Pacific Indemnity Company v. Kiton Corporation

Background

Pacific Indemnity Company and Kiton Corporation were parties to consolidated litigation concerning Kiton’s insurance claims. Pacific issued Kiton a commercial general liability policy covering the claims period from December 31, 2019, through December 31, 2020. The policy covered direct physical loss or damage to buildings and personal property caused by a covered peril. It also provided business-income and extra-expense coverage when an impairment of operations resulted from direct physical loss or damage, as well as civil-authority coverage requiring a prohibition on access caused by nearby direct physical loss or damage.

Kiton alleged that COVID-19 and government orders closing or restricting businesses caused losses at its boutiques. It claimed that the virus attached to surfaces, required cleaning and sanitizing, altered or damaged the property, and made the property dangerous and unusable for generating business income. Kiton sought a declaration that Pacific had to provide coverage and indemnify it, and it asserted a breach-of-contract claim for unpaid business-income losses.

Motion and Analysis

Pacific moved under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim. The court considered the operative complaint in the related consolidated action and treated its well-pleaded allegations as true for purposes of the motion.

The court relied on the Second Circuit’s decision in 10012 Holdings, Inc. v. Sentinel Insurance Co., Ltd., and later decisions addressing similar COVID-19 insurance claims. Those decisions held that, under New York law, “direct physical loss” and “physical damage” require actual physical loss of or damage to insured property; they do not include merely losing access to or use of property without physical damage.

The court found Kiton’s policy materially indistinguishable from the policies in those cases. It concluded that Kiton’s allegations that coronavirus was present on property and surfaces were generic allegations that did not show damage to any part of the buildings or their contents, much less damage requiring repair, replacement, or total loss. The court also found that the allegations did not explain how the property could no longer serve its insured function except because access was denied.

The court rejected Kiton’s argument that the property’s alleged danger and need for remediation established direct physical loss. It relied on the Second Circuit’s conclusion that the virus’s inability to physically alter or persistently contaminate property distinguishes it from contaminants such as radiation, chemical dust, gas, and asbestos. The court also rejected Kiton’s argument that the policy’s lack of a virus exclusion showed that virus-related losses were covered, explaining that the absence of an exclusion cannot itself create coverage.

Disposition

The court held that Kiton’s complaint failed to state a claim for relief. It granted Pacific Indemnity’s motion to dismiss. Because Kiton identified no facts it could allege that would support coverage under the policy, the court dismissed the complaint with prejudice. The Clerk of Court was directed to close the motion and the case.

Practical Effect

The ruling ended Kiton’s claims in this action for coverage and payment of its COVID-19-related business losses. It did not leave the complaint open for refiling based on additional facts, because the dismissal was with prejudice.