Menominee Indian Tribe of Wisconsin v. Lexington Insurance Company

Background

Menominee Indian Tribe of Wisconsin, the Menominee Indian Gaming Authority doing business as Menominee Casino Resort, and the Wolf River Development Company sought coverage from Lexington Insurance Company and other insurers for losses allegedly caused by the COVID-19 pandemic and government closure orders. The insured properties included businesses and a tribal clinic in Wisconsin. The applicable insurance program covered “direct physical loss or damage” and included business-interruption, extra-expense, civil-authority, ingress/egress, contingent-time-element, tax-revenue-interruption, and property-protection provisions.

Menominee alleged that people carrying COVID-19 entered its properties, that the virus was present there, and that the virus and closure orders made the properties uninhabitable and interrupted business. Menominee asserted breach-of-contract and declaratory-judgment claims under each of the seven coverage provisions after its insurance claim was denied.

Legal Standard

The insurers moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which requires dismissal when a complaint does not allege enough facts to plausibly support a legal claim. The court generally accepts well-pleaded factual allegations as true at this stage but need not accept conclusory allegations or unreasonable inferences.

Choice of Law

The court concluded that Wisconsin law governed interpretation of the policy. Under the court’s analysis, the policy indicated that Wisconsin was the place of performance because Menominee and its insured properties were located there.

Meaning of “Direct Physical Loss or Damage”

The court examined Wisconsin authorities addressing the difference between physical loss and physical damage. It concluded that, under the Wisconsin cases it considered, physical loss does not necessarily require structural damage, but loss of use must result from a physical event. The court declined to follow an Illinois federal court’s contrary approach allowing loss of use alone to qualify as direct physical loss.

The court held that the presence of COVID-19 did not constitute direct physical loss or damage under the policy. It reasoned that the virus could be eliminated through cleaning and disinfecting, and that Menominee had not alleged an unsatisfactory physical condition of the properties that could be repaired, rebuilt, or replaced. The court also concluded that Menominee had not alleged a qualifying physical event causing the loss of use. Installing barriers and increasing cleaning and sanitizing protected people from transmission but did not repair the insured property in the sense required by the policy.

Coverage Provisions

For business-interruption and extra-expense coverage, the court acknowledged that Menominee plausibly alleged that COVID-19 was actually present at its businesses. But the court held that Menominee could not plausibly allege that direct physical loss or damage caused the business interruptions. The closure orders and the presence of the virus did not meet that policy requirement.

For interruption-by-civil-authority coverage, Menominee did not allege that property within ten miles of its insured property was physically damaged or destroyed, or that qualifying property damage caused the closure orders. The court also noted that the orders were issued to mitigate the spread of COVID-19 rather than because of damage to or destruction of property.

For ingress/egress coverage, the court held that Menominee could not show that physical loss or damage prevented access to its property. The allegations indicated that employees could access the businesses and that some facilities remained open, even if patrons could not enter certain areas.

For contingent-time-element coverage, Menominee did not plausibly allege that a supplier or customer location was actually exposed to COVID-19 or suffered physical damage that prevented it from supplying goods or services or accepting them. The court also found that the allegation concerning the War Bonnet Bar & Grill was insufficient, particularly because the business remained open for curbside orders.

For tax-revenue-interruption coverage, the court found Menominee’s allegations of damage to contributing property conclusory. Because COVID-19 could not constitute damage to the insured property, the court held that it likewise could not constitute damage to contributing property under this provision.

For protection-and-preservation-of-property coverage, the court held that Menominee’s allegations about barriers, cleaning, and sanitizing did not plausibly show expenses taken to protect property from physical loss or damage. Those measures were alleged to protect people from COVID-19 transmission instead.

Disposition

The court held that amendment would be futile because additional allegations could not establish that the presence of COVID-19 constituted direct physical loss or damage under Wisconsin law. It therefore granted all defendants’ motions related to Lexington’s motion to dismiss the amended complaint with prejudice and ordered that judgment be entered. Judge William H. Orrick signed the order.