Baylor Scott & White Holdings v. Factory Mut. Ins. Co.
| Decision Date | 31 March 2023 |
| Docket Number | CIVIL 4:22-CV-120-SDJ |
| Parties | BAYLOR SCOTT & WHITE HOLDINGS v. FACTORY MUTUAL INSURANCE COMPANY |
| Court | U.S. District Court — Eastern District of Texas |
Before the Court is Defendant Factory Mutual Insurance Company's Motion to Dismiss. (Dkt. #8). The Court held a hearing on the motion. (Dkt. #25). Having considered the motion, applicable law, extensive briefing-including supplemental briefing-by the parties, and argument presented at the hearing, the Court concludes that the motion should be GRANTED.
This case involves an insurance coverage dispute stemming from losses related to COVID-19.[1] On October 31, 2019, Baylor Scott & White Holdings (“Baylor”), the largest non-profit health care system in Texas, and Factory Mutual Insurance Company (“FM”), an insurance company executed an insurance policy (hereinafter “Policy”) covering Baylor's properties “against ALL RISKS OF PHYSICAL LOSS OR DAMAGE” from November 1, 2019, through November 1, 2020. (Dkt. #6-1 at 2, 9).[2]The term “physical loss or damage” is not defined in the Policy.
The Policy includes two primary types of insurance benefits that Baylor can claim because of “physical loss or damage” to its covered properties. The first is “property damage” coverage, which insures repairs to the properties themselves. (Dkt. #6-1 at 16-43). And the second is “time element” coverage, which covers either “GROSS EARNINGS and [an] EXTENDED PERIOD OF LIABILITY” or “GROSS PROFIT” lost as a result of “physical loss or damage” to the properties. (Dkt. #6-1 at 44-65). The “time element” coverage continues until the properties can be repaired, replaced, or made ready for operations. (Dkt. #6-1 at 44-52). Together, these Policy provisions operate to compensate Baylor for the value of “physical loss or damage” to its properties, the gross earnings lost due to the “physical loss or damage,” and the period of reduced business earnings while Baylor recovers from the period of loss.
The Policy also includes a “communicable disease” provision which covers “Actual Loss Sustained and EXTRA EXPENSE incurred” because of the “presence of [a] communicable disease.” (Dkt. #6-1 at 63-64). “[C]ommunicable disease” is defined under the Policy as a disease which is “transmissible from human to human by direct or indirect contact with an affected individual or the individual's discharges, or [is] Legionellosis.” (Dkt. #6-1 at 74-75). This provision can be triggered regardless of whether any “physical loss or damage” has occurred. The Policy caps coverage under this provision at a $5 million annual aggregate. (Dkt. #6-1 at 11).
Finally, as relevant here, the Policy contains several exclusions to coverage, including the “loss of market or loss of use” exclusion. (Dkt. #6-1 at 17-21). An additional exclusion precludes coverage for “contaminations” unless such contamination is the direct result of “other physical damage not excluded by this Policy.” (Dkt. #6-1 at 21). The “contamination” exclusion is defined as follows:
1) contamination, and any cost due to contamination including the inability to use or occupy property or any cost of making property safe or suitable for use or occupancy. If contamination due only to the actual not suspected presence of contaminant(s) directly results from other physical damage not excluded by this Policy, then only physical damage caused by such contamination may be insured.
(Dkt. #6-1 at 21) (emphases in original).
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Beginning in early 2020, a global pandemic caused by COVID-19 forced Baylor to make substantial investments in its more than 1,100 facilities and change its administrative protocols to allow Baylor to safely treat patients during the ongoing public health crisis. (Dkt. #6 ¶¶ 15, 82-86). Because of COVID-19's unique characteristics as an airborne viral pathogen and its capacity to remain attached to surfaces for extended periods, Baylor claims that the remedial efforts it took resulted in $192 million of lost income. (Dkt. #6 ¶ 118). Baylor submitted insurance claims under the Policy for the costs borne across its covered healthcare facilities. (Dkt. #6 ¶¶ 115-18). FM denied Baylor's claims, (Dkt. #6 ¶ 121), though FM ultimately paid Baylor $5 million under the Policy's “communicable disease” coverage. (Dkt. #6 ¶¶ 15-16).
Baylor filed this lawsuit following FM's denial of coverage, alleging that FM (1) breached the Policy and (2) violated Section 542.060 of the Texas Insurance Code by “failing to timely pay Baylor's loss in connection with its claim.” (Dkt. #6 ¶¶ 12651). FM subsequently filed the instant motion to dismiss, which is fully briefed. The central dispute between the parties concerns (1) whether Baylor's properties sustained “physical loss or damage” due to COVID-19 to trigger the Policy's coverage and (2) whether the Policy's exclusions bar coverage beyond the $5 million “communicable disease” cap.
Under Federal Rule of Civil Procedure 12(b)(6), a court may dismiss a complaint for “failure to state a claim upon which relief can be granted.” FED. R. CIV. P. 12(b)(6). To survive a Rule 12(b)(6) motion to dismiss, a complaint must provide “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Plausibility means “more than a sheer possibility,” but not necessarily a probability. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
When assessing a motion to dismiss under Rule 12(b)(6), the facts pleaded are entitled to a presumption of truth, but legal conclusions that lack factual support are not entitled to the same presumption. Id. The court accepts all well-pleaded facts as true and views them in the light most favorable to the plaintiff. In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir. 2007). To determine whether the plaintiff has pleaded enough to “nudge its claims . . . across the line from conceivable to plausible,” a court draws on its own common sense and judicial experience. Iqbal, 556 U.S. at 680 (quoting Twombly, 550 U.S. at 570) (cleaned up). This threshold is surpassed when “the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 678.
In conducting this review, the court's inquiry is limited to “(1) the facts set forth in the complaint, (2) documents attached to the complaint, and (3) matters of which judicial notice may be taken under Federal Rule of Evidence 201.” Walker v. Beaumont Indep. Sch. Dist., 938 F.3d 724, 735 (5th Cir. 2019).
The Court applies Texas law to the instant case as it involves a breach-of-contract dispute based on diversity jurisdiction. Petrohawk Props., L.P. v. Chesapeake La., L.P., 689 F.3d 380, 387 (5th Cir. 2012) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938)) (“When jurisdiction is based on diversity, we apply the substantive law of the forum state.”). Under Texas law, “insurance policies are interpreted by the same principles as contract construction.” Terry Black's Barbecue, L.L.C. v. State Auto. Mut. Ins. Co., 22 F.4th 450, 454 (5th Cir. 2022) (citing State Farm Lloyds v. Page, 315 S.W.3d 525, 527 (Tex. 2010)). “The policy's terms are given their ordinary and generally-accepted meaning unless the policy shows the words were meant in a technical or different sense.” Gilbert Tex. Const., L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118, 126 (Tex. 2010).
A policy is unambiguous where its “terms can be given definite or certain legal meaning.” Ferrer & Poirot, GP v. Cincinnati Ins. Co., 36 F.4th 656, 658 (5th Cir. 2022) (per curiam) (citing Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995) (per curiam)). Such unambiguous policies are enforceable “as written.” Pan Am Equities, Inc. v. Lexington Ins. Co., 959 F.3d 671, 674 (5th Cir. 2020). On the other hand, a policy is ambiguous where, after applying the rules of construction, it could have “more than one reasonable interpretation.” Terry Black's, 22 F.4th at 455 (citing Nat'l Union Fire, 907 S.W.2d at 520) (emphasis added). “When an insurance policy is ambiguous, and the parties offer conflicting reasonable interpretations of the policy, Texas law favors adopting the interpretation in favor of the insured.” Id. (citing RSUI Indem. Co. v. The Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015)).
In the instant case, Baylor alleges that FM breached the Policy's “time element” and “additional time element” provisions by denying coverage for Baylor's costs associated with retrofitting its healthcare facilities and losses incurred due to the COVID-19 pandemic. (Dkt. #6 ¶¶ 126-47). FM argues that Baylor's claims are not covered because Baylor's properties have not suffered “physical loss or damage,” which is a prerequisite to coverage. Alternatively, FM contends that the “contamination” and “loss of use” exclusions bar coverage. FM also notes that it has already made payments under the only applicable Policy provision-the “communicable disease” provision, which does not require “physical loss or damage” to be triggered.
Baylor counters that: (1) COVID-19 tangibly alters property and thus it has suffered “physical loss or damage;” (2) the “contamination” exclusion does not apply to losses from “communicable diseases” because that interpretation would render the Policy internally inconsistent; and (3) the “loss of use exclusion” is inapplicable. The Court finds these arguments unpersuasive and instead agrees with each of FM's...
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