Out West Restaurant Group Inc. v. Affiliated FM Insurance Company
- Thomas Hixson
- 3:20-cv-06786
- U.S. District Court · Northern District of California
- 11
In Out West Restaurant Group v. Affiliated FM Insurance, Judge Hixson granted AFM’s motion and dismissed Plaintiffs’ claims with prejudice.
The four restaurant-business plaintiffs’ COVID-19 insurance claims were dismissed with prejudice. Affiliated FM Insurance Company obtained judgment on the pleadings; the order did not address any pending Communicable Disease coverage claims.
What happened
Out West Restaurant Group Inc. v. Affiliated FM Insurance Company involved restaurant businesses seeking insurance coverage for economic losses they attributed to COVID-19, the virus’s presence, and government shutdown orders. They argued these conditions caused covered physical loss or damage to their property.
Affiliated FM Insurance Company asked for judgment on the pleadings, arguing that the policy required physical loss or damage and that the plaintiffs’ allegations did not meet that requirement. The plaintiffs argued that COVID-19 made their property unsafe and unfit for normal use and that the policy covered their losses.
Judge Hixson ruled that the plaintiffs had not plausibly alleged direct physical loss or damage under the policy. He granted the insurer’s motion for judgment on the pleadings, dismissed the plaintiffs’ claims with prejudice, and denied as moot a discovery-stay motion and the plaintiffs’ request for judicial notice. The order did not address any pending claims involving Communicable Disease coverage.
The detailed version
- Out West Restaurant Group Inc. v. Affiliated FM Insurance Company · No. 3:20-cv-06786
- Thomas Hixson
- Mar. 19, 2021
Background
Out West Restaurant Group, Inc., Cerca Trova Restaurant Group, Inc., Cerca Trova Steakhouse, LP., and Cerca Trova Southwest Restaurant Group, LLC sued Affiliated FM Insurance Company (AFM) for coverage of economic losses to their restaurant businesses caused by COVID-19. The plaintiffs alleged that COVID-19 in the air and on surfaces made their restaurants unusable or unfit for normal occupancy, physically altered the property, and caused physical loss or damage. They also alleged that government orders impaired the use and function of their buildings.
Cerca Trova purchased an AFM policy that insured it and its subsidiaries. The policy provided coverage for “all risks of physical loss or damage,” subject to the policy’s exclusions. The plaintiffs sought coverage under several provisions, including Communicable Disease, Protection and Preservation of Property, Extra Expense, Attraction Property, Civil or Military Authority, Ingress/Egress, Supply Chain, and related professional-fee provisions. They also alleged that AFM breached its duty of good faith and fair dealing by improperly denying coverage and failing to investigate their claim fairly.
Motion and Legal Standard
AFM moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). That motion tests whether the complaint’s allegations, accepted as true, are legally sufficient to support relief. The court applies the same standard used for a motion to dismiss for failure to state a claim. Judgment is proper when the pleadings show no material factual dispute and the moving party is entitled to judgment as a matter of law.
Under California law, the insured initially must show that the claimed loss falls within the policy’s coverage. The court explained that “direct physical loss” requires a distinct, demonstrable physical alteration or physical change in the property. Limited use or economic harm, without that physical alteration, is insufficient. Where the policy requires direct physical loss of or physical damage to property, the court stated that there must be either a physical change in the property’s condition or permanent dispossession.
Court’s Analysis
The court held that the plaintiffs had not plausibly alleged direct physical loss or damage. It relied on the majority of decisions addressing COVID-19 business-interruption claims, which concluded that COVID-19 and related government orders do not cause or constitute covered property loss or damage when they result only in temporary loss of use or reduced business operations.
The court rejected the plaintiffs’ argument that the virus’s presence transformed indoor air and surfaces from safe to dangerous conditions. It also rejected their reliance on decisions involving other physical forces that made property unusable. The court noted that COVID-19 could be cleaned and disinfected from surfaces and that the plaintiffs themselves alleged they performed deep cleaning and sanitation after positive tests or exposures. Because the plaintiffs had not alleged the required physical loss or damage, the court found that their claimed losses were not covered as a matter of law.
The court therefore did not decide the scope of the policy’s virus exclusion. It explained that exclusions cannot expand the basic coverage granted by the policy, so the exclusion issue did not need to be reached after finding no initial coverage.
Disposition
The court granted AFM’s motion for judgment on the pleadings. It declined to allow amendment because, in light of the plaintiffs’ allegations and the policy’s direct-physical-loss requirement, amendment would be futile. The court dismissed the plaintiffs’ claims with prejudice and directed the entry of a separate judgment and closure of the file.
The order specifically stated that it did not address any pending claims the plaintiffs might have with AFM concerning Communicable Disease coverage, which AFM said remained under consideration. Because the dismissal was with prejudice, AFM’s motion to stay discovery was denied as moot. The plaintiffs’ request for judicial notice was also denied as moot.
Read the full 11-page opinion on CourtListener, the free public archive maintained by the Free Law Project.