R&J Entm't LLC v. Hous. Cas. Co.

• Decision Date: 10 November 2021
• Docket Number: Civil Action 4:20-cv-03782
• Court: U.S. District Court — Southern District of Texas
• Parties: R&J ENTERTAINMENT LLC D/B/A/ TRAPPED ESCAPE ROOM, ET. AL., Plaintiffs. v. HOUSTON CASUALTY COMPANY, Defendant.

R&J ENTERTAINMENT LLC D/B/A/ TRAPPED ESCAPE ROOM, ET. AL., Plaintiffs. v. HOUSTON CASUALTY COMPANY, Defendant.

Civil Action No. 4:20-cv-03782

United States District Court, S.D. Texas, Houston Division

November 10, 2021

MEMORANDUM AND RECOMMENDATION

ANDREW M. EDISON, UNITED STATES MAGISTRATE JUDGE

In this case, Plaintiffs R&J Entertainment LLC and TRAPPED! LLC on behalf of themselves and all others similarly situated (collectively “R&J”), are demanding insurance coverage from Defendant Houston Casualty Company (“HCC”) for the shutdown of their businesses due to the COVID-19 pandemic. HCC has filed a Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). See Dkt. 97. R&J and HCC have each submitted multiple notices of supplemental authority. Having reviewed the briefing, the record, the applicable law, and having heard oral argument, I recommend that the Motion to Dismiss be GRANTED.

BACKGROUND

R&J operates escape room businesses in Upland, California; San Dimas, California; and Las Vegas, Nevada. Over the past year and a half, the COVID-19 pandemic has significantly impacted R&J's operations. To prevent the spread of the virus state governments ordered the widespread shutdown of businesses across the country. Relevant here, on March 19 2020, California Governor Gavin Newsom issued Executive Order N-33-20, ordering all non-essential government workers to remain in their homes to prevent the spread of the virus. A few weeks later, on March 31, 2020, Nevada Governor Steve Sisolak issued the Emergency Directive 010 Stay at Home Order, which had the same effect as the California Executive Order.^[1] These orders effectively prevented R&J from operating escape rooms, causing financial losses.

R&J holds an all-risk insurance policy with HCC (the “Policy”). Specifically, HCC issued a Master Policy to the Association for Room Escapes of North America (“ARENA”), under which the Policy was issued for the period 11/01/2019 to 11/01/2020. R&J obtained the Policy through its membership with ARENA.

After suffering financial losses as a result of the COVID-19 pandemic, R&J sought coverage under the Policy's business income, extra expense, and civil authority coverage provisions. However, according to R&J, HCC “has systematically denied and continues to deny and refuses to provide payment for insurance claims for coverage for similar losses and expenses by insureds holding policies” that are substantially similar, if not identical, to the Policy. Dkt. 95 at 2.

Consequently, in August 2020, R&J filed a purported class action case against HCC in the Northern District of California, demanding coverage under the Policy for losses suffered because of COVID-19 related closures. A short time later, upon joint stipulation of the parties, the case was transferred to this Court. Since then, R&J has filed a First Amended Complaint, seeking a declaratory judgment regarding HCC's alleged violation of the Policy's business income, civil authority, and extra expense coverage provisions.

APPLICABLE LAW

A. Motion to Dismiss Under Rule 12(b)(6)

Rule 12(b)(6) allows for the dismissal of a complaint for the “failure to state a claim upon which relief can be granted.” FED. R. CIV. P. 12(b)(6). To survive a motion to dismiss under Rule 12(b)(6), a plaintiff's complaint must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

In deciding a Rule 12(b)(6) motion, I must “accept all well-pleaded facts as true, drawing all reasonable inferences in the nonmoving party's favor.” Benfield v. Magee, 945 F.3d 333, 336 (5th Cir. 2019). I “do not, however, accept as true legal conclusions, conclusory statements, or naked assertions devoid of further factual enhancement.” Id. at 336-37 (cleaned up). Because a complaint must be liberally construed in favor of the plaintiff, a motion to dismiss under Rule 12(b)(6) is generally viewed with disfavor and is rarely granted. See Harrington v. State Farm Fire & Cas. Co., 563 F.3d 141, 147 (5th Cir. 2009).

B. Texas Insurance Law

The parties agree that Texas law governs this action. Under Texas law, insurance policies are read based on “common principles governing the construction of contracts, and the interpretation of an insurance policy is a question of law for a court to determine.” Am. Int'l Specialty Lines Ins. Co. v. Rentech Steel LLC, 620 F.3d 558, 562 (5th Cir. 2010). “Unless the policy dictates otherwise, courts give words and phrases their ordinary and generally accepted meaning, reading them in context and in light of the rules of grammar and common usage.” Nassar v. Liberty Mut. Fire Ins. Co., 508 S.W.3d 254, 258 (Tex. 2017) (cleaned up). Courts “enforce unambiguous policies as written.” Pan Am Equities, Inc. v. Lexington Ins. Co., 959 F.3d 671, 674 (5th Cir. 2020). “If policy language is worded so that it can be given a definite or certain legal meaning, it is not ambiguous and [courts] construe it as a matter of law.” Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 157 (Tex. 2003). See also Pan Am, 959 F.3d at 674 (“If an insurance contract, just like any other contract, uses unambiguous language, that's that.”).

If a policy is ambiguous, a court must resolve the uncertainty by adopting the construction that most favors the insured. John M. O'Quinn, P.C. v. Lexington Ins. Co., 906 F.3d 363, 367 (5th Cir. 2018). “The insured bears the initial burden of showing that there is coverage, while the insurer bears the burden of proving the applicability of any exclusions in the policy.” Id. (quoting Guar. Nat'l Ins. Co. v. Vic Mfg. Co., 143 F.3d 192, 193 (5th Cir. 1998)).

ANALYSIS

R&J seeks to recover under the Policy's business income civil authority, and extra expense coverage provisions. The business income coverage provision allows recovery only if the insured alleges facts that plausibly show that the suspension in business operations was “caused by direct physical loss of or damage to property at [the] premises.” Dkt. 41-1 at 34. The civil authority coverage provision allows recovery only if the insured alleges facts that plausibly show that a government order prohibited “access to the described premises due to direct physical loss of or damage to property, other than at the described premises.” Id. at 35. Similarly, the extra expense coverage provision allows recovery only if the insured incurred expenses due to “direct physical loss or damage to property.”^[2] Id. at 34.

HCC maintains that there is no insurance coverage. The crux of HCC's argument is that R&J's losses were not caused by events or occurrences which constituted “direct physical loss of or damage to the property” under the Policy. R&J takes the opposite position that losses caused by the government closure orders constitute direct physical loss as defined by the Policy. Thus, the definition of “direct physical loss of or damage to property” is central to this dispute. I will address this definitional issue first. Then I will apply the definition to each provision.

A. “Direct Physical Loss of or Damage to Property”

The term “direct physical loss of or damage to property” is not defined by the Policy. As described above, when a policy term is undefined, a court typically must apply the term's ordinary and generally accepted meaning. See Nassar, 508 S.W.3d at 258. Sometimes, however, a court is tasked with applying a technical definition. See Anadarko Petroleum Corp. v. Houston Cas. Co., 573 S.W.3d 187, 193 (Tex. 2019) (“We must give an insurance policy's undefined words their common, ordinary meaning unless the policy itself demonstrates that the parties intended a different or more technical meaning.” (cleaned up and emphasis added)).

Here, HCC argues that I should apply the plain and ordinary meaning, as has been previously applied in numerous Texas federal courts. R&J counters this argument in two ways. First, R&J argues that the plain ordinary meaning of “direct physical loss of or damage to property” covers its property because it

was changed by an “external event” from an “initial satisfactory state”-in which the air was safe to breathe, surfaces were safe to touch, and ordinary business could be conducted on premises-“into an unsatisfactory state”-in which fatal particles permeated the air and covered surfaces, causing civil authorities to conclude that premises were so unsafe that ordinary business could not be conducted.

Dkt. 100 at 6-7. Next, R&J argues that I should apply a technical definition because the Insurance Services Offices, Inc. (“ISO”)-the entity which created the forms used by HCC to draft its insurance policies-seemingly understood the term to include the type of non-physical damages typically caused by viruses.

I begin by rejecting the use of any technical definition. Although R&J has included a significant amount of information concerning the ISO in its live pleading, the simple fact remains that the Policy does not internally reference the ISO or the existence of any supposedly applicable technical definition. In other words, the policy itself does not demonstrate that R&J and HCC intended a different or more technical meaning for the term “direct physical loss of or damage to property.” See Anadarko, 573 S.W.3d at 193. Consequently, I “must give [the Policy's] undefined words their common, ordinary meaning.” Id.

The common and ordinary meaning of “direct physical loss of or damage to property” is not open to debate. “While the policy does not define ‘direct...