Protege Restaurant Partners LLC v. Sentinel Insurance Company, Limited

Background

Protégé Restaurant Partners LLC brought a proposed class action against Sentinel Insurance Company, Limited, doing business as The Hartford. Protégé alleged that Sentinel wrongfully refused to pay COVID-19-related claims under a business-interruption insurance policy covering the period from January 2020 through January 2021.

Protégé alleged that Santa Clara County and California issued orders limiting business operations in March 2020. Although the orders allowed essential businesses, including restaurants, to remain open, Protégé stopped in-person dining and chose to shut down its operations. Protégé submitted a claim for losses caused by COVID-19 and the closure orders, and Sentinel denied coverage.

The complaint asserted claims for declaratory relief and breach of contract based on Business Income, Civil Authority, Extra Expense, Sue and Labor, and Virus Endorsement provisions. It also asserted claims for breach of the implied covenant of good faith and fair dealing. Sentinel moved to dismiss for failure to state a claim, lack of subject-matter jurisdiction, and lack of personal jurisdiction.

Court’s Analysis

Under California law, the court interpreted the insurance policy as a matter of law. The court held that the Business Income and Extra Expense provisions required direct physical loss of or physical damage to property. The policy language was unambiguous. The court explained that direct physical loss requires a distinct, demonstrable physical alteration or physical change in the property; where the policy also refers to physical loss of property, it requires permanent dispossession.

The court found that Protégé did not adequately plead either requirement. The closure orders did not permanently dispossess Protégé of its property. Instead, the orders restricted customers’ access, while Protégé retained access to the restaurant. The court also found that reduced use, decreased profitability, the risk that COVID-19 particles were present, and the possible presence of such particles did not constitute physical damage under the policy. The court further reasoned that Protégé alleged it suspended operations because of the closure orders, not because physical damage caused the suspension or its expenses.

For Civil Authority coverage, the court held that Protégé had to show both that access to its premises was specifically prohibited and that the closure orders were issued directly because of a risk of physical loss to property nearby. The court found that Protégé adequately alleged neither requirement. The orders allowed essential businesses such as restaurants to remain open, and the orders did not establish that they were issued because of a risk of direct physical loss to property.

The court held that the Sue and Labor provision also required direct physical loss of or damage to property. Because Protégé had not adequately alleged that predicate loss or damage, the court found that the provision did not apply.

The court separately addressed the Virus Endorsement. It found that the policy’s Virus Exclusion unambiguously applied to losses caused directly or indirectly by COVID-19. The court also found that Protégé did not plead facts showing that COVID-19 resulted from a qualifying specified cause of loss, such as smoke or water damage. The Virus Endorsement claims therefore failed as pleaded.

Finally, the court rejected the claims for breach of the implied covenant of good faith and fair dealing. Under California law, those claims require benefits to have been due under the policy and withheld for an unreasonable reason. Because Protégé had not adequately alleged that the policy covered its losses, it could not establish that benefits were due.

Disposition

The court concluded that Protégé had not pleaded facts showing that any of its alleged losses were covered under the policy. It dismissed the proposed class claims because the named plaintiff had failed to state a claim for itself. The court did not decide whether Protégé had standing to bring claims on behalf of the proposed class.

Judge Beth Labson Freeman granted Sentinel’s motion to dismiss Claims One through Twelve with leave to amend. The court allowed Protégé 21 days from the date of the order to file an amended complaint and stated that any amendment had to comply with the obligations governing factual and legal support for pleadings.