OUT WEST RESTAURANT GROUP INC., еt al., Plaintiffs, v. AFFILIATED FM INSURANCE COMPANY, Defendant.
Case No. 20-cv-06786-TSH
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA
THOMAS S. HIXSON United States Magistrate Judge
ORDER GRANTING MOTION FOR JUDGMENT ON THE PLEADINGS Re: Dkt. No. 26
I. INTRODUCTION
Plaintiffs Out West Restaurant Group, Inc., Cerca Trova Restaurant Group, Inc., Cerca Trova Steakhouse, LP., and Cerca Trova Southwest Restaurant Group, LLC (“Plaintiffs“) bring this action against Affiliated FM Insurance Company (“AFM“), seeking coverage for economic losses to their restaurant businesses caused by COVID-19. Pending before the Court is AFM‘s Motion for Judgment on the Pleadings pursuant to
II. BACKGROUND
A. Factual Background
Plaintiff Out West Restaurant Group, Inc. is a restaurant management company. First Am. Compl. (“FAC“) ¶ 9, ECF No. 18. It is the exclusive franchisee of Outback Steakhouse restaurants in Arizona, Cоlorado, Nevada, and New Mexico and the predominate franchisee in California. Id. Plaintiff Cerca Trova Steakhouse is an entity that holds leases for all California restaurants, while Plaintiff Cerca Trova Southwest Restaurant Group is an entity that holds leases for the non-California restaurants. Id. ¶¶ 10-11. Plaintiff Cerca Trova Restaurant Group, Inc. owns the other Plaintiffs and is the “ultimate parent of the Out West entities.” Id. ¶¶ 12, 34. AFM is an insurance company. Id. ¶¶ 13, 27. Cerсa Trova purchased an insurance policy (the “Policy“) from AFM which insures Cerca Trova along with its subsidiaries. Id. ¶¶ 27, 33-34; id., Ex. A (Policy). The Policy had an effective date of February 15 through December 1, 2020 and provides coverage for “all risks of physical loss or damage” except as excluded by the Policy. Id. ¶¶ 28, 31; Policy at COMPLAINT-00022.
Plaintiff alleges the COVID-19 pandemic and presence of the virus in the air makes restaurant properties with оutdoor or indoor dining spaces unusable and unfit for normal occupancy. FAC ¶ 90. The presence of the virus at Out West‘s locations, including on surfaces, also causes physical alteration of the integrity of the property and causes physical loss. Id. ¶ 89. According to Plaintiffs, these conditions constitute “loss” and “damage” under the Policy. Id. ¶¶ 80-81.
B. Procedural Background
Plaintiffs filed their initial complaint on September 29, 2020. ECF No. 1. AFM moved to dismiss, arguing that Plaintiffs’ complaint violated
On December 8, 2020, Plaintiffs filed the operative FAC for declaratory relief, breach of contract, and breach of implied covenant of good faith and fair dealing, alleging that (1) the presence of COVID-19 “on surfaces” and “in the air” at Plaintiffs’ restaurant locations caused physical loss or damage to their property, and (2) the “Governmental Orders issued as a result [of COVID-19] caused physical loss of and/or damage” to Plaintiffs in that they have deprived them of the use and function of their buildings. FAC ¶¶ 2, 89-94.
Plaintiffs allege that they are “currently aware of over 100 employees testing pоsitive for COVID-19 across numerous of its insured locations“; “[t]hat there may be several more insured locations where customers
Plaintiffs allege AFM‘s failure to diligently pursue a thorough, fair, and objective investigation of their claim and its improper dеnial of coverage constitute a breach of good faith and fair dealing. Id. ¶ 140. In addition to their Communicable Disease claims (id. ¶¶ 100-06), Plaintiffs seek coverage under the following Policy provisions, each of which in some manner requires physical loss or damage to property: Business Interruption (id. ¶ 109, Policy at COMPLAINT-0040); Protection and Preservation of Property - Property Damage (FAC ¶ 107, Policy at COMPLAINT-0035-36); Extra Expense (FAC ¶ 111, Policy at COMPLAINT-0043); Attraction Property (FAC, ¶ 113, Policy at COMPLAINT-0045); Civil or Military Authоrity (FAC ¶ 116, Policy at COMPLAINT-0045); Ingress/Egress (FAC ¶ 121, Policy at COMPLAINT-0048); and Supply Chain (FAC ¶ 124, Policy at COMPLAINT-0052), along with Professional Fees associated with these coverages (FAC ¶ 127, Policy at COMPLAINT-0035 (referring to “payable amounts . . . for which this Company has accepted liability“).
AFM filed its Answer on December 22, 2020. ECF No. 20.
III. LEGAL STANDARD
“After the pleadings are closed - but early enough not to delay trial - a party may move for judgment on the pleadings.”
A district court generally may not consider materials outside the pleadings in deciding a motion under
IV. DISCUSSION
AFM argues the Court must grant judgment on the pleadings because: (1) the AFM policy‘s contamination and loss of use exclusions bar coverage for Plaintiffs’ claims (except as may potentiаlly be allowed under the Communicable Disease coverages); (2) COVID-19 and the associated governmental shut-down orders cannot cause or constitute physical loss or damage under the policy as a matter of law; and (3) Plaintiffs’ allegations regarding Communicable Disease coverage fail to state any claim upon which relief can be granted. Mot. at 2.
A. Insurance Policy Interpretation
Under California law, the interpretation of an insurance policy is a question of law. Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 18 (1995), as modified on denial of reh‘g (Oct. 26, 1995). “While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply.” Bank of the W. v. Superior Court, 2 Cal. 4th 1254, 1264 (1992). “If contractual language is clear and explicit, it governs.” Id. In addition, “[t]he terms in an insurance policy must be read in context and in reference to the poliсy as a whole, with each clause helping to interpret the other.” Sony Computer Ent. Am. Inc. v. Am. Home Assur. Co., 532 F.3d 1007, 1012 (9th Cir. 2008) (citing
B. Physical Loss or Damage
The parties dispute whether Plaintiffs’ allegations establish loss and/or damage within the Policy‘s grant of coverage. AFM argues the presence of COVID-19 does not constitute physical loss or damage because the virus does not cause physical alteration of the property. Mot. at 19. Plаintiffs argue “[t]he presence of COVID-19 constitutes the requisite ‘damage’ to trigger coverage as that undefined term is reasonably understood, because its physical presence transforms property, specifically indoor air and surfaces, from a safe condition to a dangerous and potentially deadly condition unsafe and unfit for its intended purpose.” Opp‘n at 7. The parties also dispute whеther the Policy bars coverage for any condition of property due to the presence of a virus, with AFM arguing the contamination exclusion bars coverage and Plaintiffs arguing it does not. Mot. at 10-17; Opp‘n at 15-24.
Under California law, the insured has the initial burden of proving that its loss is covered. MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766, 777 (2010). Once the insured has made that showing, the burden is on the insurer to prove thе claim is specifically excluded. Id. California courts have interpreted “direct physical loss” to require a “distinct, demonstrable, physical alteration of the property” or a “physical change in the condition of the property.” See id. at 779-800 (simplified). Accordingly, “a detrimental economic impact,” such as limited use of property, “unaccompanied by a distinct, demonstrable, physiсal alteration of the property,” is insufficient to claim a “direct physical loss.” Id. at 779. Where a policy additionally requires “direct physical loss of or physical damage to property,” there must either be a physical change in the condition or a permanent dispossession of the property. See Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 2020 WL 5525171, at *4 (N.D. Cal. Sept. 14, 2020) (“finding that a more expansive interpretation of ‘direct physical loss of property’ to include dispossession of property would require a ‘permanent dispossession.‘“).
The overwhelming majority of courts have concluded that neither COVID-19 nor the governmental orders associated with it cause or constitute property loss or damage for purposes of insurance coverage. These decisions have reasoned that the virus fails to cause physical alterаtion of property because temporary loss of use of property (if any) during a pandemic and while government orders are in effect does not qualify as physical loss or damage. See e.g., Protégé Rest. Partners LLC v. Sentinel Ins. Co., Ltd., 2021 WL 428653, at *4 (N.D. Cal. Feb. 8, 2021) (“Every California court that has addressed COVID-19 business interruption claims to date has concluded that government orders that prevent full use of a commercial property or that make the business less рrofitable do not themselves cause or constitute ‘direct physical loss of or physical damage to’ the insured property.“) (collecting cases); Kevin Barry Fine Art Assocs. v. Sentinel Ins. Co., Ltd., 2021 WL 141180, at *3 (N.D. Cal. Jan. 13, 2021) (“Numerous courts have considered whether allegations similar to KBFA‘s constitute a ‘direct physical loss of . . . property, and the overwhelming majority have concluded that temporarily closing a business due to government closure orders during the pаndemic does not constitute a direct loss of
Plaintiffs cite Mudpie in support of their position that COVID-19 on property would be capable of causing damage to property. Opp‘n at 8. It admits that the insured there “had made no such allegation and, thus, there was no coverage,” Opp‘n at 8, but points to the court‘s statement in dicta that “[h]ad Mudpie allеged the presence of COVID-19 in its store, the Court‘s conclusion about an intervening physical force would be different. SARS-CoV-2 - the coronavirus responsible for the COVID-19 pandemic, which is transmitted either through respiratory droplets or through aerosols which can remain suspended in the air for prolonged periods of time - is . . . a ‘physical force‘“. Mudpie, 2020 WL 5525171, at *5. However, as discussed above, the overwhelming majority of cases issued after Mudpie have found otherwise. Further, it is well-settled that “observations, commentary, or mere dicta touching upon issues not formally before the Court do not constitute binding determinations.” Dunbar v. Google, Inc., 2012 WL 6202797, at *10 (N.D. Cal., 2012).
Plaintiffs also rely on several out-of-state decisions to suggest that mere loss of use or access to property constitutes “direct physical loss of or damage” to property. Opp‘n at 8 (citing Shakespeare Festival Ass‘n v. Great Am. Ins. Co., 2016 WL 3267247, at *9 (D. Or. June 7, 2016), vacated, 2017 WL 1034203 (D. Or. Mar. 6, 2017) (finding property sustаined “physical loss or damage” where wildfire smoke made theatre “uninhabitable and unusable“); Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 WL 6675934, at *6 (D.N.J. Nov. 25, 2014) (finding that “ammonia discharge inflicted ‘direct physical loss of or damage to’ property, where “ammonia physically rendered the facility unusable“)). However, courts in this District have rejected similar arguments that loss of use or access constitutes direct physical loss, noting that the cases plaintiffs cited, the sаme cases that Plaintiffs cite here, “involved an intervening physical force which made the premises uninhabitable or entirely unusable.” Colgan v. Sentinel Ins. Co., Ltd., 2021 WL 472964, at *3 (N.D. Cal. Jan. 26, 2021); Mudpie, 2020 WL 5525171, at *4.
Further, the cases Plaintiffs cite are distinguishable because this case involves a virus, which “can be disinfected and cleaned” from surfaces. See, e.g., O‘Brien, 2021 WL 105772, at *4 (no physical loss or damage because surfaces contaminated with the novel coronavirus “can be disinfectеd and cleaned“) (citing Mama Jo‘s, Inc. v. Sparta, 2018 WL 3412974, *9 (S.D. Fla., 2018), aff‘d, 823 F. App‘x 868 (11th Cir. 2020) (presence of construction debris and dust from road work did not constitute physical loss or damage to covered property; “[t]he fact that the restaurant needed to be cleaned more frequently does not mean Plaintiff suffered a direct physical loss or damage“)); Kevin Barry Fine Art Assocs., 2021 WL 141180, at *6 (“Even if KBFA had included allegations regarding the virus being present on and damaging the property, they would not be plausible.“; citing cases in which there was no coverage because COVID-19 can be disinfected and cleaned from surfaces); Terry Black‘s Barbecue, LLC v. State Auto. Mut. Ins. Co., 2020 WL 7351246, at *7 (W.D. Tex. Dec. 14, 2020) (“Even assuming that the virus that causes COVID-19 was present at Plaintiffs’ properties, it would not constitute the direct physical loss or damage required to trigger coverage under the Policy because the virus can be eliminated. The virus does not threaten the structures covered by property insurance policies, and can be removed from surfaces with routine cleaning and disinfectant“); Promotional Headwear Int‘l v. Cincinnati Ins. Co., 2020 WL 7078735, at *8 (D. Kan. Dec. 3, 2020) (“even assuming that the virus physically attached to covered property, it did not constitute the direct, physical loss or damage required to trigger coverage because its presence can be eliminated. Much like the dust and debris at issue in Mama Jo‘s, routine cleaning and disinfecting can eliminate the virus on surfaces“); Rococo Steak, LLC v. Aspen Spec. Ins. Co., 2021 WL 268478, at *4 (M.D. Fla. Jan. 27, 2021) (“like the coating of dust and debris in Mama Jo‘s, the surfaces allegedly contaminated by COVID-19 seem to only require cleaning to fix.“). On this point, the Court notes that Plaintiffs admit that COVID-19 can be cleaned, alleging that “Out West undertakes full deep cleaning and sanitation procedures after it becomes aware of a positive test or positive exposure to COVID-19.” FAC ¶ 84; see also id. ¶ 112 re: claimed disinfection/cleaning costs. Further, the property was not rendered “unusable,” as Plaintiffs admit their restaurants remained open for delivery and takeout at all locations, with outdoor dining at some locations. FAC ¶¶ 83, 95-96, 112.1
In sum, the Court finds that Plaintiffs have not plausibly alleged “direct physical loss of or damage to” property, as required by the Policy, and their alleged losses are not covered as a matter of law. Because the Court finds that Plaintiffs cannot allege direct physical loss or damage, it need not address the scope of the
Accordingly, Plaintiffs’ claims in this case must be dismissed. However, this Order does not address any pending claims Plaintiffs may have with AFM regarding Communicable Disease coverage under the Policy, as AFM admits those remain under consideration. Seе Mot. at 4 (“Importantly, on April 17, 2020, AFM requested additional information regarding potential Communicable Disease claims identified by Plaintiffs, noting that it had not denied those
claims.“).
V. CONCLUSION
For the reasons stated above, the Court GRANTS AFM‘s motion for judgment on the pleadings. The Court will not provide leave to amend because, in light of Plaintiffs’ allegations regarding COVID-19 and the Policy provisions regarding direct physical loss of property, doing so would be futile. See Kevin Barry Fine Art Assocs., 2021 WL 141180, at *7 (granting motion for judgment on the pleadings in COVID-19 insurance coverage case without leave to amend). Accordingly, the Court DISMISSES Plaintiffs’ claims WITH PREJUDICE.2 The Court shall enter a separate judgment, after which the Clerk shall close the file.
IT IS SO ORDERED.
Dated: March 19, 2021
THOMAS S. HIXSON
United States Magistrate Judge