Baxter Senior Living, LLC v. Zurich Am. Ins. Co.

• Decision Date: 30 September 2022
• Docket Number: 3:22-cv-00044-SLG
• Parties: BAXTER SENIOR LIVING, LLC, Plaintiff, v. ZURICH AMERICAN INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — District of Alaska

BAXTER SENIOR LIVING, LLC, Plaintiff,
v.
ZURICH AMERICAN INSURANCE COMPANY, Defendant.

No. 3:22-cv-00044-SLG

United States District Court, D. Alaska

September 30, 2022

ORDER CERTIFYING QUESTIONS TO THE ALASKA SUPREME COURT

SHARON L. GLEASON, UNITED STATES DISTRICT JUDGE

This matter is presently before the United States District Court for the District of Alaska on Defendant's motion to dismiss for failure to state a claim upon which relief can be granted.

Pursuant to Rule 407 of the Alaska Rules of Appellate Procedure, the U.S. District Court respectfully requests the Alaska Supreme Court to answer the following certified questions of Alaska law:

1) Under Alaska law, can the presence of the COVID-19 virus at an insured property constitute “direct physical loss of or damage to” the property for the purposes of a commercial insurance policy

2) Under Alaska law, can operating restrictions imposed on an insured property by COVID-19 pandemic-related governmental orders constitute “direct physical loss of or damage to” the property for the purposes of a commercial insurance policy

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BACKGROUND^[1]

In 2019, Plaintiff Baxter Senior Living, LLC, opened a senior-living facility in Anchorage, Alaska. To insure the facility, Baxter obtained a “Property Portfolio Protection” (PPP) insurance policy from Defendant Zurich American Insurance Company. Relevant here, the policy provided Baxter with “Business Income” and “Extra Expense” insurance coverage. But the policy specified that both coverages only applied to losses caused by “direct physical loss of or damage to” Baxter's insured property.

Business Income Coverage Form

We will 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 a “premises” at which a Limit of Insurance is shown on the Declarations for Business Income. The loss or damage must be directly caused by a “covered cause of loss”.^[2]...

Extra Expense Coverage Form

...

We will pay for the actual and necessary “extra expense” you incur due to direct physical loss of or damage to property at a “premises”

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at which a Limit of Insurance is shown for Extra Expense on the Declarations. The loss or damage must be directly caused by a “covered cause of loss”.^[3]

According to the complaint, the onset of the COVID-19 pandemic in early 2020 significantly impacted Baxter's operations. The pandemic prevented Baxter from offering tours of its facility, and the facility soon fell below 60 percent occupancy. In March 2020, Baxter received an email from a licensing specialist at the Alaska Department of Health and Social Services listing the Center for Disease Control's (CDC) “recommended . . . interventions [for] Assisted Living Facilities to reduce the risk [C]ovid-19 poses to residents of your facilities.”^[4] Baxter interpreted this email as a State requirement that it restrict the use of its facility, including by canceling large live gatherings, increasing social distancing, implementing closures and quarantines as needed, and suspending visitor access.^[5]

In August 2020, the State of Alaska issued an official document entitled COVID-19 Recommended Guidance for Congregate Residential Settings that recommended “aggressive efforts to limit COVID-19 exposure and to prevent the spread of COVID-19 within [residential care] facilities.” The document set out a three-phase system for operating residential care facilities. Under the system, facilities would begin at the first phase, which imposed strict limitations on facilities'

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operation and residents' activities. If a facility went 14 days without a new-onset COVID-19 case, the facility could progress to the next phase, which would have looser limitations. Although it was entitled “recommended guidance,” the August 2020 document invoked the Governor of Alaska's “Public Health Disaster Emergency” powers, and it specified that residential care facilities' adoption of the phased-in system or a “similar” system was mandatory.^[6]

Baxter alleges that the COVID-19 virus and the State's restrictions caused it to lose business income and incur extra expenses. In September 2020, Baxter submitted a claim to Zurich under the policy. Zurich denied Baxter's claim, stating that the policy “does not provide coverage for the loss of revenue and extra expenses incurred by [Baxter].”^[7] On February 2, 2022, Baxter sued Zurich in Alaska Superior Court.^[8] Baxter's complaint alleges nine causes of action against Zurich: seven claims for breach of contract (Claims 1 to 7) and two claims for breach of the implied covenant of good faith and fair dealing (Claims 8 and 9).^[9]Claims 1 to 6 each involve coverage predicated on “direct physical loss of or

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damage to” insured property. Zurich removed the case to the U.S. District Court on March 4, 2022.^[10]

DISCUSSION

Zurich asserts that Claims 1 through 6 of Baxter's Complaint fail to state a claim upon which relief can be granted. Noting that each of the claims rely on provisions of the policy that condition coverage on “direct physical loss of or damage to” insured property, Zurich asserts that the facts in Baxter's complaint, even if taken as true, do not establish that Baxter suffered any “direct physical loss of or damage to” any property covered by the policy. A considerable majority of courts in the United States, both state and federal, have precluded coverage in these circumstances, concluding that the COVID-19 pandemic's effects on a business facility do not constitute a “direct physical loss of or damage to” insured property.^[11] A minority of courts have held that loss of the physical use of a business facility due to the COVID-19 pandemic and related government restrictions constitute a “direct physical loss” of insured property.^[12]

Although the Alaska Supreme Court has issued decisions in cases involving insurance policies that covered “direct physical loss or damage to” property, the phrase's construction was not at issue in any of those cases, each of which clearly

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involved physical destruction of property.^[13] Moreover, as of the date of this order, the Alaska Supreme Court has not yet issued any published decisions involving Alaska insurance law and the COVID-19 pandemic.

As of the date of this order, courts in the following jurisdictions have all held-frequently in connection with...