Or. Clinic, PC v. Fireman's Fund Ins. Co.

• Docket Number: 22-35047
• Decision Date: 31 July 2023
• Citation: 75 F.4th 1064
• Parties: The OREGON CLINIC, PC, an Oregon professional corporation, Plaintiff-Appellant, v. FIREMAN'S FUND INSURANCE COMPANY, a California corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

75 F.4th 1064

The OREGON CLINIC, PC, an Oregon professional corporation, Plaintiff-Appellant, v. FIREMAN'S FUND INSURANCE COMPANY, a California corporation, Defendant-Appellee.

No. 22-35047

United States Court of Appeals, Ninth Circuit

Argued and Submitted February 9, 2023

Submission Vacated April 10, 2023

Resubmitted July 25, 2023 Portland, Oregon

Filed July 31, 2023

Appeal from the United States District Court for the District of Oregon Stacie F. Beckerman, Magistrate Judge, Presiding, D.C. No. 3:21-cv-00778-SB

Seth H. Row (argued), Iván Resendiz Gutierrez, and Katelyn J. Fulton, Miller Nash LLP, Portland, Oregon; Jodi S. Green, Miller Nash LLP, Long Beach, California; for Plaintiff-Appellant.

Brett D. Solberg (argued), DLA Piper LLP (US), Houston, Texas; Joseph D. Davison and Anthony Todaro, DLA Piper LLP (US), Seattle, Washington; for Defendant-Appellee.

James M. Davis, Perkins Coie LLP, Seattle, Washington; Bradley H. Dlatt, Perkins Coie LLP, Chicago, Illinois; Stephen M. Feldman, Perkins Coie LLP, Portland, Oregon; for Amicus Curiae United Policyholders.

Before: Mary H. Murguia, Chief Judge, and Danielle J. Forrest and Jennifer Sung, Circuit Judges.

Opinion by Chief Judge Murguia

OPINION

MURGUIA, Chief Circuit Judge:

This appeal arises out of a commercial property insurance policy ("Policy") that Oregon Clinic, P.C. ("Oregon Clinic") purchased from Fireman's Fund Insurance Company ("Fireman's Fund"). The Policy provides Oregon Clinic, a medical provider with more than fifty locations in Oregon, with coverage for reduction of business income only if its insured property suffers "direct physical loss or damage." In March 2020, after the COVID-19 pandemic began, Oregon Clinic, like hundreds of other insured businesses nationwide, sought coverage under its Policy. It alleged that it suffered "direct physical loss or damage" because of the COVID-19 pandemic and related governmental orders that prevented it from fully making use of its insured property. Fireman's Fund denied coverage.

Oregon Clinic then sued Fireman's Fund in the United States District Court for the District of Oregon, asserting claims for breach of contract and breach of the implied duty of good faith and fair dealing. As most courts nationwide have done when faced with similar complaints, the District Court dismissed with prejudice Oregon Clinic's complaint under Federal Rule of Civil Procedure 12(b)(6). Oregon Clinic timely appealed. At Oregon Clinic's request, we certified to the Oregon Supreme Court the interpretation of "direct physical loss or damage" under Oregon law and stayed proceedings. The Oregon Supreme Court declined our certification request.

We reassume jurisdiction pursuant to 28 U.S.C. § 1291 and conclude that the Oregon Supreme Court would interpret "direct physical loss or damage" to require physical alteration of property, consistent with the interpretation reached by most courts nationwide. Because Oregon Clinic fails to state a claim under this interpretation, and because amendment would be futile, we affirm the District Court's judgment.

I.

"[W]e accept the factual allegations of the complaint as true and construe them in the light most favorable to [Oregon Clinic]." Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885, 889 (9th Cir. 2021) (first alteration in original) (citations omitted).

Oregon Clinic is a medical provider with fifty-seven locations in the Portland, Oregon metro area. Like it did to most businesses, the COVID-19 pandemic severely impacted Oregon Clinic. As alleged in Oregon Clinic's complaint, between March and November 2020, "approximately twenty-two" of Oregon Clinic's "employees or patients . . . confirmed they were infected with the [COVID-19] virus while they were on [its] premises." And, given the virus's asymptomatic spread and the large number of people who congregate in Oregon Clinic's offices, it is "statistically certain or near-certain that the [COVID-19] virus was continuously dispersed into the air and on physical surfaces and other property in, on, and within 1,000 feet of [t]he Oregon Clinic's offices, in early March 2020, and thereafter." Accordingly, "[t]he continuous dispersal of the [COVID-19] virus into the air and onto physical surfaces and other property rendered . . . Oregon Clinic's cleaning practices ineffective . . . , requiring physical and other changes" to its property and practices. Making matters worse for Oregon Clinic's business operations, Oregon Governor Kate Brown issued a series of orders that required Oregon Clinic, and all other health clinics, to stop performing non-urgent healthcare procedures. These orders restricted or eliminated Oregon Clinic's ability to use its facilities.

The pandemic and governmental orders had a detrimental effect on Oregon Clinic's business income. For example, by mid-March 2020, Oregon Clinic's daily patient visits had dropped from over 1,800 to as low as 300. Oregon Clinic was also forced to spend money on "purchas[ing] and alter[ing] business personal property" to "minimize the suspension" of its operations and "preserve and protect" its property. Oregon Clinic's "net revenue[ ] dropped by $20,170,000" while it completed these changes.

Before the pandemic, Oregon Clinic purchased a commercial property insurance policy from Fireman's Fund that provides Oregon Clinic with coverage for business income lost because of "direct physical loss or damage" to its property. As part of the Policy, Oregon Clinic also purchased additional specialty coverages from Fireman's Fund. The Policy was effective at all times material to Oregon Clinic's COVID-19 allegations, including in March 2020. Of major import here, coverage under each Policy provision expressly requires "direct physical loss or damage" to property. The Policy, however, does not define "direct physical loss or damage."

On or about March 17, 2020, Oregon Clinic provided timely written notice to Fireman's Fund of its insurance coverage claims related to COVID-19 and the governmental orders. Fireman's Fund performed a limited investigation of Oregon Clinic's claim and concluded that there was no "direct physical loss or damage to property at Oregon Clinic's locations or within 1,000 feet of such locations," as required by the Policy. On or about May 13, 2020, Fireman's Fund denied coverage.

In response, Oregon Clinic sued Fireman's Fund in the United States District Court for the District of Oregon, seeking a declaration of coverage and alleging claims for breach of contract and breach of the implied duty of good faith and fair dealing. Oregon Clinic asserted coverage under ten Policy provisions: (1) Property Coverage; (2) Business Income and Extra Expense Coverage; (3) Business Access Coverage; (4) Civil Authority Coverage; (5) Dependent Property Coverage; (6) Expediting Expense Coverage; (7) Extended Business Income and Extra Expense Coverage; (8) Communicable Disease Coverage; (9) Ordinance or Law Coverage; and (10) Loss Adjustment Expense Coverage.

In its complaint, Oregon Clinic alleged that its insured locations suffered direct physical loss or damage to property because of COVID-19 and, in the alternative, the governmental orders. Oregon Clinic also included more than ten pages of allegations in its complaint about the nature of COVID-19. For example, Oregon Clinic alleged that COVID-19 is caused by a highly contagious virus that causes illness and death in humans, is spread by asymptomatic carriers, survives for up to twenty-eight days on a variety of surfaces, and cannot be eliminated from property by routine cleaning.

The District Court granted Fireman's Fund's motion to dismiss without granting Oregon Clinic leave to amend. The District Court relied on a long line of cases from district courts in the Ninth Circuit, including the District Court of Oregon, and from federal appellate courts, including the Ninth Circuit, in which courts held that "neither COVID-19 nor the governmental orders associated with it cause or constitute property loss or damage for purposes of insurance coverage." Out W. Rest. Grp. Inc. v. Affiliated FM Ins. Co., 527 F. Supp. 3d 1142, 1148 (N.D. Cal. 2021), aff'd and remanded, No. 21-15585, 2022 WL 4007998 (9th Cir. Sept. 2, 2022). Persuaded by this authority, the District Court concluded that Oregon Clinic did not plausibly allege that COVID-19 or the governmental orders caused "direct physical loss or damage" to its property because Oregon Clinic did not allege its property had been damaged in a manner that required it to "suspend operations to conduct repairs or replace any insured property." Rather, the District Court determined Oregon Clinic's alleged losses were purely economic.

Oregon Clinic timely appealed the District Court's order. Oregon Clinic also filed a separate motion asking this Panel to certify several questions to the Oregon Supreme Court on the definition of the phrase "direct physical loss or damage" to property. We granted the certification request after hearing oral argument in this case and stayed the proceedings pending a response from the Oregon Supreme Court. The Oregon Supreme Court declined our request.

II.

A.

We review de novo the District Court's order granting a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). Mudpie, 15 F.4th at 889.

We have diversity jurisdiction over this dispute and must apply Oregon law to interpret the Policy. Alexander Mfg., Inc. Emp. Stock Ownership Plan & Tr. v. Ill. Union Ins. Co., 560 F.3d 984, 986 (9th Cir. 2009). Under Oregon Law, "[t]he interpretation of an insurance policy is a question of law," which is reviewed de novo. N. Pac. Ins. Co. v. Hamilton, 332 Or. 20, 22 P.3d 739, 741 (2001). When an insurance policy does not define the phrase in question, as is the case here, we must "first consider whether the phrase in question has a plain meaning." Holloway v. Rep. Indem. Co. of Am., 341 Or. 642, 147 P.3d 329, 333 (2006). If it does, we apply...