Water Sports Kauai, Inc. v. Fireman's Fund Insurance Company

Background

Water Sports Kauai, Inc., a Hawaii corporation doing business as Sand People, operated twelve stores on three islands. It alleged that it closed the stores because of the spread of coronavirus and directives from Hawaii’s Governor limiting non-essential businesses. It submitted an insurance claim under business-income and civil-authority provisions in a policy issued by Fireman’s Fund Insurance Company, National Surety Corporation, and Allianz Global Risks US Insurance Co. The insurers denied the claim.

Sand People’s amended complaint asserted breach of contract, breach of the covenant of good faith and fair dealing, unfair or deceptive business practices, and declaratory-relief claims on behalf of a proposed nationwide class and a Hawaii subclass.

Policy and Legal Issue

The policy covered actual lost business income caused by a necessary suspension of operations during a restoration period, but required the suspension to result from “direct physical loss of or damage to” covered property. Its civil-authority provision covered lost income and extra expenses when a government action prohibited access to the insured premises because of direct physical loss of or damage to other property. The policy defined the restoration period as ending when the property should be repaired, rebuilt, or replaced.

The issue was whether Sand People plausibly alleged the physical loss or damage required for either type of coverage.

Court’s Analysis

The court agreed with what it described as the overwhelming majority of courts addressing similar COVID-19 insurance claims. It held that the alleged threat of coronavirus was not enough to establish direct physical loss of or damage to property. Sand People did not allege that coronavirus was actually present at any store, that any store had been physically contaminated, or that such exposure caused a particular store to close. The court also rejected the argument that closing stores to avoid an imminent threat was equivalent to actual physical exposure.

The court likewise rejected coverage based solely on Hawaii’s closure orders. Sand People’s inventory and equipment remained in place, and it did not allege that any specific property had been permanently taken away, physically altered, or damaged. The court reasoned that the policy’s restoration-period language supported this conclusion because nothing on the premises allegedly needed to be repaired, rebuilt, replaced, or disinfected.

The court also found that the civil-authority claim was not plausibly pleaded. The closure orders were preventative measures intended to stop the spread of COVID-19, and Sand People did not identify a specific neighboring property that had suffered actual coronavirus exposure or other direct physical loss or damage. Without that alleged physical loss or damage to other property, the required causal connection for civil-authority coverage was missing.

Other Claims

Because Sand People did not plausibly plead coverage under the policy, the court did not reach its good-faith, unfair-business-practices, and declaratory-relief claims to the extent they depended on the underlying coverage claim. The court separately stated that the unfair-business-practices claim lacked specific facts identifying the alleged misrepresentations, and it granted limited leave to amend that claim to identify what misrepresentations Sand People allegedly received about the policy’s coverage.

Disposition

The court granted the defendants’ motion to dismiss. The lost-business-income claim was dismissed with limited leave to amend, and the civil-authority claim was likewise dismissed with limited leave to amend. The court gave Sand People limited leave to amend as described in the order and required any amended complaint to be filed within 20 days.