Abbey Hotel Acquisition, LLC v. National Surety Corporation

Background

The plaintiffs entered into a commercial property insurance policy with National Surety Corporation covering April 27, 2019, through April 27, 2020. The policy promised payment for “direct physical loss or damage” to insured property, as well as business income and extra expenses arising from such loss or damage. It also provided coverage for direct physical loss or damage resulting from a covered “communicable disease event.” The policy excluded losses caused by disease, sickness, bacteria, or virus.

The plaintiffs alleged that the COVID-19 pandemic and government restrictions caused a sharp decline in their business. The complaint stated that Florida declared a state of emergency and that the Miami-Dade County Mayor issued an order preventing hotels from accepting new reservations or extending existing reservations. The plaintiffs asked National Surety to cover their economic losses, but the opinion states that National Surety did not respond. The plaintiffs then filed this coverage action, and National Surety removed it to federal court.

Legal standard and governing law

National Surety moved to dismiss the complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). The court applied New York’s choice-of-law rules and concluded that Florida law governed the coverage issues because the parties agreed there were no significant differences between Florida and New York law on the issues raised by the motion, and the relevant factors favored Florida law.

Under Florida law, the insured must show that the claimed loss falls within the policy’s coverage. The court explained that the plaintiffs therefore had to allege that the loss came within the policy’s insuring clause and a covered-perils provision.

Direct physical loss or damage

The court held that “direct physical loss or damage” unambiguously requires a tangible alteration to the covered property. In the court’s view, a decline in business caused by COVID-19 or by government action designed to limit the spread of COVID-19 is an economic loss, not a direct physical loss or damage to property. The plaintiffs therefore did not adequately allege that their losses fell within the policy’s basic coverage provision.

Communicable disease event

The plaintiffs also argued that their losses were covered under the policy’s communicable-disease provision. The court rejected that argument. It interpreted the provision as requiring an event in which a public health authority ordered a location to be evacuated, decontaminated, or disinfected because of an outbreak of a communicable disease at that location. The plaintiffs alleged that officials barred new or extended hotel reservations, but they did not allege that public health authorities ordered them to evacuate, decontaminate, or disinfect their facilities.

Because the plaintiffs did not adequately allege that their claim fell within the policy’s insuring clause, the court did not reach the separate question of whether the policy exclusions applied.

Disposition

The court concluded that the plaintiffs had not stated and could not state a claim. Judge Valerie Caproni granted National Surety Corporation’s motion to dismiss and dismissed the plaintiffs’ claim with prejudice.