Novant Health Inc. v. Am. Guarantee & Liab. Ins. Co.

563 F.Supp.3d 455

NOVANT HEALTH INC., Plaintiff,

v.AMERICAN GUARANTEE AND LIABILITY INSURANCE COMPANY, Defendant.

1:21-CV-309

United States District Court, M.D. North Carolina.

Signed September 23, 2021

A. Todd Brown, Hunton Andrews Kurth LLP, Charlotte, NC, Casey L. Coffey, Hunton Andrews Kurth LLP, Miami, FL, Lawrence J. Bracken, II, Rachel E. Hudgins, Hunton Andrews Kurth LLP, Atlanta, GA, Syed S. Ahmad, Hunton Andrews Kurth LLP, Washington, DC, for Plaintiff.

William A. Bulfer, Teague Campbell Dennis & Gorham, LLP, Asheville, NC, Daniel T. Strong, Brown Law, LLP, Raleigh, NC, for Defendant.

MEMORANDUM OPINION AND ORDER

Catherine C. Eagles, District Judge.

This is an insurance coverage case brought by the insured, Novant Health Inc., against defendant-insurer, American Guarantee and Liability Insurance Company. Novant has made claims under an insurance policy with AGLIC for certain losses arising from the COVID-19 pandemic, and AGLIC has not paid those claims. Novant has adequately alleged physical losses and AGLIC has not established at this stage that the virus exclusion applies, so AGLIC's Rule 12(b)(6) motion will be denied. AGLIC's motion to dismiss Novant's claim under the communicable disease provision on ripeness grounds will also be denied, as AGLIC cannot complain when an insured complies with policy language requiring an insured to bring suit within one year of a loss.

I. Overview

Novant Health is a network of healthcare centers comprising "approximately 700 locations, including 15 hospitals and hundreds of outpatient facilities and physician clinics." Doc. 8 at ¶ 21. AGLIC insured Novant via an all-risk policy in place from February 1, 2020, to February 1, 2021. Id. at ¶¶ 3, 5.

Like every person and entity in the United States, Novant has been affected by the COVID-19 pandemic. It seeks to recover various losses under the AGLIC policy, which provides coverage for "direct physical loss or damage" and "interruption by communicable disease." AGLIC contends that the complaint fails to state a claim for physical loss and that any such coverage is excluded by an exclusion directed to losses caused by virus. As to communicable disease coverage, AGLIC contends that this part of the lawsuit should be dismissed because it is not ripe.

II. Direct Physical Loss of or Damage to Property

A. Collateral Estoppel

Novant contends that the coverage issue for direct physical losses caused by COVID-19 has been resolved against a party in privity with AGLIC in Henderson Rd. Rest. Sys., Inc. v. Zurich Am. Ins. , 513 F. Supp. 3d 808 (N.D. Ohio 2021), so that AGLIC is collaterally estopped from contesting coverage. Collateral estoppel "forecloses the relitigation of issues of fact or law that are identical to issues which have been actually determined and necessarily decided in prior litigation in which the party against whom collateral estoppel is asserted had a full and fair opportunity to litigate." In re Microsoft Corp. Antitrust Litig. , 355 F.3d 322, 326 (4th Cir. 2004) (quoting Sedlack v. Braswell Servs. Grp., Inc. , 134 F.3d 219, 224 (4th Cir. 1998) ) (cleaned up).

Federal courts apply the forum state's law of collateral estoppel. Kremer v. Chem. Constr. Corp. , 456 U.S. 461, 481–82, 102 S.Ct. 1883, 72 L.Ed.2d 262 (1982) ; In re McNallen , 62 F.3d 619, 624 (4th Cir. 1995). Under North Carolina law, collateral estoppel can be applied only if several factors are met, including, inter alia , that "the issues to be precluded are the same as those involved in the prior action." U.S. Fire Ins. v. Se. Airmotive Corp. , 102 N.C. App. 470, 472, 402 S.E.2d 466, 468 (Ct. App. 1991) (quoting King v. Grindstaff , 284 N.C. 348, 358, 200 S.E.2d 799, 806 (1973) ). In Henderson Rd. , the court applied Ohio law to interpret the insurance contract at issue. 513 F. Supp. 3d at 819. Here, the case involves application of North Carolina law. Thus, the issue litigated in Henderson Rd. is not the same as the issue in this case. Novant has not satisfied the first requirement of collateral estoppel under North Carolina law. U.S. Fire Ins. , 102 N.C. App. at 472, 402 S.E.2d 466.

B. Rule 12(b)(6) motions.

As is appropriate at this stage, facts are taken from the amended complaint, Doc. 8, and are assumed to be true for the purposes of the motion. A Rule 12(b)(6) motion to dismiss "tests the sufficiency of a complaint," and the Court's "evaluation is thus generally limited to a review of the allegations of the complaint itself." Goines v. Valley Cmty. Servs. Bd. , 822 F.3d 159, 165–66 (4th Cir. 2016). The Court may also consider exhibits to a complaint if there is no challenge to authenticity. Id. at 166 ; see also FED. R. CIV. P. 10(c). Here, the amended complaint quotes from and makes numerous references to the Policy, Doc. 8 at 9–11, 16–23, and the amended complaint includes the Policy as Exhibit A. Doc. 26-1. Neither party has disputed its authenticity.

In North Carolina, an insurance policy is a contract, and its terms are interpreted in fundamentally the same manner as contract terms: the goal is to arrive at the intent of the parties when the policy was issued. Woods v. Nationwide Mut. Ins. , 295 N.C. 500, 505, 246 S.E.2d 773, 777 (1978). The insured carries "the burden of bringing itself within the insuring language of the policy. Once it has been determined that the insuring language embraces the particular claim or injury, the burden then shifts to the insurer to prove that a policy exclusion excepts the particular injury from coverage." Prod. Sys., Inc. v. Amerisure Ins. , 167 N.C. App. 601, 605, 605 S.E.2d 663, 665 (Ct. App. 2004) ; Nationwide Mut. Fire Ins. v. Allen , 68 N.C. App. 184, 188, 314 S.E.2d 552, 554 (Ct. App. 1984).

"Exclusions from coverage provided by the policy are strictly construed, and when language which is reasonably susceptible of differing construction is used in the policy, it must be given the construction most favorable to the insured." Van Sumner, Inc. v. Pennsylvania Nat. Mut. Cas. Ins. , 74 N.C. App. 654, 657, 329 S.E.2d 701, 703 (Ct. App. 1985) (citing Wachovia Bank & Trust Co. v. Westchester Fire Ins. , 276 N.C. 348, 172 S.E.2d 518 (1970) ).

C. Coverage¹

The Policy "insures against direct physical loss of or damage caused by a Covered Cause of Loss to Covered Property ... subject to the terms, conditions and exclusions stated in this Policy." Doc. 26-1 at 15 (Policy § 1.01). "Covered Cause of Loss" is defined as, "All risks of direct physical loss of or damage from any cause unless excluded." Id. at 62 (Policy § 7.11).

Novant alleges that the COVID-19 virus exists and is spread by human beings into the air and on surfaces, Doc. 8 at ¶ 42, and that it "results in tangible physical transformation of the air and surfaces, rendering them dangerous transmission vehicles" for the disease. Id. at ¶ 41. The "impact and physical damage" caused by the presence of COVID-19 "is not temporary;" instead, it is "sustained through any occupation of the property," and the damage is not fully remediated by "[r]outine cleaning and disinfection alone." Id. Because of the nature of its health care operations, the presence of the COVID-19 virus on Novant's real and personal property "causes a tangible alteration to that property" that "can change the property, including air and the surfaces" so that the property is "unsafe, unfit and uninhabitable for ordinary functional use." Id. at ¶ 40. According to Novant, COVID-19 "transforms air and property into a dangerous and potentially deadly instrumentality," id. at ¶ 50; government authorities have recognized that COVID can cause physical loss and damage to the property of health care providers, id. at ¶ 47; and the virus has caused such physical loss and damage to Novant. See, e.g. , Id. at ¶¶ 36-38, 49, 88.

"Direct physical loss" is not defined in the Policy. Even before the pandemic, courts struggled with defining physical loss in insurance policies where the policy left the term undefined, in cases involving asbestos, lead, bacteria, harmful gases, and more.² The lone North Carolina case most directly addressing the meaning of "direct physical loss" was decided at summary judgment, when the facts were more clearly developed.

Harry's Cadillac-Pontiac-GMC Truck Co. v. Motors Ins. , 126 N.C. App. 698, 702, 486 S.E.2d 249, 251–52 (Ct. App. 1997) (holding there was no coverage where insured's losses were caused by its inability to access its building because of a snowstorm, not from damage to the building caused by the snowstorm).

In Summit Hosp. Grp., Ltd. v. Cincinnati Ins. , a court applying North Carolina law dismissed a similar case brought by a hospital against its insurer for COVID-19 related losses at the Rule 12(b)(6) stage, but the allegations in that complaint were quite different. There, the court noted that it "need not decide whether the presence of the coronavirus would satisfy the policy's requirement for direct physical damage or loss because plaintiff has not alleged that COVID-19 was discovered in any of its covered properties." Summit Hosp. , No. 5:20-CV-254-BO, 2021 WL 831013, at *4 (E.D.N.C. Mar. 4, 2021) (appeal filed). Similarly, in the recent Golden Corral Corp. v. Ill. Union. Ins. , the court dismissed a restaurant chain's claim against its insurer for COVID-19 related losses at the Rule 12(c) stage, but there the plaintiff alleged no need for repair, replacement, or even cleaning. No. 5:20-CV-349-D, 2021 WL 4097684, at *8 (E.D.N.C. Sept. 8, 2021). Here, Novant has alleged that COVID-19 is present and continually re-introduced to its properties, despite its best efforts, and that COVID-19 has caused physical damage and losses potentially covered by the Policy. E.g. , Doc. 8 at ¶ 34.

Whether COVID-19 has resulted in direct physical damage or loss to Novant, and if so to what extent, are questions better evaluated on a developed factual record. Novant has adequately alleged direct physical damage or loss, and dismissal on this basis is inappropriate at the Rule...