Sutter's Place, Inc. v. Zurich American Insurance Company

Background

Sutter’s Place asserted claims against Zurich for breach of contract and breach of the implied covenant of good faith and fair dealing. Sutter’s Place operates the Bay 101 Casino in San Jose, California. It purchased an “all risk” commercial insurance policy from Zurich beginning December 1, 2019.

The policy provided Business Income coverage for actual loss of business income caused by a necessary suspension of operations during a restoration period. The suspension had to be caused by “direct physical loss of or damage to” property at an insured premises, and the loss or damage had to result from a covered cause of loss. The policy also provided Extra Expense coverage for actual and necessary extra expenses caused by direct physical loss of or damage to property.

The policy included a Microorganism Exclusion. That exclusion barred coverage for loss or damage consisting of, or directly or indirectly caused by, the presence, growth, spread, or activity of microorganisms. The policy defined “microorganism” to include a virus. The policy also included a loss-of-use exclusion.

After California and Santa Clara County issued COVID-19-related emergency and stay-at-home orders, Sutter’s Place suspended its business operations. It alleged that it incurred extra expenses for equipment, construction, services, and supplies needed to comply with reopening requirements. Sutter’s Place submitted a claim to Zurich for business-interruption losses resulting from the government-ordered suspension. Zurich denied the claim, stating that Sutter’s Place had not claimed direct physical loss of or damage to the casino and that the Microorganism Exclusion barred coverage for losses based on a virus.

Motion and analysis

Zurich moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). This motion tests whether the complaint legally states claims for relief, while the court generally accepts the complaint’s factual allegations as true and draws reasonable inferences for the nonmoving party.

Zurich argued that Sutter’s Place could not establish the policy’s requirement of direct physical loss of or damage to property. Zurich also argued that the Microorganism Exclusion barred the claims. Before deciding the motion, the court denied as moot Zurich’s request for judicial notice of approximately 330 decisions involving similar COVID-19 insurance claims because the court did not need those decisions to resolve the motion.

The court relied on the Ninth Circuit’s decision in a prior related proceeding involving similar policy language and a virus exclusion. That decision held that “direct physical loss of or damage to” property requires a “distinct, demonstrable, physical alteration of the property,” and held that the virus exclusion barred coverage for the losses at issue there.

The court found this case materially indistinguishable. Sutter’s Place did not allege a distinct, demonstrable, physical alteration of the casino and did not argue that it could plausibly do so. The court therefore held as a matter of law that Sutter’s Place was not entitled to coverage under the policy and that its claims were barred by the Microorganism Exclusion.

Disposition

The court GRANTED Zurich’s motion for judgment on the pleadings. Because Sutter’s Place did not request leave to amend and the court concluded that amendment would be futile, the court DISMISSED the action. The Clerk of Court was directed to close the file. The opinion does not state that the dismissal was with or without prejudice.

Judge

The order was signed by Edward J. Davila, United States District Judge.