Sagome, Inc. v. Cincinnati Ins. Co.

56 F.4th 931

SAGOME, INC., d/b/a L'Hostaria, Plaintiff - Appellant,

v.The CINCINNATI INSURANCE COMPANY, Defendant - Appellee.

United Policyholders; American Property Casualty Insurance Association, Amici Curiae.

No. 21-1359

United States Court of Appeals, Tenth Circuit.

FILED January 3, 2023

Bradley A. Levin (Susan S. Minamizono with him on the briefs), Levin Sitcoff Waneka PC, Denver, Colorado, for Plaintiff-Appellant.

Daniel G. Litchfield (Alan I. Becker and Michael P. Baniak, Litchfield Cavo LLP, Chicago, Illinois, and Conor P. Boyle, Hall & Evans LLC, Denver, Colorado, with him on the brief) for Defendant-Appellee.

Timothy M. Garvey, McDermott Law, LLC, Denver, Colorado, filed an Amicus Curiae Brief for United Policyholders, in support of Appellants.

Laura A. Foggan, Crowell & Moring LLP, Washington, DC, and Wystan Ackerman, Robinson & Cole LLP, Hartford, Connecticut, filed an Amicus Curiae Brief for American Property Casualty Insurance Association in support of Appellee.

Before HARTZ, TYMKOVICH, and MATHESON, Circuit Judges.

TYMKOVICH, Circuit Judge.

Like many businesses during the COVID-19 pandemic, Sagome, Inc.’s restaurant, L'Hostaria, suffered significant financial losses from reduced customer traffic and government lockdowns and restrictions. And like many businesses, it sought to recover under its comprehensive general insurance policy. And like many insurers, The Cincinnati Insurance Company denied coverage because the virus did not impose physical loss or damage as required by the policy.

Sagome sued, but the district court concluded its financial losses were not covered. Addressing Sagome's coverage under Colorado law, we agree and affirm. COVID-19 did not cause Sagome to suffer a qualifying loss because there was never any direct physical loss or damage to L'Hostaria.

I. Background

Sagome operated L'Hostaria in Aspen, Colorado. Cincinnati insured Sagome throughout 2020. The insurance policy provided Cincinnati would "pay for direct ‘loss’ " to Sagome's covered property "caused by or resulting from any Covered Cause of Loss."¹ Supp. App. 30. In turn, " ‘Loss’ mean[t] accidental physical loss or accidental physical damage ." Supp. App. 65 (emphases added). The policy did not define "physical loss" or "physical damage."

Additionally, the policy provided that Cincinnati would pay for lost business income if Sagome suspended operations during a "period of restoration" if the suspension was "caused by or result[ed] from a Covered Cause of Loss."² Supp. App. 45 (internal quotation marks omitted). The "period of restoration" ended when the property "should be repaired, rebuilt or replaced with reasonable speed and similar quality," when business "resumed at a new permanent location," or on a specified date, whichever occurred first.³ Supp. App. 68. And the policy included civil authority coverage that was triggered when a covered loss damaged other property, causing the government to prohibit access to Sagome's property.⁴

COVID-19 struck in March 2020, and the resulting government orders caused Sagome to temporarily close. It was able to reopen in late April with limited curbside pickup and outdoor dining, and it could later operate limited indoor dining.

Sagome provided timely notice of its losses to Cincinnati, which denied coverage. Sagome sued, alleging breach of contract, bad faith, and violation of Colorado insurance law. It also sought a declaratory judgment that its losses were covered.

Cincinnati successfully moved for Rule 12(b)(6) dismissal. Fed. R. Civ. P. 12(b)(6). The district court concluded COVID-19 did not physically damage Sagome's property. And "because no neighboring properties suffered physical loss triggering coverage," Sagome was not entitled to civil authority coverage. App. 86. Deeming any amendment futile, the court dismissed with prejudice.

II. Analysis

Sagome contends the insurance policy covered losses resulting from the COVID-19 pandemic. According to Sagome, it is entitled to coverage because physical loss or damage includes loss of use when property is rendered unsafe and dangerous. As we explain, this reading does not comport with the policy's plain language and is not compelled by Colorado law.

A. The Policy

As an initial matter, whether COVID-19 causes direct physical loss or damage under a property insurance policy is an open question in Colorado.⁵ Relying on relevant precedent from Colorado and other jurisdictions, we answer that question in the negative and conclude Sagome was not covered.

We review a Rule 12(b)(6) dismissal de novo and apply the same standards as the district court. Mayfield v. Bethards , 826 F.3d 1252, 1255 (10th Cir. 2016). To survive, "a complaint must allege facts that, if true, state a claim to relief that is plausible on its face." Id. (internal quotation marks omitted). We view the alleged facts "in the light most favorable to the plaintiff." Id. Because the policy covers a Colorado restaurant, we apply Colorado law. See Berry & Murphy, P.C. v. Carolina Cas. Ins. Co. , 586 F.3d 803, 808 (10th Cir. 2009).

Under Colorado law, "[w]e construe an insurance policy according to principles of contract interpretation," giving effect to the parties’ intentions and reasonable expectations. Hoang v. Assurance Co. of Am. , 149 P.3d 798, 801 (Colo. 2007). We enforce the policy's plain language unless it is ambiguous, which occurs when "it is susceptible to more than one reasonable interpretation." Id.

In another COVID-19 case, we recently addressed the meaning of "direct physical loss" under Oklahoma law. Goodwill Indus. of Cent. Okla., Inc. v. Phila. Indem. Ins. Co. , 21 F.4th 704 (10th Cir. 2021), cert. denied , ––– U.S. ––––, 142 S. Ct. 2779, 213 L.Ed.2d 1017 (2022). There, Goodwill Industries sought to recover under similar policy language after it closed stores to comply with government orders. Id. at 708. Relying on dictionary definitions, we concluded "a ‘direct physical loss’ requires an immediate and perceptible destruction or deprivation of property." Id. at 710. But since COVID-19 did not destroy any property, and Goodwill Industries "never lost physical control of its buildings or merchandise from its stores," we found no coverage. Id. A contrary conclusion would have required us to improperly "ignore the word ‘physical.’ " Id. at 711. We noted the policy's period of restoration clause bolstered our conclusion because Goodwill Industries "had nothing to repair, rebuild, or replace before it could resume operations." Id. To the contrary, it "simply had to wait until the government lifted the restrictions." Id.

Sagome posits a few reasons why Goodwill Industries is inapplicable. First, it asserts the Goodwill Industries court was not bound by the relevant Colorado precedent of Western Fire Insurance Co. v. First Presbyterian Church , 165 Colo. 34, 437 P.2d 52 (1968). But as we explain below, Western Fire does not compel a different result. Second, it asserts Goodwill Industries did not allege the virus was on its premises. The pertinent question, however, is not simply whether COVID-19 was present, but whether it caused physical loss or damage. Third, Sagome notes that unlike its policy, Goodwill Industries’ policy contained a virus exclusion. True, but we only analyzed the exclusion as an alternative basis for finding no coverage. Goodwill Indus. , 21 F.4th at 712. Finally, Sagome asserts the Colorado Supreme Court takes a more skeptical approach to insurance contracts than the Oklahoma Supreme Court. But both Colorado and Oklahoma law require us to give an unambiguous policy term its plain, ordinary meaning. See Hoang , 149 P.3d at 801 ; Bituminous Cas. Corp. v. Cowen Constr., Inc. , 55 P.3d 1030, 1033 (Okla. 2002). And doing so here establishes COVID-19 did not cause direct physical loss. It did not destroy Sagome's property. Goodwill Indus. , 21 F.4th at 710. And Sagome's "temporary inability to use its property for its intended purpose"—a fully-functioning restaurant—was not a qualifying loss. Id. at 711.

For the same reasons, Sagome did not suffer "direct physical damage." Webster's Third New International Dictionary (2002) defines "direct" as "marked by absence of an intervening agency, instrumentality, or influence: immediate"; "physical" as "of or relating to natural or material things as opposed to things mental, moral, spiritual, or imaginary"; and damage as "injury or harm to person, property, or reputation."

For Sagome to be covered, COVID-19 had to injure or harm its property in some physical manner. But Sagome did not—and could not—plead such damage, because COVID-19 does not physically injure or harm property. Most courts have agreed that this type of policy language does not cover COVID-19 losses. See, e.g. , Dukes Clothing, LLC v. Cincinnati Ins. Co. , 35 F.4th 1322, 1328 (11th Cir. 2022) (Alabama law) (finding the insured "did not state a claim that COVID-19 caused physical damage to its property because (1) COVID-19 does not physically alter the property it rests on; and (2) COVID-19 particles can be removed from a surface by standard cleaning measures"); Ferrer & Poirot, GP v. Cincinnati Ins. Co. , 36 F.4th 656, 660 (5th Cir. 2022) (per curiam) (Texas law) (internal quotation marks omitted) ("While COVID-19 has wrought great physical harm to people, it does not physically damage property within the plain meaning of physical."); Verveine Corp. v. Strathmore Ins. Co. , 489 Mass. 534, 184 N.E.3d 1266, 1276 (2022) (internal quotation marks omitted) (concluding COVID-19's "mere presence does not amount to loss or damage to the property").

In defining "physical loss" and "physical damage," Sagome primarily relies on the fact that the virus is physical in the sense it is tangible, attaches to property, and causes disease. But that interpretation improperly isolates "physical" from "loss" and "damage." See U.S. Fid. & Guar. Co v. Budget Rent-A-Car Sys., Inc. , 842 P.2d 208, 213 (Colo. 1992). For coverage, the loss or damage itself must be physical,...