Water Sports Kauai, Inc. v. Fireman's Fund Ins. Co.

• Citation: 499 F.Supp.3d 670
• Decision Date: 09 November 2020
• Docket Number: Case No. 20-cv-03750-WHO
• Court: U.S. District Court — Northern District of California
• Parties: WATER SPORTS KAUAI, INC., Plaintiff, v. FIREMAN'S FUND INSURANCE COMPANY, et al., Defendants.

499 F.Supp.3d 670

WATER SPORTS KAUAI, INC., Plaintiff,

v.FIREMAN'S FUND INSURANCE COMPANY, et al., Defendants.

Case No. 20-cv-03750-WHO

United States District Court, N.D. California.

Signed November 9, 2020

Alexandra Louise Foote, Wendel, Rosen, Black & Dean LLP, Oakland, CA, Fabrice Nijhof Vincent, Jacob Henry Polin, Robert Jay Nelson, Lieff Cabraser Heimann & Bernstein, LLP, San Francisco, CA, Judith Ann Pavey, Pro Hac Vice, Starn O'Toole Marcus and Fisher, Honolulu, HI, Gabriel August Panek, Pro Hac Vice, Lieff Cabraser Heimann and Bernstein, LLP, New York, NY, for Plaintiff.

John Paul Phillips, Paul Hastings LLP, San Francisco, CA, Gregory George Sperla, DLA Piper LLP, Sacramento, CA, Robert M. Hoffman, DLA Piper LLP, Dallas, TX, for Defendants.

ORDER GRANTING THE MOTION TO DISMISS

Re: Dkt. No. 39

William H. Orrick, United States District Judge

Plaintiff Water Sports Kauai, Inc., a Hawaii corporation, dba Sand People ("Sand People"), shut down its businesses (twelve stores on three islands that sell gifts, artwork, décor, jewelry, glassware, coastal furnishing, apparel, soaps, lotions, candles, and books) six months ago due both to the spread of the coronavirus and to directives from Hawaii's Governor limiting the operation of non-essential businesses, including Sand People's stores. Amended Complaint ("AC"), Dkt. No. 38, ¶ 56. It submitted a claim for coverage under an insurance policy (Policy) issued by defendants Fireman's Fund Insurance Company, National Surety Corporation, and Allianz Global Risks US Insurance Co. (collectively, "defendants") under the "Lost Business Income" and "Civil Authority" provisions. AC ¶ 4. That claim was denied, and Sand People filed suit.

I agree with the vast majority of cases that have addressed materially similar policy provisions and facts. Sand People has failed to plausibly plead Business Income or Civil Authority coverage. Its claims are dismissed with limited leave to amend.

BACKGROUND

The Policy provides that the defendants will "pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss." AC, Ex. 9 at 30. In relevant part, the Policy states:

3. Covered Causes of Loss

RISKS OF DIRECT PHYSICAL LOSS unless the loss is [excluded].

Id. at 31.

g. Business Income

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 the described premises, including personal property in the open (or in a vehicle) within 100 feet, caused by or resulting from any Covered Causes of Loss.

Id. at 33.

h. Extra Expense

We will pay necessary Extra Expense you incur during the period of restoration that you would not have incurred if there had been no direct physical loss or damage to property at the described premises, including personal property in the open (or in a vehicle) within 100 feet of the described premises, caused by or resulting from a Covered Cause of Loss

Id. at 34.

i. Civil Authority

We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss. This coverage will apply for a period of up to two consecutive weeks from the date of that action.

Id. at 35.

15. Period of Restoration means the period of time that:

a. Begins with the date of direct physical loss or damage caused by or resulting from any Covered Cause of Loss at the described premises; and

b. Ends on the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality.

Id. at 63.

Based on the spread of the coronavirus, directives from Hawaii's Governor limiting the operation of non-essential businesses, including Sand People's stores, and government closure orders issued in 49 other states/jurisdictions as a result of the coronavirus pandemic, and defendants’ denial of requests for coronavirus coverage under similarly worded policies, Sand People asserts the following claims on behalf of a class and a subclass: (1) Breach of Contract; (2) Breach of Covenant of Good Faith and Fair Dealing; (3) Unfair or Deceptive Business Practices; and (4) Declaratory Relief.

The class and subclass are defined as:

Class

All persons or entities in the United States (including its territories and the District of Columbia) who own an interest in a business that was insured by Defendants in March 2020 and made (or attempted to make) a claim with Defendants arising from lost business income (or other losses related to business interruption) at that business related to COVID-19, and did not receive coverage for that claim.

Hawaii Subclass

All persons or entities in Hawaii who own an interest in a business that was insured by Defendants in March 2020 and made (or attempted to make) a claim with Defendants arising from lost business income (or other losses related to business interruption) at that business related to COVID-19, and did not receive coverage for that claim.

AC ¶ 123.

LEGAL STANDARD

In Hawaii, " ‘because insurance policies are contracts of adhesion and are premised on standard forms,’ " the contracts must be "construed liberally" in favor of the insured and based on the reasonable expectations of a layperson, with any ambiguities being resolved against the insurer. Hart v. Ticor Title Ins. Co., 126 Hawai'i 448, 456, 272 P.3d 1215 (2012) (quoting Dairy Road Partners v. Island Ins. Co., Ltd. , 92 Hawai'i 398, 411-414, 992 P.2d 93 (2000) ); see also Great Divide Ins. Co. v. AOAO Maluna Kai Estates , 492 F. Supp. 2d 1216, 1226–27 (D. Haw. 2007) ("A policy provision is not ambiguous just because the insurer and insured disagree over the interpretation of the terms of a policy.... Ambiguity exists only when the policy ‘taken as a whole, is reasonably subject to differing interpretation.’ ") (quoting Oahu Transit Servs., Inc. v. Northfield Ins. Co. , 107 Hawai'i 231, 236 n. 7, 112 P.3d 717 (Haw. 2005) ).

DISCUSSION

Defendants move to dismiss Sand People's claims because the mere threat of coronavirus is insufficient to show a "direct physical loss of or damage to" its covered property and the government closures orders are likewise insufficient to show the same. Defendants note that district courts around the country – including ones in this District and throughout the Ninth Circuit – have rejected identical claims under similar policies and that the only two federal cases Sand People identifies in support of their claims – both from the Western District of Missouri – are distinguishable or wrongly decided. Sand People responds that this case is different from the bulk of district court cases relied on by defendants because (i) it specifically alleges that it had to close its properties due directly to the coronavirus’ rapid spread and imminent threat to its businesses, and (ii) the vast majority of district court cases dismissing for lack of coverage also had virus exclusions limitations in their policies.

As described below, I will follow the overwhelming majority of courts that have determined that the mere threat of coronavirus cannot cause a "direct physical loss of or damage to" covered property as required under the Policy. That resolves the issue of coverage under the Business Income and Civil Authority provisions as a result of both the spread of coronavirus and the government closure orders.

I. LOST BUSINESS INCOME

Sand People contends that "lost business income" coverage was triggered by both the "physical" spread of the coronavirus and, independently, the government closure orders. I will address each argument in turn.

A. Spread of Coronavirus

Sand People asserts that it adequately alleged closure because of the "imminent" threat of coronavirus at their properties. AC ¶ 69 ("The Coronavirus and its pernicious spread created inherently dangerous conditions where the stores and property within them were at immediate and imminent risk of exposure to the Coronavirus. This caused them to suspend operations and lose access to the stores, which rendered them untenantable."); ¶ 76 ("Because, inter alia, the spread of Coronavirus rendered Sand People's facilities no longer usable for their intended purpose(s), and in many cases impossible to operate safely, it directly caused them to suffer physical damage and loss."). It claims that the explosive spread of coronavirus and the imminence of the threat it presented is sufficient to show a "direct physical loss" because the closure is alleged to have resulted from a physical event "the spread of the virus" and potential exposure to a disease.

Sand People relies on a series of cases where courts found coverage because asbestos, arsenic, and e-coli contamination were present on covered property. For example, in Port Auth. of New York and New Jersey v. Affiliated FM Ins. Co. , 311 F.3d 226 (3d Cir. 2002), the Third Circuit interpreted a "physical loss or damage" policy with respect to asbestos and concluded, "[w]hen the presence of large quantities of asbestos in the air of a building is such as to make the structure uninhabitable and unusable, then there has been a distinct loss to its owner. However, if asbestos is present in components of a structure, but is not in such form or quantity as to make the building unusable, the owner has not suffered a loss." Id. at 236. The court explained, " ‘physical loss or damage’ occurs only if an actual release of asbestos fibers from asbestos containing materials has resulted in contamination of the property such that its function is nearly eliminated or destroyed, or the structure is made useless or uninhabitable, or if there exists an imminent threat of the release of a quantity of...