Squire Motor Inns Inc. v. Fireman's Fund Ins. Co.

• Decision Date: 02 May 2022
• Docket Number: CV-21-08157-PCT-MTL
• Parties: Squire Motor Inns Incorporated, Plaintiff, v. Fireman's Fund Insurance Company, Defendant.
• Court: U.S. District Court — District of Arizona

Squire Motor Inns Incorporated, Plaintiff, v. Fireman's Fund Insurance Company, Defendant.

No. CV-21-08157-PCT-MTL

United States District Court, D. Arizona

May 2, 2022

ORDER

MICHAEL T. LIBURDI, UNITED STATES DISTRICT JUDGE

Plaintiff Squire Motor Inns Incorporated (“Squire”) seeks to recover insurance coverage benefits for lost business income and other expenses arising from the COVID-19 pandemic. Fireman's Fund Insurance Company (“Fireman's Fund”), the defendant here, moves to dismiss the Amended Complaint in its entirety under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failing to state a claim. (Doc. 26.)

Squire alleges a claim for breach of contract and declaratory judgment arising from Fireman's Fund's denial of coverage. (Doc. 23.) It also alleges a claim for bad faith insurance practices relating to what it calls “ineffective purported reductions of coverage” in the renewed 2020-2021 policy. (Id.) Fireman's Fund argues that the Amended Complaint should be dismissed because (1) the Amended Complaint fails to allege actual physical loss or damage to the insured properties and (2) the insurance policy terms “expressly exclude from coverage any loss or damage caused by or resulting from a disease or virus”. (Doc. 26 at 11, 23.) The motion will be granted.

I. BACKGROUND

Squire operates a hotel with attached restaurants and a bar in Tusayan, Arizona, a town near the south entrance to the Grand Canyon National Park. (Doc. 23 ¶ 2.) Prior to the onset of the COVID-19 pandemic, Squire purchased an all-risk insurance policy written by Fireman's Fund that included business interruption and extra expense loss insurance. (Id. ¶¶ 4, 10, 13.) The policy also included “income support property” coverage for operational losses resulting from “direct physical loss” at the Grand Canyon. (Id. ¶¶ 14, 31.) As is relevant here, the policy coverage period was for 2019 to 2020. It was renewed for 2020 to 2021 with some changes that will be discussed below.^[1]

The First Amended Complaint alleges that the COVID-19 virus caused “physical loss or damage” to its property in a manner similar to a “fire, windstorm, flood, or any other natural or man-made calamities (if not more so) and all such damaged property is equally incapable of producing revenues.” (Id. 23 ¶ 67.) According to Squire, its financial losses attributed to COVID-19 constitute physical loss or damage to property and, as such, trigger policy coverage.

Around the beginning of April, as the COVID-19 pandemic began to take hold, the federal government ordered the closure of the Grand Canyon National Park. (Id. ¶¶ 54, 89.) Later, after the park reopened, the National Park Service imposed visitation restrictions that Squire alleges adversely impacted its business. (See id. ¶ 92.) Squire alleges that these orders and actions by civil authorities justifies policy coverage. It also alleges that the closure constitutes a “physical loss” for the purposes of its income support property coverage.

II. LEGAL STANDARD

To survive a motion to dismiss, a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief” such that the defendant is given “fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 545, 555 (2007) (quoting Fed.R.Civ.P. 8(a)(2); Conley v. Gibson, 355 U.S. 41, 47 (1957)). Dismissal under Rule 12(b)(6) “can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988). A complaint should not be dismissed “unless it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim that would entitle it to relief.” Williamson v. Gen. Dynamics Corp., 208 F.3d 1144, 1149 (9th Cir. 2000).

The Court must accept material allegations in the Complaint as true and construe them in the light most favorable to Plaintiff. North Star Int'l v. Arizona Corp. Comm'n, 720 F.2d 578, 580 (9th Cir. 1983). “Indeed, factual challenges to a plaintiff's complaint have no bearing on the legal sufficiency of the allegations under Rule 12(b)(6).” Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). Review of a Rule 12(b)(6) motion is “limited to the content of the complaint.” North Star Int'l, 720 F.2d at 581. “Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).

III. ANALYSIS

A. Actual Physical Damage

The interpretation of an insurance contract is a matter of law reserved for the court. Lennar Corp. v. Transamerica Ins. Co., 227 Ariz. 238, 244 (App. 2011). Contract provisions free of ambiguity should be interpreted “according to their terms.” Fidelity Nat'l Title Ins. Co. v. Osborn III Partners LLC, 250 Ariz. 615, 624 (App. 2021). “If a clause is ambiguous, we consider it in the context of the transaction as a whole and in light of legislative goals and social policy, and if an ambiguity remains thereafter, we generally construe the ambiguous term in favor of the insured.” Id.

With some minor verbiage differences amongst them, the policy provisions at issue here are all grounded in the concept of physical loss. The task before the Court here is to define whether physical loss requires some degree of physical damage or destruction of the subject property. This is no longer a novel question in the context of COVID-related insurance coverage, given the many decisions rendered by courts across the country since the pandemic began. As this Court recently observed in another COVID-coverage case,

The phrase, “direct physical loss of or damage, ” is infamously undefined in insurance policies. There are hundreds of cases asking what this phrase means. And it is plain to see that out of these hundreds of cases, nearly every court comes to the same conclusion: it means the policies only cover actual physical damage to the property.

Team 44 Restaurants LLC v. Am. Ins. Co., --- F.Supp.3d ---, CV-21-00404-PHX-DJH, 2021 WL 4775106, at *2 (D. Ariz. Oct. 13, 2021); accord B St. Grill & Bar LLC v. Cincinnati Ins. Co., 525 F.Supp.3d 1008 (D. Ariz. 2021).

Similarly, in a case involving California law, the Ninth Circuit Court of Appeals held that insurance coverage for business income and extra expense loss required showing that the insured's property suffered from a “distinct, demonstrable, physical alteration” or that the insured was “permanently dispossessed of its property.” Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885, 892 (9th Cir. 2021) (quoting MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal.App.4th 766, 115 Cal.Rptr.3d 27, 37 (2010)). There, the at-issue coverage provision stated that the insurer would “pay for direct physical loss of or damage to [the insured's] Covered Property . . . caused by or resulting from a Covered Cause of Loss.” Id. at 889.

These are just a few of the many cases populating judicial dockets across the country in which insurers ultimately prevailed on their decisions to deny coverage for COVID-related business losses. Because each count in Squire's complaint relies on coverage based on “direct physical loss or damage” to property and no such loss was alleged, the Court will dismiss Squire's complaint in its entirety. And in keeping with precedent, the Court similarly finds that each of the policy provisions at issue unambiguously require some “actual physical damage to the covered premises as a prerequisite of coverage.” B. St. Grill & Bar LLC, 525 F.Supp.3d at 1015.

1. Income Support Property Provision

First is the Income Support Property policy coverage, which was part of the 20192020 policy. Squire avers, and emphasized at oral argument, that it purchased this coverage to mitigate financial risks associated with previous budget-related Grand Canyon National Park closures.^[2] Most recently was the December 2018 “closure” due to the partial government shutdown.^[3] According to Squire, the Income Support Property coverage provides relief when the Grand Canyon-an “income support property”-ceases operations for any reason. But that is not what the policy term says.

The Income Support Property coverage provision states:

We will pay the actual loss of business income you sustain resulting for a reduction in your operations at the locations described in the declarations of this policy due to direct physical loss at the premises of an income support property not described in the declarations caused by or resulting from any covered cause of loss.

(Doc. 1-4 at 117, italic and underline added; bolded terms in original.) Squire did not allege “direct physical loss at the premises of” the Grand Canyon or other nearby attractions. (See Doc. 23.) Accordingly, Squire cannot recover under this provision.

Squire heavily emphasizes its reasons why it believes that it has stated a claim to recover under the income support property coverage. (Doc. 32 at 10-12.) But those reasons are unpersuasive. First, its argument that the National Park Service's order closing the Grand Canyon constitutes a physical loss is belied by the policy language itself. A governmental order shutting down an attraction might prevent patrons from visiting and spending money on nearby hotels and restaurants. But the order in and of itself does not physically alter the property. Second, Squire's attempts to distinguish the prior COVID-19-coverage cases because, here, “[t]he applicable coverage does not even include the phrase ‘to property,' much less tie coverage to it.” (Doc. 32 at 12.) This...