Broadway 104, LLC v. AXA Financial, Inc.

Background

Broadway 104, LLC, doing business as Café du Soleil, operated a restaurant that suspended operations after state and municipal COVID-19 shutdown orders. XL Insurance America, Inc. had issued a commercial property policy effective June 25, 2019, through June 25, 2020. The policy included business-income coverage when a suspension of operations was caused by direct physical loss of or damage to property, subject to a covered cause of loss. It also included a civil-authority provision and a New York virus exclusion.

The Café submitted an insurance claim for pandemic-related business losses. XL denied coverage, asserting that the policy did not cover the claimed losses and relying heavily on the virus exclusion. The first amended complaint asserted breach of contract, breach of the implied duty of good faith and fair dealing, and a claim for a declaration that XL was obligated to provide coverage. The claims were brought on behalf of a proposed class.

Rule 12(b)(6) Standard

XL moved to dismiss under Rule 12(b)(6), which permits dismissal when a complaint does not contain enough factual allegations to state a legally plausible claim. In deciding the motion, the court considered the insurance policy because it was referenced in and integral to the complaint.

Direct Physical Loss

The court held that the policy’s requirement of “direct physical loss of or damage to property” was unambiguous. It interpreted “direct physical loss” as referring to tangible loss of property, not merely a government restriction on using the property. The court reasoned that the policy’s references to a “period of restoration” and repairing, rebuilding, or replacing property tied business-income coverage to physical restoration of damaged property.

The complaint alleged that the Café lost the use of its restaurant because of COVID-19 restrictions, but it did not allege a direct physical loss of property. The court therefore concluded that the complaint did not plausibly allege a covered loss. Counts I and III—the breach-of-contract claim and the claim for declaratory relief—were dismissed to the extent they relied on that alleged coverage.

Civil-Authority Coverage

The court separately held that the complaint did not plausibly allege coverage under the policy’s civil-authority provision. That provision required, among other things, that a civil authority prohibit access to the insured premises because of damage to property in the immediately surrounding area and dangerous physical conditions resulting from that damage.

The complaint alleged that authorities prohibited indoor dining, not that they prohibited access to the Café’s premises. It also did not allege that the orders responded to damaged property or dangerous physical conditions caused by such damage. The court noted that the complaint did not allege that authorities prohibited the Café from preparing and selling meals for pickup or delivery. The court therefore concluded that the civil-authority provision did not provide coverage, and the contract and declaratory-judgment claims were dismissed on that basis as well.

Virus Exclusion

The court also held that the policy’s virus exclusion independently barred the claimed coverage. The exclusion stated that XL would not pay for loss or damage caused by or resulting from any virus, bacterium, or other microorganism capable of inducing physical distress, illness, or disease.

The court found the exclusion unambiguous. It rejected the Café’s arguments that the exclusion did not cover the broad COVID-19 pandemic, that the exclusion had causal ambiguities because it did not use the phrase “directly or indirectly,” and that government shutdown orders—not the virus—were the efficient proximate cause of the losses. The court concluded that a reasonable business person would understand an exclusion for losses caused by or resulting from any virus to include losses caused by immediate efforts to mitigate a viral outbreak. The court stated that the motion to dismiss was therefore separately granted because any claimed loss fell within the virus exclusion.

Good-Faith-and-Fair-Dealing Claim

The court dismissed Count II, which alleged that XL breached the implied duty of good faith and fair dealing by mischaracterizing the policy and avoiding its contractual duties. The court concluded that the complaint did not plausibly allege conduct contrary to the contractual relationship. It also stated that the claim was based on the same facts and sought the same damages as the breach-of-contract claim, making it duplicative.

Leave to Amend and Disposition

The Café requested permission to file a second amended complaint if any part of XL’s motion was granted. The court denied that request because the Café had already amended its complaint after receiving XL’s pre-motion letter addressing the civil-authority provision and virus exclusion, and the request did not explain the basis for another amendment.

The court granted XL’s motion to dismiss, dismissed the three counts, denied leave to amend, directed the Clerk to terminate the motion and close the case, and ordered entry of judgment for XL.