Assocs. in Periodontics, PLC v. Cincinnati Ins. Co.

540 F.Supp.3d 441

ASSOCIATES IN PERIODONTICS, PLC, Plaintiff,

v.The CINCINNATI INSURANCE COMPANY, Defendant.

Case No. 2:20-cv-171

United States District Court, D. Vermont.

Signed May 17, 2021

Filed May 18, 2021

Adam M. Moskowitz, Esq., Pro Hac Vice, Adam A. Schwartzbaum, Esq., Pro Hac Vice, Howard M. Bushman, Esq., The Moskowitz Law Firm, PLLC, Coral Gables, FL, Gregory A. Weimer, Esq., Kirkpatrick & Goldsborough, PLLC, South Burlington, VT, John J. Reilly, Esq., Lawrence E. Bathgate, II, Esq., Ryan M. Farrell, Esq., Bathgate, Wegener & Wolf, Lakewood, NJ, William F. Merlin, Jr., Esq., Pro Hac Vice, Merlin Law Group, Tampa, FL, for Plaintiff.

Kathleen F. Adams, Esq., Litchfield Cavo LLP, Simsbury, CT, Kathleen J. Collins, Esq., Litchfield Cavo, LLP, Cherry Hill, NJ, Shapleigh Smith, Jr., Esq., Dinse, Burlington, VT, for Defendant.

OPINION AND ORDER

William K. Sessions III, U.S. District Court Judge Plaintiff Associates in Periodontics, PLC ("Plaintiff") brings this case as a putative class action against Defendant Cincinnati Insurance Company ("Cincinnati"), seeking insurance coverage for losses suffered during Plaintiff's COVID-19 business closure. Pending before the Court is Cincinnati's motion to dismiss the Complaint for failure to state a claim. For the reasons set forth below, the motion to dismiss is granted.

Factual Background

Plaintiff is a dental office located in South Burlington, Vermont. The Complaint alleges that on or about October 1, 2017, Plaintiff purchased an "all-risk" insurance policy ("Policy") issued and underwritten by Cincinnati. The Policy provides coverage for, among other things, "actual loss of ‘business income’ as well as ‘extra expense’ that results from the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration’ due to ‘loss’ to Covered Property resulting from a Covered Cause of Loss." The Policy defines "loss" as "accidental physical loss or accidental physical damage."

Plaintiff claims it suffered financial losses as a result of the closure of its office during the COVID-19 pandemic, and that those losses are covered by the Policy. With respect to the Policy requirement of physical loss or damage, Plaintiff alleges that COVID-19 is a physical substance that causes such damage. Specifically, the Complaint alleges that virus particles infect and remain on certain surfaces for up to 28 days, and can be airborne for extended periods of time. The presence of COVID-19 thus allegedly renders physical property unsafe, impairing its usefulness and value.

The Policy also provides "Civil Authority" coverage: "[w]hen a Covered Cause of Loss causes damage to property other than Covered Property at a ‘premises’, we will pay for the actual loss of ‘Business Income’ and necessary Extra Expense you sustain caused by action of civil authority that prohibits access to the ‘premises’ ...." This coverage applies only when access to the area around the damaged property is prohibited, and the civil authority took action in response to "dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property."

Relevant to this case, the presence of COVID-19 caused civil authorities throughout the United States to suspend specified businesses and activities by means of closure orders. In Vermont, the Governor issued a March 13, 2020 Executive Order declaring a State of Emergency. That Order, as amended on March 20, 2020, required suspension of elective dental care services. Because Plaintiff's periodontal practice consisted primarily of elective procedures, it was unable to operate its business for over two months.

Plaintiff's extended business closure allegedly resulted in lost business income and extra expenses. "Business income" is defined in the Policy as net income and normal operating expenses, while "extra expense" is defined as "the necessary and reasonable expenses you incur during the ‘period of restoration’ that you would not have incurred if there had been no ‘loss’ due to a Covered Cause of Loss to Covered Property." The Policy also covers "Extended Business Income" for loss of business income beyond the "period of restoration" under certain conditions.

The Policy provides further coverage for "Business Income From Dependent Properties." A "dependent property" means a "property operated by other whom you depend on to ... [d]eliver materials or services to you, or to others for your account." Plaintiff allegedly suffered losses of income due to closures in other dental offices ("dependent properties"), as most of Plaintiff's referrals come from offices that provide general dentistry.

The Complaint notes that Cincinnati did not include a standard virus exclusion, or any other type of exclusion that would apply to the COVID-19 pandemic.

Plaintiff's losses and expenses accrued between March 19, 2020 and June 1, 2020. Plaintiff submitted a claim for losses under the Policy, and Cincinnati declined coverage. Plaintiff subsequently filed this lawsuit in the United States District Court for the District of New Jersey. Cincinnati filed a motion to dismiss or transfer, and on October 28, 2020 the case was transferred to this Court.

Now before the Court is Cincinnati's motion to dismiss for failure to state a claim. Cincinnati argues that the Policy issued to Plaintiff covers physical harm to property, as in the case of a fire or storm, and does not cover financial losses arising from a government-imposed shutdown. Plaintiff contends that coverage is due because the COVID-19 virus caused physical harm to its property, and that the term "physical loss" means the inability to use its premises as a dental office. Plaintiff also argues that if the Courts finds the Policy ambiguous, it should rule in favor of coverage.

Discussion

I. Motion to Dismiss Standard

To survive a motion to dismiss pursuant to Rule 12(b)(6), a complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Matson v. Bd. of Educ. , 631 F.3d 57, 63 (2d Cir. 2011) (quoting Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ). Although all allegations contained in a complaint are assumed to be true, this tenet is "inapplicable to legal conclusions." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937.

II. Policy Interpretation and Vermont Law

Both parties cite Vermont law for interpretation of the Policy. In Vermont, "[a]n insurance policy is construed according to ‘its terms and the evident intent of the parties as expressed in the policy language.’ " Cincinnati Specialty Underwriters Ins. Co. v. Energy Wise Homes, Inc. , 2015 VT 52, ¶ 16, 199 Vt. 104, 120 A.3d 1160 (quoting Sperling v. Allstate Indem. Co. , 2007 VT 126, ¶ 8, 182 Vt. 521, 944 A.2d 210 ). The policy is also "to be strictly construed against the insurer." Simpson v. State Mut. Life Assurance Co. of Am. , 135 Vt. 554, 556, 382 A.2d 198, 199 (1977). "The insurer bears the burden of showing that an insured's claim is excluded by the policy." Shriner v. Amica Mut. Ins. Co. , 2017 VT 23, ¶ 6, 204 Vt. 321, 167 A.3d 326.

Vermont law further requires "terms that are ambiguous or unclear be construed broadly in favor of coverage." Towns v. N. Sec. Ins. Co. , 2008 VT 98, ¶ 21, 184 Vt. 322, 964 A.2d 1150. "Words or phrases in an insurance policy are ambiguous if they are fairly susceptible to more than one reasonable interpretation." Whitney v. Vt. Mut. Ins. Co. , 2015 VT 140, ¶ 16, 201 Vt. 29, 135 A.3d 272. "When a provision is ambiguous or may reasonably be interpreted in more than one way, then we will construe it according to the reasonable expectations of the insured, based on the policy language." Vt. Mut. Ins. Co. v. Parsons Hill P'ship , 2010 VT 44, ¶ 21, 188 Vt. 80, 1 A.3d 1016. However, "the fact that a dispute has arisen as to proper interpretation does not automatically render the language ambiguous." Isbrandtsen v. N. Branch Corp. , 150 Vt. 575, 581, 556 A.2d 81, 85 (1988). Where the language is not ambiguous, the "expectations of an insured cannot control over the unambiguous language of the policy." Whitney , 2015 VT 140, ¶ 16, 201 Vt. 29, 135 A.3d 272.

A fundamental debate in this case is whether the COVID-19 pandemic caused direct physical loss or damage as contemplated by the Policy. The Policy does not define either "physical loss" or "physical damage." In City of Burlington v. Indemnity Insurance Company of North America , 332 F.3d 38, 44 (2d Cir. 2003), the Second Circuit noted that Vermont courts had not decided how "direct physical loss or damage" should be interpreted. The Second Circuit then considered rulings from other jurisdictions holding that "[t]he language ‘physical loss or damage’ strongly implies that there was an initial satisfactory state that was changed ... into an unsatisfactory state," and found it "extremely likely" that the Vermont Supreme Court would interpret the phrase the same way. City of Burlington , 332 F.3d at 44 (citations and internal quotation marks omitted).

City of Burlington , though instructive, does not square precisely with the pandemic-related facts presented here. That case involved 33 damage-causing leaks, and the court determined that there was coverage under an all-risk policy for the leaks themselves but not for defective welds that had not yet failed. Id. The Second Circuit reasoned that while the actual failure of a defective part created an "unsatisfactory state" amounting to physical loss or damage, the mere presence of a defect does not qualify for coverage. Id. In this case, the question is whether the presence of a virus and a related...