Elegant Massage, LLC v. State Farm Mut. Auto. Ins. Co.

95 F.4th 181

ELEGANT MASSAGE, LLC, d/b/a Light Stream Spa,on behalf of itself and all others similarly situated, Plaintiff - Appellee, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY;State Farm Fire and Casualty Company, Defendants - Appellants.American Property Casualty Insurance Association; American Tort Reform Association;National Association of Mutual Insurance Companies, Amici Supporting Appellant.

No. 22-1853

United States Court of Appeals, Fourth Circuit

Argued: September 20, 2023

Decided: March 8, 2024

Appeal from the United States District Court for the Eastern District of Virginia, at Norfolk. Raymond A. Jackson, Senior District Judge. (2:20-cv-00265-RAJ-RJK)

ARGUED: Christina Guerola Sarchio, DECHERT LLP, Washington, D.C., for Appellants. Melissa L. Yeates, KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania, for Appellee. ON BRIEF: Douglas W. Dunham, Bert L. Wolff, DECHERT LLP, New York, New York; Theodore I. Brenner, Alexander S. de Witt, FREEBORN & PETERS LLP, Richmond, Virginia; Joseph A. Cancila, Jr., James P. Gaughan, RILEY SAFER HOLMES & CANCILA LLP, Chicago, Illinois, for Appellants. Joseph H. Meltzer, Tyler S. Graden, Jordan Jacobson, KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania; William H. Monroe, Jr., Marc C. Greco, Kip A. Harbison, Michael A. Glasser, GLASSER AND GLASSER, P.L.C., Norfolk, Virginia; James E. Cecchi, Lindsey H. Taylor, Donald A. Ecklund, Zachary A. Jacobs, CARELLA, BYRNE, CECCHI, OLSTEIN, BRODY & AGNELLO, P.C., Roseland, New Jersey, for Appellee. Wystan M. Ackerman, ROBINSON & COLE LLP, Hartford, Connecticut, for Amici American Property Casualty Insurance Association and National Association of Mutual Insurance Companies. H. Sherman Joyce, Lauren Sheets Jarrell, AMERICAN TORT REFORM ASSOCIATION, Washington, D.C.; Steven P. Lehotsky, Scott A. Keller, Jeremy Evan Maltz, Washington, D.C., Katherine C. Yarger, LEHOTSKY KELLER LLP, Denver, Colorado, for Amicus American Tort Reform Association.

Before DIAZ, Chief Judge, WYNN, Circuit Judge, and KEENAN, Senior Circuit Judge.

Reversed and remanded with instructions by published opinion. Senior Judge Keenan wrote the majority opinion, in which Chief Judge Diaz joined. Judge Wynn wrote an opinion concurring in the judgment in part and dissenting in part.

BARBARA MILANO KEENAN, Senior Circuit Judge:

In this appeal of a class action certification order, we consider a complaint alleging breach of contract and other related claims. State Farm Mutual Automobile Insurance Company (State Farm) appeals the district court's certification of a class of businesses that was denied insurance coverage when several Virginia executive orders required full or partial closure of those businesses during the COVID-19 pandemic. State Farm also asks, based on our recent decision in Uncork & Create LLC v. Cincinnati Insurance Co., 27 F.4th 926 (4th Cir. 2022), which similarly addressed a question of commercial property insurance coverage during the COVID-19 pandemic, that we exercise pendent appellate jurisdiction to consider alleged legal error in the district court's denial of State Farm's motion to dismiss. Because the immediately appealable issue of class certification and the district court's decision denying State Farm's motion to dismiss are "so interconnected" as to require concurrent review, we exercise pendent appellate jurisdiction to consider the district court's denial of the motion to dismiss. After considering the precedential effect of Uncork on the district court's decision, we reverse the district court's judgment and remand the case with instructions that the court dismiss the entire case.

I.

In March 2020, Elegant Massage, LLC, d/b/a Light Stream Spa (Elegant Massage), operated a massage parlor in Virginia Beach, Virginia. On March 16, 2020, Elegant Massage voluntarily closed to "protect its employees and the public" from the spread of the COVID-19 virus. The Governor of Virginia and the Virginia State Health Commissioner declared a public health emergency four days later, and on March 23, 2020, the Governor issued an executive order directing the closure of "all public access" to recreational and entertainment businesses, including spas and massage parlors. In May 2020, the Governor issued amended executive orders that allowed "massage centers" to reopen subject to certain conditions.¹

On the day Elegant Massage voluntarily closed, it filed a claim for loss of business income and extra expenses under its "all risk" commercial property insurance policy issued by State Farm (the policy). The policy, which was in effect from July 22, 2019 through July 22, 2020, covered loss or damage to the premises operated by Elegant Massage (the covered property). This coverage included "loss of income" sustained due to the "suspension" of operations during any "period of restoration," as well as "extra expenses" incurred during the same period. The "period of restoration" was defined in the policy as beginning "immediately after the time of accidental direct physical loss caused by any Covered Cause Of Loss at the [covered property]," and ending on the earlier of the date when the covered property "should be repaired, rebuilt[,] or replaced with reasonable speed and similar quality," or when "business is resumed at a new permanent location."

To qualify for "loss of income" coverage, the policy required that the "suspension" be caused by "accidental direct physical loss" to the covered property, and that the loss be "covered," that is, not subject to any exclusions.² As relevant to the present case, the policy excluded coverage for any loss caused by "virus" (the virus exclusion).

On March 26, 2020, State Farm denied Elegant Massage's claim for loss of business income. State Farm explained that Elegant Massage voluntarily had closed on March 16, 2020, before any Virginia executive order was in place, that there was no known damage to the covered property due to COVID-19, and that, because of the virus exclusion, the suspension of Elegant Massage's business operations was not a "covered" cause of loss under the policy.

Following State Farm's denial of coverage, Elegant Massage filed a putative class action complaint against State Farm on behalf of itself and similarly situated individuals and entities, seeking a declaratory judgment that the virus exclusion did not apply and asserting claims for breach of contract and breach of the duty of good faith and fair dealing. As the basis for its claims, Elegant Massage alleged that the executive orders requiring full or partial closure of Elegant Massage and the other businesses in the putative class resulted in covered losses under the policy. State Farm moved to dismiss Elegant Massage's first amended complaint under Federal Rule of Civil Procedure 12(b)(6), arguing that Elegant Massage had not alleged "accidental direct physical loss" to the covered property, that Elegant Massage had not alleged any loss requiring a "period of restoration," and that exclusions in the policy barred Elegant Massage's claims.

The district court rejected State Farm's arguments, holding that the phrase "direct physical loss" was ambiguous under Virginia law, and that it was plausible that such loss "could mean" that property is "uninhabitable, inaccessible, or dangerous" to use because of "intangible, or non-structural sources." The court did not address State Farm's argument regarding the "period of restoration," and held that the virus exclusion did not bar Elegant Massage's claims. The court thus denied State Farm's motion to dismiss.³

State Farm moved to amend the court's denial of the motion to dismiss, or for certification of interlocutory appeal under 28 U.S.C. § 1292(b). The district court summarily denied these requests.

Proceeding under Rule 23(b)(3), Elegant Massage moved for class certification.⁴ In addition to determining whether the requirements of Rule 23(a) were satisfied, including "commonality" of the class members' claims, the district court also was required to determine under Rule 23(b)(3) whether "questions of law or fact common to the members of the class predominate[d] over any questions affecting only individual members" (the predominance requirement). Gariety v. Grant Thornton, LLP, 368 F.3d 356, 362 (4th Cir. 2004). The district court held that each required factor under Rule 23(a) and Rule 23(b)(3) was satisfied, and granted Elegant Massage's class certification motion (the class certification order). The certified class included:

All persons or entities in the Commonwealth of Virginia with a Businessowners insurance policy issued by State Farm on Form CMP-4100, including a Loss of Income and Extra Expense endorsement . . . in effect at any time between March 23, 2020 and June 30, 2020 (the "Closure Period"), that were subject to a partial or full business suspension under the Orders and submitted claims for business income losses and/or extra expenses incurred during the Closure Period that were denied by Defendants.

State Farm timely petitioned this Court for permission to appeal the class certification order under Federal Rule of Civil Procedure 23(f). We granted State Farm's petition.

II.

On appeal, State Farm relies heavily on our decision in Uncork & Create LLC v. Cincinnati Ins. Co., 27 F.4th 926 (4th Cir. 2022), which we issued two weeks after State Farm filed its notice of appeal in the present case. Before turning to the issues presently before us, we describe the factual background and our holding in Uncork.

In March 2020, Uncork and Create LLC (Uncork) operated a "creative events" business at two art studios in West Virginia. 27 F.4th at 928. After the Governor of West Virginia issued an executive order that required non-essential businesses in West Virginia to close temporarily during the COVID-19 pandemic (the closure order), Uncork sought coverage for lost business income under its commercial property insurance policy. Id. at 928-29. The policy, issued by The...