Sacramento Downtown Arena LLC v. Factory Mutual Ins. Co. ( 2022 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10 11 Sacramento Downtown Arena LLC, et al., No. 2:21-cv-00441-KJM-DB 12 Plaintiffs, ORDER 13 v. Factory Mutual Insurance Company, 1S Defendant. 16 17 In this insurance coverage dispute, Factory Mutual Insurance Company moves to dismiss 18 | its insureds’ claims that it wrongly denied coverage of losses related to the COVID-19 pandemic. 19 | The motion is denied. As explained in this order, one reasonable interpretation of the policy’s 20 | scope and exclusions encompasses the plaintiffs’ insurance claims. 21 | I. BACKGROUND 22 The plaintiffs operate and manage the Golden 1 Center, which is the home of the 23 | Sacramento Kings, as well as a nearby hotel and outdoor shopping center. See Compl. 15-18, 24 | 24-27. early 2020, the rapid spread of SARS-CoV-2 and COVID-19 developed into a global 25 | pandemic. See id. J 40-48. California and Sacramento County urged people to stay home, and 26 | every event at the Golden 1 Center was cancelled for the next year: basketball games, a Bon Jovi 27 | concert, a talk by the former First Lady of the United States, and a graduation ceremony for 28 | Sacramento State University, among many others. See id. 59. The basketball team and arena 1 lost a year’s revenue. See id. ¶ 7. Occupancy at the hotel dropped to almost zero before it closed 2 completely for ten weeks, and after reopening, occupancy was half of what it once was. See id. 3 ¶ 8. Retailers’ and restaurants’ revenues plummeted as foot traffic disappeared. See id. ¶ 9. The 4 plaintiffs also spent money cleaning, replacing air filtration systems, remodeling, and taking other 5 precautions. See id. ¶ 77. 6 Before the pandemic, one of the plaintiffs had purchased an insurance policy from Factory 7 Mutual Insurance Company. See id. ¶ 28; Policy, Compl. Ex. A, ECF No. 1-1. The Golden 1 8 Center, the hotel, and the shopping center are insured locations under this policy. See Compl. 9 ¶ 30; Policy App’x A (Schedule of Locations). The policy is an “all risks” policy, as explained in 10 the preamble on the first page of its declarations: 11 This Policy covers property, as described in this Policy, against ALL 12 RISKS OF PHYSICAL LOSS OR DAMAGE, except as 13 hereinafter excluded, while located as described in this Policy. 14 Policy at 1. It provides several hundred million dollars’ annual aggregate coverage against 15 various losses. See id. at 3–5. 16 The policy’s first section provides coverage for property damage. See id. at 7–32. Part of 17 that section describes “other additional coverages.” It introduces these categories of “additional 18 coverages” as coverages “for insured physical loss or damage.” One category of additional 19 coverages relates to “communicable disease response”: 20 If a location owned, leased or rented by the Insured has the actual 21 not suspected presence of communicable disease and access to such 22 location is limited, restricted or prohibited by: 23 1) an order of an authorized governmental agency regulating 24 the actual not suspected presence of communicable disease; 25 or 26 2) a decision of an Officer of the Insured as a result of the 27 actual not suspected presence of communicable disease, 28 this Policy covers the reasonable and necessary costs incurred by the 29 Insured at such location with the actual not suspected presence of 30 communicable disease for the: 1 1) cleanup, removal and disposal of the actual not suspected 2 presence of communicable diseases from insured property; 3 and 4 2) actual costs of fees payable to public relations services or 5 actual costs of using the Insured’s employees for reputation 6 management resulting from the actual not suspected presence 7 of communicable diseases on insured property. 8 This Additional Coverage will apply when access to such location is 9 limited, restricted or prohibited in excess of 48 hours. 10 Id. at 20. The boldface terms are defined. A “communicable disease” is a “disease which is 11 transmissible from human to human by direct or indirect contact with an affected individual or the 12 individual’s discharges.” Id. at 62. “Locations” are those specified in the schedule cited above. 13 See id. at 64 & App’x A. 14 After defining property damage, the policy defines another type of coverage: “time 15 element” coverage. See id. at 33–53. This portion of the policy allows claims based on lost 16 earnings or profits if the loss resulted “directly . . . from physical loss or damage of the type 17 insured . . . to property described elsewhere in this Policy and not otherwise excluded by this 18 Policy or otherwise limited in the TIME ELEMENT COVERAGES . . . .” Id. at 33. This 19 coverage is extended to several categories of loss grouped under the heading “supply chain time 20 element coverage extensions.” Id. at 45–49 (formatting omitted). The first of these categories is 21 related to losses incurred as a result of civil and military orders: 22 This Policy covers the Actual Loss Sustained and EXTRA 23 EXPENSE incurred by the Insured during the PERIOD OF 24 LIABILITY if an order of civil or military authority limits, restricts 25 or prohibits partial or total access to an insured location provided 26 such order is the direct result of physical damage of the type insured 27 at the insured location or within five statute miles/eight kilometers 28 of it. 29 Id. at 45.1 30 ///// 1 A statute mile, also known as a land mile, is 5,280 feet. See U.S. Dep’t Commerce, Nat’l Inst Standards & Technology, “U.S. Survey Foot: Revised Unit Conversion Factors” (Aug. 31, 2020), https://www.nist.gov/pml/us-surveyfoot/revised-unit-conversion-factors. 1 The policy excludes coverage in two relevant sections. First, “unless otherwise stated,” 2 the policy excludes “loss of market or loss of use.” Id. at 9. Second, the policy makes an 3 exclusion related to “contamination”: 4 This Policy excludes the following unless directly resulting from 5 other physical damage not excluded by this Policy: 6 1) contamination, and any cost due to contamination 7 including the inability to use or occupy property or any cost 8 of making property safe or suitable for use or occupancy. If 9 contamination due only to the actual not suspected 10 presence of contaminant(s) directly results from other 11 physical damage not excluded by this Policy, then only 12 physical damage caused by such contamination may be 13 insured. . . . 14 Id. at 9, 12. “Contamination” and “contaminant” are also both defined. A contaminant is 15 “anything that causes contamination,” and contamination is “any condition of property due to the 16 actual or suspected presence of any . . . virus,” among other causes. Id. at 62 (boldface omitted). 17 The plaintiffs believed the policy here covered the losses they had sustained as a result of 18 COVID-19 and government shut-down orders, and they gave notice to Factory Mutual. Compl. 19 ¶¶ 12, 66. Factory Mutual denied the claim. Id. ¶ 13. The plaintiffs then filed a complaint in this 20 court, asserting claims for breach of contract, id. ¶¶ 126–37, declaratory relief, id. ¶¶ 120–25, and 21 bad faith denial of coverage, id. ¶¶ 138–47. Factory Mutual now moves to dismiss on the basis of 22 three arguments: (1) the plaintiffs’ losses are not covered because they were not the result of 23 “physical loss or damage,” (2) their losses are excluded under the contamination exclusion, and 24 (3)their losses are excluded under the exclusion for loss of use. See Mot., ECF No. 10; Mem., 25 ECF No. 10-1. The plaintiffs opposed, ECF No. 14, and Factory Mutual replied, ECF No. 17. 26 The court heard the motion by videoconference on July 16, 2021. Fredrick Crombie, Howard 27 Slavitt, and Richard Patch appeared for the plaintiffs. Joyce Wang and Lisa Kirk appeared for the 28 defense. Mins, ECF No. 18. After the hearing, the parties stipulated to the court’s taking judicial 29 notice of an insurance policy in a case discussed in the parties’ briefs and oral arguments. See 30 ///// 31 ///// 1 Stip., ECF No. 20. The parties also have filed many notices of supplemental authority and briefs 2 discussing those authorities. See ECF Nos. 22, 23, 26–35, 37–44.2 3 II. LEGAL STANDARDS 4 A party may move to dismiss for “failure to state a claim upon which relief can be 5 granted.” Fed. R. Civ. P. 12(b)(6). The motion may be granted only if the complaint lacks a 6 “cognizable legal theory” or if its factual allegations do not support a cognizable legal theory. 7 Godecke v. Kinetic Concepts, Inc., 937 F.3d 1201, 1208 (9th Cir. 2019) (quoting Balistreri v. 8 Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988)). The court assumes all factual 9 allegations are true and construes “them in the light most favorable to the nonmoving party.” 10 Steinle v. City & Cnty. of San Francisco, 919 F.3d 1154, 1160 (9th Cir. 2019) (quoting Parks Sch. 11 of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995)). If the complaint’s allegations do 12 not “plausibly give rise to an entitlement to relief,” the motion must be granted. Ashcroft v. Iqbal, 13 556 U.S. 662, 679 (2009). 14 California law applies to Factory Mutual’s motion. See Manzarek v. St. Paul Fire & 15 Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). The ordinary rules of contract 16 interpretation govern the interpretation of insurance policies under California law. See Waller v. 17 Truck Ins. Exch., Inc., 11 Cal. 4th 1, 18 (1995). The court must interpret the policy’s language 18 “in context, with regard to its intended function.” Bank of the West v. Superior Court, 2 Cal. 4th 19 1254, 1264 (1992). “If contractual language is clear and explicit, it governs.” Id. But if language 20 is capable of two or more reasonable interpretations, the resulting ambiguity is generally resolved 21 in favor of coverage to protect the “objectively reasonable expectations of the insured.” AIU Ins. 22 Co. v. Superior Ct., 51 Cal. 3d 807, 822 (1990). Coverage clauses are thus interpreted broadly 23 “so as to afford the greatest possible protection of the insured, whereas exclusionary clauses are 24 interpreted narrowly against the insurer.” MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648 25 (2003) (alterations omitted) (quoting White v. W. Title Ins. Co., 40 Cal. 3d 870, 881 (1985)). 2 This motion at ECF No. 42 is granted. 1 III. DISCUSSION 2 The court begins with the breach-of-contract claim. Factory Mutual contends it did not 3 breach the policy’s terms because the plaintiffs’ losses are not within the basic scope of coverage. 4 It argues plaintiffs’ losses were not the result of “physical loss or damage” as required. See Mem. 5 at 7–11. It cites several cases in which courts have held that losses attributable to the COVID-19 6 pandemic and related government orders are not the result of “physical loss or damage.” See id. 7 (collecting authority); see also Def. Not. Suppl. Auth., ECF No. 26 (citing Mudpie, Inc. v. 8 Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir. 2021)). The plaintiffs contend that the 9 words “physical loss or damage” might cover their claims even if viruses did not alter any 10 structures or properties. See Opp’n at 6–9. Factory Mutual disagrees. See Reply at 3–4; Resp. 11 Suppl. Br. at 1, ECF No. 30. 12 No matter what might be possible to plead and prove about a different policy and viral 13 pandemics in the abstract, the policy at the center of this case can reasonably be interpreted as 14 defining the presence of a “communicable disease” as “physical loss or damage.” The policy’s 15 first sentence explains that it offers coverage only for risks of “physical loss or damage.” Policy 16 at 1. It later lists “Additional Coverages for insured physical loss or damage.” Id. at 15. And 17 among these additional coverages—by definition, all “for insured physical loss or damage”—the 18 policy lists “the reasonable and necessary costs incurred” in response to government orders 19 regulating the actual presence of a “communicable disease.” Id. at 20. An insured could 20 reasonably expect, given these terms, that the presence of a communicable disease such as 21 COVID-19 fits under the “physical loss or damage” umbrella for the policy as a whole. 22 This reasoning extends equally to the plaintiffs’ claims based on losses incurred as a result 23 of civil and military orders. See id. at 45. That policy provision ties back to the same “physical 24 damage of the type insured.” See id. An insured could reasonably expect the term “physical 25 damage” to have the same meaning throughout the policy. 26 Factory Mutual reads the communicable disease provisions differently. It says they do not 27 expressly require “physical loss or damage,” so Factory Mutual argues that under the policy, a 28 communicable disease can be present without causing any physical change to the property. See 1 Mem. at 2, 12–13 & n.1; Reply at 4. For that reason, it contends the presence of a communicable 2 disease is not within the basic scope of coverage. See Mem. at 12–13; Reply at 4. This reading 3 may be a reasonable alternative to the plaintiffs’ interpretation, but that is not the question here. 4 Under California law, if the language in an insurance policy is capable of more than one 5 reasonable interpretation, as in this case, the ambiguity is resolved in favor of coverage. 6 AIU, 51 Cal. 3d at 822; MacKinnon, 31 Cal. 4th at 648. 7 Factory Mutual also argues the plaintiffs’ interpretation overextends the communicable 8 disease provisions. See Reply at 4. To that end, it quotes a decision from a Washington federal 9 district court in a case about a similar policy: 10 The Communicable Disease provisions apply when the disease is 11 present, making it distinct from the Insurance Provided provision, 12 which requires physical loss or damage. Thus, the fact that the 13 Communicable Disease Provisions are applicable does not reverse- 14 activate the Insurance Provided provision. 15 Nguyen v. Travelers Cas. Ins. Co. of Am., 541 F. Supp. 3d 1200, 1227 (W.D. Wash. 2021). 16 Although the policies in this case and Nguyen are similar, they differ in one crucial respect. In 17 Nguyen, the policy simply listed the communicable disease provision as one of many “additional 18 coverages.” See Nguyen Policy at 5, 7, Stip. Ex. A, ECF No. 20. It did not describe the 19 communicable disease provisions as one additional coverage “for insured physical loss or 20 damage,” as the plaintiffs’ policy does in this case. Policy at 15. 21 The other decisions Factory Mutual cites are not binding, and they address different 22 disputes. See Reply at 5–6 (collecting authority). At the moment, this case involves no dispute 23 about whether COVID-19 was actually present on the plaintiffs’ property. See Ralph Lauren 24 Corp. v. Factory Mut. Ins. Co., No. 20-10167, 2021 U.S. Dist. LEXIS 90526, at *9 (D.N.J. May 25 12, 2021). Nor has anyone questioned whether COVID exposure occurred at a covered location. 26 See Mohawk Gaming Enters., LLC v. Affiliated FM Ins. Co., 534 F. Supp. 3d 216, 223 (N.D.N.Y. 27 2021). Other decisions Factory Mutual cites do not confront the ambiguity discussed above, 28 wherein the policy appears to define the presence of a communicable disease as “physical loss or 29 damage.” See Rockhurst Univ. v. Factory Mut. Ins. Co., 582 F. Supp. 3d 633, 639 (W.D. Mo. 1 2022). As explained above, it is unnecessary to decide whether the presence of a virus might be 2 “physical loss or damage” in the abstract or under a different policy with different terms. Cf. 3 Islands Rests., Ltd. P’ship v. Affiliated FM Ins. Co., 532 F. Supp. 3d 948, 951–55 (S.D. Cal. 4 2021); Out W. Rest. Grp. Inc. v. Affiliated FM Ins. Co., 527 F. Supp. 3d 1142, 1148–51 (N.D. 5 Cal. 2021); see also Inns-by-the-Sea v. Cal. Mut. Ins. Co., 71 Cal. App. 5th 688, 692 (2021) 6 (expressly limiting decision to “the specific insurance policy” in dispute). 7 Factory Mutual next faults the plaintiffs’ interpretation for ignoring the different sublimits 8 and liability periods that apply to the various parts of the policy. See, e.g., Reply at 5. It argues 9 that if the presence of a communicable disease counts as “physical loss or damage” for the policy 10 as a whole, then the sublimits and liability periods specific to the communicable disease 11 provisions are meaningless. See id. But the communicable disease provisions and other policy 12 provisions insure against different risks. For example, the communicable disease provisions 13 cover “cleanup, removal and disposal” of diseases and “actual costs of fees payable to public 14 relations services” and other related costs. Policy at 20. By contrast, the “time element” 15 coverage provisions cover specifically defined losses and expenses incurred as a result of a civil 16 or military order. See id. at 33–34, 45. Thus, differing sublimits and differing time periods will 17 govern these differing coverage provisions even if the policy defines the presence of a 18 communicable disease as “physical loss or damage.” 19 In sum, the plaintiffs have offered a reasonable interpretation of the policy that would 20 bring their alleged losses within the basic scope of coverage. Factory Mutual’s motion must be 21 denied unless an exclusion applies. It cites two exclusions. 22 First, Factory Mutual cites the contamination exclusion. See Mem. at 13–18. The 23 contamination exclusion does not bar coverage for “other physical damage not excluded by this 24 Policy,” including viral contamination. Policy at 12, 62. As explained above, it is reasonable to 25 read the policy as defining the presence of a “communicable disease” as non-excluded “physical 26 damage,” so this exclusion would be no bar to coverage. MacKinnon, 31 Cal. 4th at 648. This 27 interpretation does not nullify the exclusion, as Factory Mutual contends. Losses caused by other 28 contaminants listed in the Policy’s definitions, those that are not “communicable diseases,” would 1 remain within the exclusion’s scope. Contamination by foreign substances, impurities, pollutants, 2 hazardous materials, poisons, toxins, mold, and mildew all would be excluded under the 3 plaintiffs’ interpretation. See Policy at 62. 4 Factory Mutual also advocates an alternative reading of the contamination exclusion. It 5 argues the additional coverage for communicable diseases acts as an exception to the more 6 general exclusion of losses caused by contaminants. See, e.g., Reply at 7–8. By this reading, an 7 insured is limited to the coverage in the communicable disease provisions, and the contamination 8 exclusion bars claims based on other parts of the policy: 9 [The policy] covers certain losses due to COVID-19 under the 10 Communicable Disease coverages, provided that the specific 11 requirements of the Communicable Disease coverages are met, and 12 subject to the applicable sublimits. Absent these specific 13 requirements of the Communicable Disease coverages, or in excess 14 of the applicable sublimits, the Contamination Exclusion applies. 15 The Communicable Disease coverages simply provide the insured 16 with a narrow exception to the exclusion, subject to all other Policy 17 terms. 18 Id. at 7. This interpretation may be reasonable, but that is, again, not the question at this time. 19 When both the insured and insurer propose reasonable interpretations, a court must resolve the 20 ambiguity in the insured’s favor. MacKinnon, 31 Cal. 4th at 648. And because the disputed 21 language is an exclusion, it must be interpreted narrowly. Id. 22 The second exclusion Factory Mutual cites is the loss-of-use exclusion. See Mem. at 18– 23 19. But the loss-of-use exclusion does not apply if the policy states otherwise, and here the policy 24 includes terms insuring the losses the plaintiffs claim here: (1) the communicable disease 25 coverage, which can be read as implicitly defining the presence of a communicable disease as 26 insured “physical loss or damage,” as explained above; and (2) the time elements coverage, which 27 provides coverage for certain claimed losses caused by certain interruptions, including civil and 28 military orders, see id. at 45. 29 Factory Mutual has not shown the policy’s exclusions remove the plaintiffs’ claims from 30 the scope of coverage. Its motion to dismiss the contract claim must be denied. What remains, 31 then, are Factory Mutual’s arguments about the plaintiffs’ claims for declaratory relief and bad 1 faith denial of coverage. These arguments are derivative of Factory Mutual’s arguments about 2 the contract claim. See id. at 19–20. Its motion to dismiss these claims is denied as well. 3 IV. CONCLUSION 4 The motion for leave to file supplemental authority (ECF No. 42) is granted, and the 5 court has considered the supplemental authority provided by the parties. The motion to dismiss 6 (ECF No. 10) is denied. A status (pretrial scheduling) conference is set for December 1, 2022 at 7 2:30 p.m., with a joint status report due fourteen days prior. 8 IT IS SO ORDERED. 9 DATED: October 28, 2022.