Protege Restaurant Partners LLC v. Sentinel Insurance Company, Limited

Background

Protege Restaurant Partners LLC sued Sentinel Insurance Company, Limited, alleging that Sentinel failed to provide business-insurance coverage for losses related to COVID-19 and county and state stay-at-home orders. The dispute concerned an all-risk business-insurance policy in effect from January 20, 2020, through January 20, 2021, and a materially identical policy in effect from January 20, 2021, through January 20, 2022.

Protege’s second amended complaint relied on the policy’s Business Income, Extra Expense, Sue and Labor, and Civil Authority coverage provisions. It alleged losses from COVID contamination of restaurant property and from government closure orders. Protege also alleged that Sentinel breached the implied covenant of good faith and fair dealing by denying coverage without conducting an adequate investigation.

Sentinel moved under Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim. Sentinel also moved under Rule 12(b)(1), which concerns subject-matter jurisdiction, arguing that Protege lacked standing to pursue nationwide class claims. Sentinel separately raised personal-jurisdiction arguments. The parties’ requests for judicial notice were granted.

Analysis

Virus exclusion. The policy excluded loss or damage caused directly or indirectly by the presence, growth, spread, or activity of a virus. The court held that this exclusion unambiguously barred coverage for Protege’s alleged COVID-related losses, whether the losses were attributed directly to COVID contamination or indirectly to the closure orders. The court rejected Protege’s argument that the exclusion applied only to physical losses and not to business losses.

Limited virus coverage. Protege argued that a Limited Virus Coverage provision restored coverage under the policy’s Time Element Coverage. The court found that Protege had not adequately alleged the requirements for that coverage. Specifically, Protege had not alleged facts showing a loss that resulted in a virus, a suspension of operations satisfying the applicable coverage conditions, or a covered suspension caused by loss or damage other than a virus. The court therefore found no plausible basis for coverage under the Limited Virus Coverage or Time Element Coverage provisions.

Other coverage provisions. The court separately ruled that, even if the virus exclusion did not apply, Protege had not plausibly alleged coverage under the Business Income, Extra Expense, Sue and Labor, or Civil Authority provisions. Each provision required direct physical loss of or physical damage to property, either expressly or through the policy’s definition of a covered cause of loss. The court interpreted that requirement to mean a physical change in the property’s condition or permanent dispossession of the property.

The court concluded that alleged COVID contamination did not satisfy that requirement. It also concluded that the closure orders did not permanently dispossess Protege of its property, including because the restaurant could reopen when it offered takeout. The court found that Protege’s additional allegations did not change the conclusions reached on its earlier complaint.

Good faith and fair dealing. Under California law, an insurance claim for breach of the implied covenant of good faith and fair dealing requires benefits to have been owed under the policy and the withholding of those benefits to have been unreasonable or without proper cause. Because Protege had not plausibly alleged that policy benefits were due, the court ruled that its good-faith-and-fair-dealing claims also failed.

Standing and personal jurisdiction. The court denied Sentinel’s Rule 12(b)(1) motion without prejudice as to standing. Although Sentinel noted that Protege operated only in California and purchased the policy in California, the court deferred consideration of the scope of any class until the class-certification stage. The court also denied Sentinel’s personal-jurisdiction motion without prejudice because Sentinel had raised that issue only in a footnote.

Leave to amend. The court denied Protege leave to amend. It reasoned that this was Protege’s third version of the complaint, that the court had already found the virus exclusion barred coverage, and that the policy provisions did not plausibly provide coverage. The court concluded that further amendment would be futile.

Disposition

Judge Beth Labson Freeman granted Sentinel’s Rule 12(b)(6) motion to dismiss for failure to state a claim. The court denied without prejudice Sentinel’s Rule 12(b)(1) motion to dismiss for lack of standing or personal jurisdiction, denied Protege leave to amend, and dismissed Protege’s claims with prejudice. The court stated that a separate judgment would issue and directed the clerk to close the file.