Spirit Realty Capital, Inc. v. Westport Insurance Corporation

Background

Spirit Realty Capital, Inc. is a real estate investment trust that holds ownership interests in approximately 2,000 commercial properties. It rents or leases those properties to businesses including restaurants, movie theaters, convenience stores, gyms, and supermarkets. During the COVID-19 pandemic, state and local government orders required many tenants to close to the public or change their operations. Spirit alleged that tenants’ resulting inability to pay rent caused it to lose more than $11 million in rental income. It also alleged that COVID-19 had been confirmed at some properties and that employees at its headquarters had contracted the virus.

Spirit held an all-risks insurance policy from Westport. The policy covered direct physical loss or damage to insured property and provided related coverage for lost profits and rental income. It also contained communicable-disease provisions covering certain costs when an insured location had the actual, not merely suspected, presence of a communicable disease and access was limited, restricted, or prohibited by a government order regulating that presence. The policy also excluded certain losses involving contaminants, including viruses, but the court did not decide whether that exclusion independently barred coverage.

Westport denied Spirit’s claim for pandemic-related losses. Spirit then sued for breach of contract and sought a declaration that its losses were covered under the policy.

Rule 12(b)(6) standard

Westport moved to dismiss under Rule 12(b)(6), which tests whether a complaint alleges enough facts to state a legally plausible claim. The court accepted the complaint’s factual allegations as true for purposes of the motion but required enough nonconclusory facts to support a plausible claim for relief.

Direct physical loss or damage

The court held that Spirit had not plausibly alleged the direct physical loss or damage required by the policy. The court noted that the parties agreed that “physical loss or damage” required some form of actual physical damage to the insured premises, rather than merely a loss of use.

The court rejected Spirit’s argument that COVID-19’s presence on surfaces and in the air satisfied that requirement. It relied on the weight of New York and federal district court authority holding that COVID-19 does not qualify as physical loss or damage. The court distinguished cases involving microscopic matter that penetrated property, remained there, and caused lasting physical alterations. Spirit alleged only that COVID-19 was temporarily present on surfaces at some properties; it did not allege that the virus penetrated the properties, made them uninhabitable, or could not be removed through routine cleaning.

Communicable-disease coverage

The court also ruled that Spirit had not plausibly shown coverage under the policy’s communicable-disease provisions. First, the court found that Spirit adequately alleged actual, confirmed COVID-19 presence only at seven properties in New Mexico. Its allegations about other states, infected employees, and a tenant’s separate lawsuit were too general because Spirit did not identify the other properties or allege that its employees became infected at work or were infectious at headquarters.

Second, the court found that many of the government orders did not limit, restrict, or prohibit access to the properties. Some orders required businesses to close to the public, while others merely curtailed operations. The court also noted that some orders regulated the public and did not restrict Spirit itself.

Third, the court ruled that Spirit did not plausibly allege that any property was required to close because COVID-19 was actually present at that particular property. The government orders were based on whether businesses were considered essential, not on confirmed COVID-19 at a specific location. The properties therefore would have been affected whether or not COVID-19 had been confirmed there, which did not satisfy the policy’s requirement for an order regulating the actual presence of communicable disease.

Disposition

Judge Jesse M. Furman granted Westport’s motion to dismiss and dismissed Spirit’s complaint in its entirety. The court declined Spirit’s request for leave to amend, concluding that the problems with the claims were substantive and that Spirit had not identified facts that another amendment would cure. The court also noted that Spirit had previously been allowed to amend and had been warned that it would not receive another opportunity to address issues raised by the dismissal motion.

The court directed the Clerk to enter judgment for Westport and close the case.