, 17.
Since the COVID-19 pandemic began, Froedtert has handled a surge of patients who have tested positive for COVID-19 and has had to adopt new protocols for preventing the spread of the virus and for dealing with staffing issues when employees test positive. Id. at 17-20. It has spent millions of dollars on personal protective equipment and other equipment for employee and patient screening, waste disposal, cleaning, and sanitization. Id. It has also had to modify its janitorial services, patient check-in procedures, and the layout of its emergency room in order to ensure frequent cleanings and social distancing.
Through this lawsuit, Froedtert seeks to recover some of those losses under an “all-risks” property policy (the Policy) that it purchased from Factory Mutual Insurance Company covering the period from July 1, 2019 through July 1, 2020. Id. at 5-7. The Policy has liability limits, including applicable sublimits, of $2 billion. Id. Two of the Policy‘s provisions, Communicable Disease Response аnd Interruption by Communicable Disease, expressly cover costs for harms caused by communicable disease. ECF No. 18-1 at 31, 64-65. Both are triggered when “a location owned, leased or rented by the Insured has the actual not suspected presence of communicable disease[,] and[, as a result,] access to such location is limited, restricted or prohibited [for at least 48 hours] by[] . . . a decision of an Officer of the Insured.” ECF No. 18 at 6, 7; ECF No. 18-1 at 31, 64-65.
The Policy also includes several provisions that Froedtert contends extend additional coverage for Froedtert‘s COVID-19 losses. These provisions fall under the headings: “Expediting Costs,” ECF No. 18-1 at 34, “Extra Expense,” id. at 50-53, “Civil or Military Authority,” id. at 58, “Contingent Time Element Extended,” id. at 59, 76, “Ingress/Egress,” id. at 31, 59-60, and “Logistics Extra Cost,” id. at 60-61. Each of these provisions expressly covers “physical loss” or “physical damage.”2
The Policy also contains two exclusions potentially relevant to Froedtert‘s claims. The Policy specifically excludes coverage for “loss of use.” Id. at 20. It alsо does not cover “contamination[] and any cost due to contamination including the inability to use or occupy property or any cost of making property safe or suitable for use or occupancy.” Id. at 23. The Policy defines “contamination,” in relevant part, as “any condition of рroperty due to the actual or suspected presence of any . . . virus.” Id. at 75.
On April 9, 2020, Froedtert submitted a claim under the Policy for COVID-19-related losses and expenses. See ECF No. 20 at 15. Factory Mutual agreed to accept coverage, but only under the Policy‘s Communicable Disease Response and Interruption by Communicable Disease provisions. ECF No. 18 at 19-20. Factory Mutual paid Froedtert the $1 million annual aggregate sublimit applicable to these provisions. Id.
Unsatisfied with this limited recovery, on June 9, 2021, Froedtert filed its complaint with the Court. ECF No. 1. The complaint was amended two months later. ECF No. 18. On September 2, 2021, Factory Mutual moved to dismiss the Amended Complaint. ECF No. 19.
LEGAL STANDARD
When deciding a
ANALYSIS
“When federal courts obtain jurisdiction through diversity of citizenship, they ordinarily apply ‘the substantive law of the state in which the district court sits, including choice of law rulеs.‘” Green Beginnings, LLC v. W. Bend Ins. Co., No. 20-CV-1661, 2021 WL 2210116, at *3 (E.D. Wis. May 28, 2021) (citing Wachovia Sec., LLC v. Banco Panamericano, Inc., 674 F.3d 743, 751 (7th Cir. 2012)), aff‘d sub nom. Green Beginnings, LLC v. W. Bend Mut. Ins. Co., No. 21-2186, 2022 WL 1700139 (7th Cir. May 27, 2022)). “When determining ‘which jurisdiction‘s law applies to a contractual dispute,’ Wisconsin courts apply ‘the law of the jurisdiction with which the contract has its most significant relationship[.]‘” Green Beginnings, 2021 WL 2210116, at *3 (citing State Farm Mut. Auto. Ins. Co. v. Gillette, 641 N.W.2d 662, 670-71 (Wis. 2002) (citation omitted)). Both parties agree that Wisconsin law governs interpretation of the Policy. See ECF No. 20 at 16-17; ECF No. 25 аt 12.
Under Wisconsin law, an insurance policy is a contract. Kemper Indep. Ins. Co. v. Islami, 959 N.W.2d 912, 917 (Wis. 2021). “The interpretation of an insurance policy is a question of law when no extrinsic evidence is introduced to interpret the wording of the policy.” Frost ex rel. Anderson v. Whitbeck, 654 N.W.2d 225, 227 (Wis. 2002). The Court‘s role in interpreting insurance policies is “to effectuate the intent of the contracting parties” and to construe the language “as it would be understood by a reasonable person in the position of the insured.” Estate of Sustache v. Am. Fam. Mut. Ins. Co., 751 N.W.2d 845, 850 (Wis. 2008) (internal quotations and citations omitted). Courts “must consider [a] policy as a whole to give reasonable meaning to the entire policy.” 1325 N. Van Buren, LLC v. T-3 Grp., Ltd., 716 N.W.2d 822, 840 (Wis. 2006) (citing Berg v. Schultz, 526 N.W.2d 781, 783 (Wis. Ct. App. 1994)). Courts do not construe policies to cover risks insurers did not contemplate or underwrite and for which they did not receive a premium. Sustache, 751 N.W.2d at 850. Any doubts or ambiguities must be resolved against the insurer and in favor of the insured and coverage. Rural Mut. Ins. Co. v. Welch, 633 N.W.2d 633, 636 (Wis. Ct. App. 2001). Further, when construing insurance policies, words “‘are given their common and ordinary meaning.‘” J.G. v. Wangard, 753 N.W.2d 475, 482 (Wis. 2008) (quoting Danbeck v. Am. Fam. Mut. Ins. Co., 629 N.W.2d 150, 154 (Wis. 2001)).
Wisconsin uses a three-step analysis to determine whether coverage еxists. Courts look first at a policy‘s initial grant of coverage, then at the exclusions, and, finally, at any exceptions to the exclusions. Schinner v. Gundrum, 833 N.W.2d 685, 693 (Wis. 2013) (citing Sustache, 751 N.W.2d at 851). If the Court determines that the initial grant of coverage does not cover the asserted claims, it is unnecessary to examine the policy‘s exclusions and the analysis concludes. Schinner, 833 N.W.2d at 693. If the initial grant of coverage covers the claim(s) presented, courts examine the policy‘s exclusions to
I. Because COVID-19 Does Not Cause Physical Loss or Damage, Froedtert‘s Coverage Arguments Fail.
Froedtert asks the Court to declare that it is entitled to coverage under six Policy provisions3 and notwithstanding any Policy exclusions or conditions precedent. Froedtert also seeks a declaration that the Communicable Disease Response and Interruption by Communicable Disease sublimits do not limit its recovery. ECF No. 18 at 27. Factory Mutual insists Froedtert‘s request for declaratory relief fails based on the plain language of the Policy. ECF No. 20 at 17-25. The insurer points out that all of the coverage provisions that Froedtert relies upon require a showing of physical lоss or damage. Id. at 4-5, 17-25. And because Froedtert cannot plausibly allege that microscopic COVID-19 particles actually alter property, Factory Mutual argues, its claims for a declaration in favor of coverage fail as a matter of law and the Amended Complaint must be dismissed. Id. at 17-25.
Froedtert contends it has sufficiently stated a claim of physical loss or damage by alleging that COVID-19 droplets, whether located in the air or on surfaces, physically compromise property and turn it into something dangerous. ECF No. 25 at 13-21. This contention runs aground on a recent Wisconsin Supreme Court decision that rejeсted a substantially identical argument. In Colectivo Coffee Roasters, Inc. v. Society Insurance Company, the Supreme Court followed “the overwhelming majority of the other courts that have addressed [this issue],” and concluded that “the presence of COVID-19 does not constitute a physical loss of or damage to property because it does not ‘alter the appearance, shape, color, structure, or other material dimension of the property.‘” No. 2021AP463, 2022 WL 1758674, at *3 (Wis. June 1, 2022) (citing Sandy Point Dental PC v. Cincinnati Ins. Co., 488 F. Supp. 3d 690, 693-94 (N.D. Ill. 2020) (collecting cases), aff‘d, 20 F.4th 327 (7th Cir. 2021)). At the pleading stage, a plaintiff must do more than allege that the presence of COVID-19 caused physical loss or damage. Id. at *5.
Frоedtert tries to avoid this result by pointing to the Communicable Disease Response provision, which Factory Mutual has admitted offers coverage and which includes prefatory language stating, “This Policy includes the following Additional Coverages for insured physical loss or damage.” ECF No. 25 at 21-25 (citing ECF No. 18-1 at 25) (emphasis added). Based on this language, Froedtert contends, communicable disease must cause insured physical loss or damage under the Policy. Id. Froedtert further argues that the Policy‘s contamination exclusion would be unnecessary if the Policy‘s core coverage did not extend to communicable disease-related damage and losses. Id. at 25-26.
While the Court agrees that parties to an insurance policy could, in theory, agree that communicable disease, or COVID-19 specifically, causes physical loss or damage,
II. The Policy Excludes Coverage Even If Froedtert Alleges Physical Loss or Damage.
Even if Froedtert‘s coverage theory were not barred by the plain terms of the Policy and the Wisconsin Supreme Court‘s interpretation of that language, its attempt to secure coverage would be barred by the Policy‘s contamination exclusion, which expressly includes viruses.4 ECF No. 18-1 at 23, 75.
Froedtert tries to avoid this result by claiming the exclusion is unenforceable. Froedtert argues the contamination exclusion cannot be squared with the coverage granted by the Communicable Disease Response and Interruption by Communicable Disease provisions, аnd the resulting ambiguity must be resolved in favor of the insured. ECF No. 25 at 29-32. But in constructing policy coverage, courts are to give reasonable and effective meaning to all terms, see 1325 N. Van Buren, LLC, 716 N.W.2d at 840, and to consider whether there are exceptions to any exclusions. See Schinner, 833 N.W.2d at 693. The communicable disease provisiоns are easily reconcilable with the contamination exclusion if they are considered exceptions to that exclusion.
Froedtert also argues the contamination exclusion does not apply because of Wisconsin‘s independent concurrent causation doctrine, ECF No. 25 at 32-35, whiсh provides that “[w]here a policy expressly insures against loss caused by one risk but excludes loss caused by another risk, coverage is extended to a loss caused by the insured risk even though the excluded risk is a contributory cause.” Kraemer Bros., Inc. v. U.S. Fire Ins. Co., 278 N.W.2d 857, 863-64 (Wis. 1979). Froedtert contends that an insured risk, the government negligence that failed tо prevent the spread of COVID-19, caused its losses, even if an uninsured risk, COVID-19, was a contributory cause. ECF No. 25 at 32-35. But “in order to trigger coverage, ‘[an] independent concurrent cause must provide the basis for a cause of action in and of itself and must not require the occurrence of the excluded risk to mаke it actionable.‘” Siebert v. Wisconsin Am. Mut. Ins. Co., 797 N.W.2d 484, 492 (Wis. 2011) (citation omitted). Here, government negligence required the presence of COVID-19 to trigger coverage. Government negligence therefore did not independently cause the losses Froedtert cites in its claims.
III. Because Froedtert Cannot Plausibly Allege Coverage, Its Claims Must Bе Dismissed.
Given Froedtert‘s failure to plausibly allege coverage for its COVID-19 losses, the
Finally, Froedtert‘s bad-faith-denial-of-coverage claim fails. “[T]o bring a bad faith claim, ‘a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant‘s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.‘” Brethorst v. Allstate Prop. & Cas. Ins. Co., 798 N.W.2d 467, 474 (Wis. 2011) (citing Anderson v. Continental Ins. Co., 271 N.W.2d 368, 376 (Wis. 1978)). Given the Wisconsin Supreme Court‘s decision in Colectivo and this Court‘s application of that ruling to the Factory Mutual Policy, Froedtert cannot plausibly allege that the insurer lacked a reasonable basis for denying benefits.
CONCLUSION
For the reasons given above,
IT IS HEREBY ORDERED that Factory Mutual‘s motion to dismiss, ECF No. 19, is GRANTED. The case is DISMISSED, and the Clerk of Court is directed to enter judgment.
Dated at Milwaukee, Wisconsin on August 9, 2022.
s/ Brett H. Ludwig
BRETT H. LUDWIG
United States District Judge