Dakota Girls, LLC v. Phila. Indem. Ins. Co.

17 F.4th 645

DAKOTA GIRLS, LLC ; Dublin Ashanik, LLC; Educare of Greene, Inc.; Campbell Family Childcare, Inc.; Lillypad Learning Center, LLC; Fuqua Norman, Inc.; Eagle School of Hilliard Ohio, Inc.; Powell Enterprises, Inc.; Park Enterprises of Ohio, LLC; Park School of Dublin, LLC; Fixari School of Pickerington, LLC ; Fixari School of Reynoldsburg, LLC; Burkhold Enterprises, LLC; Park School of Gahanna, LLC; Dimuzio-Speranza Enterprises, Inc.; Chambers Holdings, Inc., Plaintiffs-Appellants,

v.PHILADELPHIA INDEMNITY INSURANCE COMPANY, Defendant-Appellee.

No. 21-3245

United States Court of Appeals, Sixth Circuit.

Decided and Filed: November 5, 2021

ON BRIEF: Charles H. Cooper, Jr., Sean R. Alto, COOPER & ELLIOTT, Columbus, Ohio, for Appellants. Stephen E. Goldman, Wystan M. Ackerman, ROBINSON & COLE LLP, Hartford, Connecticut, Richard M. Garner, COLLINS, ROCHE, UTLEY & GARNER, LLC, Dublin, Ohio, for Appellee. Christopher E. Kozak, PLEWS SHADLEY RACHER & BRAUN LLP, Indianapolis, Indiana, Timothy J. Fitzgerald, KOEHLER FITZGERALD LLP, Cleveland, Ohio, Laura A. Foggan, CROWELL & MORING LLP, Washington, D.C., for Amici Curiae.

Before: SILER, KETHLEDGE, and BUSH, Circuit Judges.

BUSH, Circuit Judge.

To combat the spread of COVID-19, the Ohio government ordered child-care programs in the state to shut down for around two months beginning in March 2020. As a result, Dakota Girls, LLC and its sixteen co-appellants (collectively, "Dakota Girls") could not use their facilities for their intended purpose—as private preschools. The consequent lost profits gave rise to claims against their insurer, the Philadelphia Indemnity Insurance Company ("Philadelphia"). Dakota Girls argued that the preschools’ identically worded policies contained four provisions—concerning (1) business and personal property, (2) business income, (3) civil-authority orders, and (4) communicable disease and water-borne pathogens—that provided coverage. Philadelphia disagreed, however, and denied the claims, so Dakota Girls filed suit. It sought damages for breach of contract and the insurer's alleged bad faith. Yet the district court sided with Philadelphia and granted its motion to dismiss. Dakota Girls then took the present appeal. Soon after, we issued a decision squarely foreclosing coverage under the first three of the aforementioned provisions, a point Dakota Girls now concedes. See Santo's Italian Café v. Acuity Ins. Co. , 15 F.4th 398 (6th Cir. 2021). It thus confines this appeal to the fourth provision, concerning communicable disease and water-borne pathogens. But Dakota Girls’ arguments in favor of coverage fail under the plain language of the policies. So we affirm.

I.

In its complaint, Dakota Girls invoked four coverage provisions to argue that Ohio's shutdown order caused the preschools to suffer covered losses. First was their building-and-personal-property coverage, which covers "direct physical loss of or damage to Covered Property." Dakota Girls argued that "direct physical loss" is not restricted to mere dispossession, but also includes loss of use that resulted from the shutdown order. It also theorized that COVID-19 was itself "damaging surfaces" within the preschools’ properties. The second provision was the business-income coverage, which covers income lost from a " ‘suspension’ of ‘operations’ during the ‘period of restoration’ caused by [the] direct physical loss ... or damage." Third was the civil-authority coverage. Unlike the first two provisions, it covers the income lost and expenses that result from a government order prohibiting access to covered property due to damage at some other location. And last was the communicable-disease and water-borne-pathogen provision, which covers the income lost and expenses that result from a shutdown order in response to "an actual illness at the insured premises." Though Dakota Girls could not confirm that a COVID-positive individual was ever at the preschools, it at least alleged that people with symptoms "consistent with" the disease had been there.

Those arguments, however, failed to persuade the district court. While it acknowledged that COVID "and the Closure Orders have had a devastating impact on many businesses," the district court nonetheless held that "Plaintiffs cannot plausibly allege that this impact is covered under the Policies as written." That was so because none of the provisions—at least as the district court understood them—covered Dakota Girls’ theories of harm. Without a material change in the property's condition, there could not have been "damage." Without dispossession or the property's destruction, there could not have been "loss." And without proof that someone with COVID was ever on the premises, there could not have been an "actual illness" at the preschools. (The district court also declined to reach the import of a "virus exclusion" found in seven of the policies because it held that those policies did not provide coverage in the first place.) The district court thus granted Philadelphia's motion to dismiss. On appeal, Dakota Girls argues that the district court misread the policies, misunderstood Ohio law, and erroneously denied coverage.

II.

There are two general issues here to which a standard of review is relevant: whether the district court's interpretation of the insurance policies was correct and whether the district court properly granted Philadelphia's motion to dismiss based on that interpretation. We review the first issue de novo and in accordance with the substantive law of Ohio, since this is a diversity case. See Yellowbook Inc. v. Brandeberry , 708 F.3d 837, 844 (6th Cir. 2013). We likewise review the second, procedural issue—whether Dakota Girls plausibly pleaded its entitlement to relief under that contractual interpretation—de novo. See SFS Check, LLC v. First Bank of Del. , 774 F.3d 351, 355 (6th Cir. 2014). Thus, as did the district court, we ask whether Dakota Girls’ complaint "contain[s] sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). In so doing, we disregard bare legal conclusions and "naked assertion[s]," affording the presumption of truth only to genuine factual allegations. Id. (quoting Twombly , 550 U.S. at 557, 127 S.Ct. 1955 ). In other words, we need not "accept as true a legal conclusion." Id. Nor should we credit a "[t]hreadbare recital of the elements of a cause of action ... supported by mere conclusory statements." Id. (citing Twombly , 550 U.S. at 555, 127 S.Ct. 1955 ). Ultimately, "only a complaint that states a plausible claim for relief survives a motion to dismiss." Id. at 679, 129 S.Ct. 1937 (citing Twombly , 550 U.S. at 556, 127 S.Ct. 1955 ).

III.

We begin with Dakota Girls’ claims to coverage under the business-and-personal-property, business-income, and civil-authority provisions. All of those are triggered by either "loss of" or "damage to" property—whether to the covered property itself or to other property around the covered property. At first, the parties sharply contested the meaning of that phrase. Philadelphia argued that "loss" refers to the complete destruction of property or to the owner's dispossession, while "damage" requires some tangible, adverse change in the property's condition. Dakota Girls, by contrast, argued that "loss" is sufficiently broad to encompass loss of use —the inability to use a structure for the desired purpose. It thus contended that the shutdown order had caused a covered "loss" under the policy. And it likewise suggested that COVID-19, merely through its supposed presence, was somehow "damaging surfaces" within its properties.¹

Ohio law governs our interpretation of "loss" and "damage." See Santo's Italian Café , 15 F.4th at 400. As the parties acknowledge, the Ohio Supreme Court has rendered no on-point decision. But in a similar case— Santo's Italian Café v. Acuity Insurance Co. —we recently made an Erie prediction about how it would define those terms. See id. at 404. Relying on dictionaries, a leading treatise, and Ohio intermediate-appellate-court precedent, we reasoned that the Ohio Supreme Court likely would not endorse Dakota Girls’ interpretation. Id. at 402–04. To the contrary, we held that it would require either destruction of the property or the owner's dispossession to show "loss" and a direct physical alteration of the property to show "damage." Id. at 404. The policy language thus excludes from coverage the mere economic injury and loss of use that result from a shutdown order. Id. at 402. In short, as we explained, "[a] loss of use simply is not the same as a physical loss." Id.

Dakota Girls concedes that Santo's is "controlling authority" and resolves all its claims other than those under the communicable-disease provision. Indeed, Dakota Girls did not suffer dispossession or the destruction of its property, nor did it plead that COVID-19 had materially altered the facilities’ condition. Under our circuit's view of Ohio law, then, the preschools cannot establish the "loss" or "damage" required to trigger the first three coverages. So, as to those coverages, we affirm the district court's grant of Philadelphia's motion to dismiss.

IV.

We turn next to Dakota Girls’ bid for coverage under the communicable-disease and water-borne-pathogen provision. It covers the losses that result when the government orders a shutdown of business operations "due directly to an outbreak of a communicable disease or a water-borne pathogen that causes an actual illness at the described premises[.]" Though everyone agrees that COVID-19 is a "communicable disease,"² this coverage still presents two interpretive issues. First, is the endorsement triggered simply when there is a shutdown order in response to a communicable disease found somewhere ? Or...