Case Information
IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA TRIA WS LLC, et al. , individually and on CIVIL ACTION behalf of all others similarly situated,
Plaintiffs,
v. AMERICAN AUTOMOBILE NO. 20-4159 INSURANCE COMPANY,
Defendant.
MEMORANDUM OPINION
This insurance dispute, like many these days, arises from losses sustained by Tria WS LLC, Tria TR LLC, and Alaska Café LLC (“Plaintiffs”) during government shutdowns brought on by the COVID-19 pandemic. Plaintiffs sue their insurer, Defendant American Automobile Insurance Company (“AAIC”), on behalf of themselves and three putative classes, asserting claims for declaratory judgment, breach of contract, and bad faith. AAIC moves to dismiss this action in its entirety pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.
I. BACKGROUND
A. The Insurance Policies Plaintiffs own and operate wine bars and tap rooms in the city of Philadelphia. They each purchased substantially identical all-risk commercial property insurance policies from AAIC (the “Policies”), which insure Plaintiffs against various losses arising from “direct physical loss of or damage to” property.
At issue here are the Policies’ Business Income, Extra Expense, Extended Business Income and Civil Authority coverage as well as an endorsement to the Policies, entitled “Exclusion of Loss Due to Virus or Bacteria.” [1]
B. Factual Allegations and Procedural History In late December 2019, individuals in China began falling ill with a novel coronavirus pneumonia, labelled by the World Health Organization as COVID-19. The virus soon spread to the United States and by March 2020 was ubiquitous. On March 6, 2020, in response to this public health crisis, Pennsylvania Governor Tom Wolf issued a Proclamation of Disaster Emergency and, ten days later, Philadelphia Mayor Jim Kenney prohibited restaurants—such as those operated by Plaintiffs—from providing in-person dining and limited their operations to delivery service or remote ordering. Governor Wolf then mandated the statewide closure of all restaurants and bars except to the extent such businesses could offer carry-out, delivery, or drive- through services. In June and July 2020, as conditions improved, executive orders eased the restrictions, allowing for a “limited reopening” of bars and restaurants subject to significant occupancy and other restrictions. Plaintiffs allege that, as a result of these government actions, they were forced to “cease, suspend, and/or severely limit their business operations,” which in turn cost them income and caused them to incur additional operating expenses. To date, Plaintiffs have not regained full use of their premises.
Plaintiffs submitted insurance claims to AAIC under the Policies. AAIC declined coverage on the contention that the losses were not covered by the Policies. Plaintiffs then filed suit on behalf of themselves and three putative classes of “bars, restaurants, and other eateries” that were denied coverage by AAIC for losses sustained as a result of the government closure orders: (1) a “Business Income Coverage” class; (2) an “Extended Business Income Coverage” class; and, (3) a “Civil Authority Coverage” class. Their Amended Complaint (the “Complaint”) asserts three counts of declaratory judgment, three counts of breach of contract, and three counts of bad faith. Counts I, IV, and VII seek a declaratory judgment that AAIC is required to pay Plaintiffs under the Policies’ Business Income and Extra Expense coverages, Extended Business Income coverage, and Civil Authority coverage, respectively. Counts II, V, and VIII allege that AAIC breached its obligations under the Policies when it denied Plaintiffs coverage under these provisions. Finally, Counts III, VI, and IX allege that AAIC’s coverage decisions were made in bad faith.
AAIC now moves to dismiss the Complaint in its entirety, arguing that the Policies, by their clear terms, do not afford coverage for the losses alleged by Plaintiffs.
II. LEGAL STANDARD
To survive a motion to dismiss brought under Federal Rule of Civil Procedure 12(b)(6),
“a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that
is plausible on its face.”
Ashcroft v. Iqbal
,
III. DISCUSSION
Plaintiffs allege that the losses and expenses they have sustained as a result of state and local government orders designed to mitigate the spread of COVID-19 are covered under the Policies’ Business Income, Extra Expense, Extended Business Income, and Civil Authority provisions. According to AAIC, all of Plaintiffs’ claims must be dismissed because Plaintiffs fail to allege any “direct physical loss of or damage to” property, a threshold requirement for each of these coverages. AAIC further contends that even if Plaintiffs’ losses fell within one or more of the Policies’ coverage provisions, coverage for COVID-19-related losses is nevertheless precluded pursuant to the Policies’ so-called virus exclusion, which bars coverage for losses “caused by or resulting from” a virus.
A. Principles of Policy Interpretation
The substantive law of Pennsylvania governs this diversity action.
Nationwide Mut. Ins.
Co. v. Buffetta
,
“[T]he proper focus for determining issues of insurance coverage is the reasonable
expectations of the insured.”
Reliance Ins. Co. v. Moessner
,
If, however, the policy language is ambiguous, “the court must construe the policy ‘in
favor of the insured . . . and against the insurer, as the insurer drafts the policy, and controls
coverage.’”
Nautilus Ins. Co. v. Bike & Build, Inc.
, 340 F. Supp.3d 399, 408 (E.D. Pa. 2018)
(quoting
Kvaerner Metals Civ. of Kvaerner U.S., Inc. v. Comm. Union Ins. Co.
,
It is the insured’s initial burden to prove the existence of coverage under the policy.
State
Farm Fire & Cas. Co. v. Estate of Mehlman
,
B. Coverage
1. Business Income and Extra Expense Coverage Plaintiffs first allege that they are afforded coverage pursuant to the Policies’ Business Income and Extra Expense provisions.
The Policies’ Business Income coverage requires AAIC to: 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 physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit Of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss.
A “Covered Cause of Loss” is any “direct physical loss,” unless said loss is “excluded or limited” by the Policies. Extra Expense coverage works in tandem with the Business Income provision and entitles the insured to coverage for any “extra expense” incurred during the period of restoration, that is, any “necessary expenses” that the insured “would not have incurred if there had been no direct physical loss or damage to property.”
At the threshold, coverage is available under these provisions only if Plaintiffs suffer a “suspension” [2] of their business operations “caused by direct physical loss of or damage to” the insured property. AAIC does not dispute that Plaintiffs’ business operations were “suspend[ed]” due to government-mandated COVID-19 restrictions. Rather, AAIC contends that Plaintiffs have not, and cannot, allege a “direct physical loss of or damage to” their properties sufficient to trigger these coverages.
This dispute is not the first time that insureds have done battle with their insurers regarding COVID-related suspensions. Cases like this one are being litigated across the country. To try and establish physical loss or damage, business owners seeking coverage for COVID-19- related losses have typically proceeded on one of two theories. The first is the “physical contamination” theory, whereby business owners allege that the virus was physically present on their properties, thus making the insured premises unsafe for use. See, e.g. , Studio 417, Inc. v. Cincinnati Ins. Co. , 478 F. Supp.3d 794, 802 (W.D. Mo. 2020) (denying insurer’s motion to dismiss where plaintiffs alleged that COVID-19 “particles attached to and damaged” their property); Blue Springs Dental Care, LCC v. Owners Ins. Co. , 488 F. Supp.3d 867, 876-77 (W.D. Mo. 2020) (denying insurer’s motion to dismiss where plaintiffs alleged that “COVID-19 had physically occupied and contaminated their dental clinics,” rendering them unusable).
The second is the “loss of use” theory. This theory is not premised on COVID-19
contamination or any other specific condition of or on the insured premises. Instead, its
advocates assert that the significant restrictions imposed by the government on the manner and
degree to which business owners may use their premises are sufficient, on their own, to establish
“direct physical loss of” property.
See, e.g.
,
Michael Cetta, Inc. v. Admiral Indem. Co.
, --- F.
Supp.3d ----,
Thus, the meaning of the terms “direct,” “physical,” and “loss” is central to the
resolution of this dispute. None of these terms are defined in the Policies. This does not,
however, necessarily render them ambiguous.
See Humans & Res.
, --- F. Supp.3d at ----, 2021
WL 75775, at *7. Rather, “‘[w]ords of common usage in an insurance policy are construed
according to their natural, plain, and ordinary sense,’ and thus ‘we may consult the dictionary
definition of a word to determine its ordinary usage.’”
Id.
(quoting
Kvaerner
,
Plaintiffs are thus correct that a “loss” of property could include the inability to possess
or utilize the property for its intended purpose. But when modified by the terms “direct” and
“physical,” the term “loss” is no longer reasonably susceptible to Plaintiffs’ proffered definition.
Given its ordinary meaning, the phrase “direct physical loss of” property requires that the
property be rendered unusable by some physical force. This in turn requires that the insured’s
“loss of use” bear some causal connection to the condition of the premises, such as where a fire
burns down an insured restaurant or a thief steals all of the restaurant’s cooking equipment,
thereby rendering the property unusable for its intended purpose.
See 4431, Inc. v. Cincinnati
Ins. Co.
, --- F. Supp.3d ----,
The idea that “loss of use” does not constitute “direct physical loss of or damage to” property resonates in ordinary experience outside the context of insurance coverage. Say, for example, a teenager broke curfew, and his parents punished him by taking away the keys to his car. The teen undoubtedly lost the ability to use the car. However, we would not say that there had been a “direct physical loss of or damage to” the car. The teenager was [merely] precluded from driving it.
Michael Cetta, Inc.
, --- F. Supp.3d at ----,
In any event, even if the phrase “direct physical loss” were ambiguous when considered
in isolation, when the phrase is considered in its broader context, Plaintiffs’ “loss of use” theory
is clearly untenable. The Policies provide coverage only for business income losses sustained
due to the suspension of the insured’s operations during the “period of restoration,” which, by
the terms of the Policies, ends on either the “date when the [insured property] should be repaired,
rebuilt or replaced with reasonable speed and similar quality” or the “date when business is
resumed at a new permanent location.” The terms “repair,” “rebuild,” and “replace” strongly
suggest that the insured property must have suffered some negative change in its physical
condition rendering the property unsatisfactory and requiring restoration.
[3]
As Plaintiffs
themselves appear to concede, the Policies’ “period of restoration” requirement would be
rendered superfluous if Plaintiffs’ understanding of “direct physical loss” were accepted.
See
Meyer v. CUNA Mut. Ins. Soc.
,
Similarly, the Policies’ Civil Authority provision is meaningless under Plaintiffs’
proffered understanding of “direct physical loss.”
[4]
This provision, as discussed in more detail
below, provides an insured with coverage if damage to a nearby property causes a civil authority
to prohibit access to the insured’s property. If mere loss of use were sufficient to constitute a
“direct physical loss of” the insured property, there would be no need for this Civil Authority
provision, as any business income losses resulting from a civil authority’s prohibition on
accessing the insured premises would necessarily be covered under the Business Income and
Extra Expense provisions.
See Frank Van’s Auto Tag LLC v. Selective Ins. Co. of the Se.
, --- F.
Supp.3d ----,
In response, Plaintiffs contend that reading “direct physical loss” to require some change to the physical condition of the insured premises impermissibly conflates “loss” and “damage,” rendering the term “damage” in the phrase “direct physical loss of or damage to” property meaningless. That does not follow. For instance, a hurricane could cause direct physical damage to an insured property where strong winds blow off the property’s roof. By the same token, it could cause a direct physical loss of the property where strong winds completely destroy the building. See Real Hosp., LLC v. Travelers Cas. Ins. Co. of Am. , --- F. Supp.3d ----, 2020 WL 6503405, at *6 (S.D. Miss. Nov. 4, 2020) (“[I]n a restaurant with ten tables, there could be a fire, which completely burns up five of the tables—thus, there is a ‘direct physical loss of property.’ The fire also could melt the tabletops or cause smoke damage to the remaining five tables—thus, there is ‘damage to property.’”). In other words, the terms “damage” and “loss” are not interchangeable, but instead indicate the degree to which the insured property has suffered a negative physical change.
Plaintiffs also rely on
Port Authority of New York and New Jersey v. Affiliated FM
Insurance Co.
,
When the presence of large quantities of asbestos in the air of a building is such as to make the structure uninhabitable and unusable, then there has been a distinct loss to its owner.
However, if asbestos is present in components of a structure, but is not in such form or quantity as to make the building unusable, the owner has not suffered a loss. The structure continues to function—it has not lost its utility.
Id. at 236. The court concluded:
“[P]hysical loss or damage” occurs only if an actual release of asbestos fibers from asbestos containing materials has resulted in contamination of the property such that its function is nearly eliminated or destroyed, or the structure is made useless or uninhabitable, or if there exists an imminent threat of the release of a quantity of asbestos fibers that would cause such loss of utility.
Id.
;
see also Motorists Mut. Ins. Co. v. Hardinger
,
Analogizing to Port Authority , Plaintiffs argue that they suffered a “direct physical loss” because the government orders “outright prevented [Plaintiffs] from physically accessing, occupying and operating their insured premises,” thus eliminating their properties’ functions and rendering them “useless or uninhabitable.” Initially, they argue from false premises: The government orders—attached by Plaintiffs to their Complaint—do not place any restrictions on Plaintiffs’ ability to physically access or occupy their properties. Rather, they place limitations on the ways in which Plaintiffs may utilize their properties, with the initial orders preventing Plaintiffs from offering dine-in services (but permitting Plaintiffs to offer take-out and delivery services) and the most recent orders, among other things, restricting the number of customers allowed in Plaintiffs’ restaurants at any given time.
More critically, however, Plaintiffs’ factual allegations differ materially from those of the
Port Authority
plaintiffs. Consistent with the understanding of “direct physical loss” outlined
above, the latter plaintiffs alleged the physical presence of a harmful contaminant on the insured
premises which rendered those premises useless.
See Port Auth.
,
This conclusion accords, moreover, with the general purpose of first-party property
insurance policies like the ones at issue here, which are written to protect insureds “against loss
caused by injury to the insured’s own property.”
See Port Auth.
,
For these and other reasons, the vast majority of courts to have considered Plaintiffs’
“loss of use” theory have found for the insurers.
See, e.g.
,
4431, Inc.
, --- F. Supp.3d at ----, 2020
WL 7075318, at *10 (granting insurer’s motion to dismiss, finding “economic loss resulting
from an inability to utilize a premises as intended must (1) bear some causal connection to the
physical
conditions of that premises, which conditions (2) operate to completely or near
completely preclude operation of the premises as intended”);
Kahn
, --- F. Supp.3d at ----, 2021
WL 422607, at *5 (granting insurer’s motion to dismiss, finding “the phrase ‘physical loss of or
damage to property’ unambiguously requires some issue with the physical premises that impedes
business operations”);
Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am.
, 487 F. Supp.3d 834, 841
(N.D. Cal. Sept. 14, 2020) (granting insurer’s motion to dismiss, finding “that some outside
physical force must have
induced
a detrimental change in the property’s capabilities before a
plaintiff alleging loss of use can establish a ‘direct physical loss of property’”);
Promotional
Headwear Int’l v. Cincinnati Ins. Co.
, --- F. Supp.3d ----,
Plaintiffs identify a handful of cases to the contrary, none of which offers a persuasive analysis of the policy terms at issue. [5] The Policies are not reasonably susceptible to Plaintiffs’ proffered definition of “direct physical loss,” and Plaintiffs do not otherwise plead facts sufficient to state a prima facie case of coverage under the Policies’ Business Income and Extra Expense provisions. Plaintiffs are thus not entitled to Business Income or Extra Expense coverage under the terms of their Policies.
2. Extended Business Income Coverage Plaintiffs also seek coverage under the Policies’ Extended Business Income provision, which reimburses an insured for business income losses that continue after the period of restoration ends as follows: However, by its clear terms, this provision applies only where the insured has satisfied the initial condition of showing a “Business Income loss payable under the policy.” Because Plaintiffs fail to allege facts sufficient to trigger Business Income coverage, they are necessarily precluded from seeking Extended Business Income coverage.
3. Civil Authority Coverage
Finally, Plaintiffs allege that they are due coverage pursuant to the Policies’ Civil
Authority provision. Unlike the above coverages, which address “physical loss of or damage to”
the insured premises, Civil Authority coverage addresses potential losses caused by “damage to
property other than” the insured premises. If, because of damage to other property, a civil
authority “prohibits access to” the insured property, then AAIC will reimburse the insured for
resulting loss of business income and extra expense if the nature of the civil authority’s
prohibition otherwise meets the coverage criteria. This type of coverage thus requires Plaintiffs
to plead, at minimum: (1) that there was damage to property other than their own; and, (2) that
the civil authority’s action “prohibit[ed] access to” the insured premises.
See Michael Cetta,
Inc.
, --- F. Supp.3d at ----,
Plaintiff do not allege facts sufficient to meet either requirement. The Complaint does
not contain any allegations concerning damage to property other than the insured premises. The
Complaint also does not allege that the government closure orders prohibited Plaintiffs from
accessing their properties; indeed, the orders at all times permitted Plaintiffs to access the insured
premises to prepare food for delivery and take-out service and, later, to resume limited in-person
dining.
See 4431, Inc.
, --- F. Supp.3d at ----,
In sum, none of the policy provisions cited by Plaintiffs provide coverage for the losses alleged in their Complaint. [6] Indeed, the language of the Policies clearly and unambiguously precludes coverage. [7]
C. Leave to Amend
Courts must grant plaintiffs leave to amend their complaint where justice so requires.
Fed. R. Civ. P. 15(a)(2). “Leave to amend may be denied, however, if amendment would be
futile,” that is, “if the amended complaint would not survive a motion to dismiss for failure to
state a claim upon which relief could be granted.”
Alvin v. Suzuki
,
IV. CONCLUSION
For the foregoing reasons, AAIC’s Motion to Dismiss will be granted and Plaintiffs’ Complaint will be dismissed with prejudice. An appropriate order follows.
March 30, 2021 BY THE COURT:
/s/Wendy Beetlestone, J. _______________________________ WENDY BEETLESTONE, J.
Notes
[1] Pursuant to the endorsement, AAIC “will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”
[2] “Suspension” is defined to mean “[t]he slowdown or cessation of [the insured’s] business activities.”
[3] Plaintiffs attempt to render the Policies’ “period of restoration” language ambiguous by looking to other policy
provisions which, they suggest, support their “loss of use” theory. They point, for instance, to the Policies’
definition of “suspension,” which includes situations where “part or all of the [insured premises] is rendered
untenantable.” Plaintiffs suggest that property may be “rendered untenable” even where the property has suffered
no change in its physical condition if the insured is precluded, by government order or otherwise, from accessing or
utilizing the property. Not so. Although the term “untenantable” is not defined in the Policies, it ordinarily requires
a property to be “incapable of being occupied or lived in.”
Untenantable
,
Merriam-Webster
, https://www.merriam-
webster.com/dictionary/untenantable. A government closure order which restricts an insured’s ability to access or
use the insured property does not render the property incapable of being occupied or lived in; the premises remain
fully capable of performing their former functions, even if the insured is temporarily precluded from fully utilizing
the property.
See Town Kitchen LLC v. Certain Underwriters at Lloyd’s, London
,
[4] The provision provides as follows: When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply: (1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; 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.
[5] Out of the numerous cases submitted by Plaintiffs, the Court has identified only four decisions which expressly
support Plaintiffs’ proffered definition of “direct physical loss.” In
Henderson Road Restaurant Systems, Inc. v.
Zurich American Ins. Co.
, --- F. Supp.3d ----,
[6] Further, because the language of the Policies clearly precludes coverage, the applicability of the virus exclusion need not be addressed.
[7] Plaintiffs bring this action under Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of themselves and all
others similarly situated. Because Plaintiffs’ Complaint will be dismissed in its entirety, Plaintiffs’ class allegations
are not reached.
See Estate of Gleiberman v. Hartford Life Ins. Co.
,