Brown Jug, Inc. v. Cincinnati Ins. Co.

27 F.4th 398

BROWN JUG, INC., dba Little Brown Jug, Inc., dba the Backroom; Chelsea Ventures, LLC, dba Valiant Bar & Grill; Dino Drop, Inc., dba M-Brew, dba Dino's Lounge, Buccaroo, LLC, DM Bach Enterprises, LLC, Bucaroo Too, LLC, and 45 Degree Hospitality, Inc., Plaintiffs-Appellants,

v.CINCINNATI INSURANCE COMPANY, Defendant-Appellee.

Nos. 21-2644/2715/2718

United States Court of Appeals, Sixth Circuit.

Decided and Filed: February 23, 2022

ON BRIEF: James J. Kelly, JIM KELLY LAW, PC, Farmington Hills, Michigan, for Appellants. Dennis M. Dolan, Laurence J.W. Tooth, LITCHFIELD CAVO LLP, Chicago, Illinois, Bradford S. Moyer, Jeffrey C. Gerish, PLUNKETT COONEY, Grand Rapids, Michigan, for Appellee.

Before: COLE, LARSEN, and MURPHY, Circuit Judges.

COLE, Circuit Judge.

Businesses across the United States have turned to a variety of sources to recoup economic losses attributable to the COVID-19 pandemic. Plaintiffs in this consolidated appeal are businesses that operate Michigan-based restaurants and entertainment venues that turned to their commercial property insurance policies, held by Cincinnati Insurance Company, for relief. These policies contained three provisions under which Cincinnati Insurance would compensate a policy holder if—and only if—the policy holder suffered direct physical loss or damage to its covered property, or if loss to a non-policy holder's property prevented access to a policy holder's property. Cincinnati Insurance denied plaintiffs’ claims for relief because, in its view, neither the presence of the COVID-19 virus nor shutdown orders issued by the Michigan governor constituted physical loss or damage.

Plaintiffs sought a declaratory judgment that these pandemic-related losses were compensable under the policy. Cincinnati Insurance moved to dismiss the complaints. The district court found that, under Michigan law, "direct physical loss" to property covers only tangible harm or damage to property, rather than mere loss of use. Therefore, the plaintiffs had failed to state a claim. Because we believe that the Michigan Supreme Court would agree with this interpretation of the law, we affirm the dismissal of plaintiffs’ complaints.

I. BACKGROUND

A. Factual Background

The Brown Jug, Inc.; Chelsea Ventures, LLC; Dino Drop, Inc.; Buccaroo, LLC; DM Bach Enterprises, LLC; Bucaroo Too, LLC; and 45 Degree Hospitality, Inc. (collectively "plaintiffs") are Michigan-based businesses. They operate restaurants that were covered by identical or substantially similar Cincinnati Insurance Company commercial property insurance policies early in the COVID-19 pandemic. Like many other restaurants, plaintiffs’ operations have been economically affected by the COVID-19 pandemic. Michigan's stay-at-home orders curtailed access to plaintiffs’ businesses and restricted in-person activities at their facilities. Because of COVID-19 outbreaks in Michigan generally, plaintiffs’ businesses have been unable to return to normal operations. Two restaurants, one belonging to Brown Jug and one belonging to Dino Drop, were even alleged sources of COVID-19 outbreaks.

To offset these losses, plaintiffs submitted claims for reimbursement to Cincinnati Insurance. The claims hinged on three policy provisions.¹ First, the "Business Income" provision, which provides:

[Cincinnati Insurance] will pay for the actual loss of "Business Income" [plaintiffs] sustain due to the necessary "suspension" of [plaintiffs’] "operations" during the "period of restoration". The "suspension" must be caused by direct "loss" to property at "premises" which are described in the Declarations and for which a "Business Income" Limit of Insurance is shown in the Declarations.

The "loss" must be caused by or result from a Covered Cause of Loss.

(Chelsea Policy, R. 15-1, PageID 2041.) Second, the "Extra Expense" provision, which provides that Cincinnati Insurance will reimburse plaintiffs for extra necessary expenses incurred during a "period of restoration" that would not have been incurred without "direct ‘loss’ to the property caused by or resulting from a Covered Cause of Loss." (Id. ) Third, the "Civil Authority" provision, which provides that Cincinnati Insurance will pay for the "actual loss of ‘Business Income’ [plaintiffs] sustain and necessary Extra Expense" when "a Covered Cause of Loss causes direct damage to property other than Covered Property." (Id. at PageID 2042 (emphasis added).)

"Covered Cause of Loss" is defined as "direct ‘loss’ unless the ‘loss’ is excluded or limited in this Coverage Part." (Id. at PageID 1970.) The term "loss" is defined as "accidental physical loss or accidental physical damage." (Id. at PageID 2003.) "Period of Restoration" is defined as the time between the onset of the "direct ‘loss’ " and the earlier of "[t]he date when the property at the ‘premises’ should be repaired, rebuilt or replaced with reasonable speed and similar quality" or "[t]he date when business is resumed at a new permanent location." (Id. at PageID 2003–04.)

In sum, unless a "loss" occurs, no provision of the plaintiffs’ insurance will kick in. While "loss" is defined by the policy, it is partially defined as itself, with no additional definition given for "physical" or "damage." Cincinnati Insurance denied each of plaintiffs’ claims because it contended that there was no physical loss or damage to plaintiffs’ properties—or, in the case of the Civil Authority provision, no physical loss or damage to property other than plaintiffs’ covered property.

B. Procedural History

Plaintiffs filed suit against Cincinnati Insurance, seeking, among other relief, a declaration of plaintiffs’ rights under their insurance policies. Cincinnati Insurance moved to dismiss all three complaints, arguing that plaintiffs failed to plausibly allege that COVID-19 or the stay-at-home orders caused tangible, concrete destruction of, or alteration to, the plaintiffs’ properties. See Brown Jug, Inc. v. Cincinnati Ins. Co. , No. 2:20-cv-13003, 2021 WL 2163604, at *2 (E.D. Mich. May 27, 2021) ; Dino Drop, Inc. v. Cincinnati Ins. Co. , 544 F.Supp.3d 789, 795–97 (E.D. Mich. 2021) ; Chelsea Ventures, LLC , 2021 WL 2529821, at *3–4 (same).

The district court, noting that the Michigan Supreme Court has yet to opine on the meaning of "direct physical loss," elected to follow most courts and found that plaintiffs were required to allege facts indicating that COVID-19 caused tangible harm to their property or resulted in a loss of functionality of the property, rather than merely a loss of use. Brown Jug , at *4 ; Dino Drop , at 797–99 ; Chelsea Ventures , at *5. The district court in Brown Jug noted that the losses Brown Jug alleged—"money spent on cleaning supplies and the rearranging of furniture, customers barred from entry due to temporary Stay at Home Orders, and income lost due to lingering public health restrictions and public trepidation"—did not constitute "tangible, physical losses as required under the Policy." Brown Jug , at *4. Later, the district court—in both Chelsea Ventures and Dino Drop —found that " ‘[t]he mere presence of the virus on the physical structure of the premises does not amount to direct physical loss,’ as ‘coronavirus does not physically alter the appearance, shape, color, structure, or other material dimension of the property.’ " Dino Drop , at 798 (quoting Café La Trova LLC v. Aspen Specialty Ins. Co. , 519 F. Supp. 3d 1167, 1180 (S.D. Fla. 2021) ); Chelsea Ventures , at *5.

Plaintiffs now appeal.

II. ANALYSIS

We review a district court's decision on a Rule 12(b)(6) motion to dismiss de novo. Jasinski v. Tyler , 729 F.3d 531, 538 (6th Cir. 2013).

A. Definition of "Loss" Under Michigan Law

Operating under diversity jurisdiction, this court must apply "the law of the state's highest court." Universal Image Prods., Inc. v. Fed. Ins. Co. , 475 F. App'x 569, 571–72 (6th Cir. 2012) (quoting Garden City Osteopathic Hosp. v. HBE Corp. , 55 F.3d 1126, 1130 (6th Cir. 1995) ). Under Michigan law, when interpreting an insurance contract, courts apply the same contract construction principles that govern any other type of contract. Royal Prop. Grp., LLC v. Prime Ins. Syndicate, Inc. , 267 Mich.App. 708, 706 N.W.2d 426, 432 (2005). "The primary goal in the construction or interpretation of a contract is to honor the intent of the parties." Id . (quotation marks, alteration, and citations omitted). The best way to determine the parties’ intent is to examine the ordinary and plain meaning of the language of the contract when read as a whole. Id. Where, however, there is no decision from a state's highest court that is directly on point—as is the case here—the court must make what is called an "Erie guess." Conlin v. Mortg. Elec. Registration Sys., Inc. , 714 F.3d 355, 358 (6th Cir. 2013). When making an Erie guess, we "determine how that [state's highest] court, if presented with the issue, would resolve it." Id. at 358–59.

Although the Michigan Supreme Court has not opined on the question, the Michigan Court of Appeals recently construed the term "direct physical loss" in a commercial policy insuring restaurants that claimed losses due to COVID-19. See Gavrildes Mgmt. Co. v. Mich. Ins. Co. , ––– N.W.2d ––––, ––––, No. 354418, 2022 WL 301555, at *4 (Mich. Ct. App. Feb. 1, 2022). The court found that "the word ‘physical’ necessarily requires the loss or damage to have some manner of tangible and measurable presence of effect in, on, or to the premises." Id. We recently also examined nearly identical policy language under Ohio and Kentucky law, specifically with regard to the COVID-19 pandemic. "Relying on dictionaries, a leading treatise, and Ohio intermediate-appellate-court precedent," we concluded that the unambiguous policy language requires a plaintiff to demonstrate "either destruction of the property or the owner's dispossession to show ‘loss’ and a direct physical alteration of the property to show ‘damage.’ " Dakota Girls, LLC v. Phila. Indem. Ins. Co. , 17 F.4th 645,...