Sanzo Enters., LLC v. Erie Ins. Exch.

182 N.E.3d 393

SANZO ENTERPRISES, LLC, Plaintiff-Appellant

v.ERIE INSURANCE EXCHANGE, Defendant-Appellee

No. 21-CAE-06-0026

Court of Appeals of Ohio, Fifth District, Delaware County.

DATE OF JUDGMENT ENTRY: December 7, 2021

DANIEL SCHLESSINGER, 30 South Wacker Drive, Suite 2200, Chicago, IL 60606, For Plaintiff-Appellant.

DANIEL WOLFF, 1001 Pennsylvania Ave. NW, Washington, D.C. 20004, For Amicus Curiae American Property Cas. Ins. Assn.

KENNETH A. CALDERONE, 3737 Embassy Parkway, Suite 100, Akron, OH 44333, For Defendant-Appellee.

TIMOTHY FITZGERALD, 1111 Superior Avenue, East, Ste. 2500, Cleveland, OH 44114, For Amicus Curiae Ohio Insurance Institute.

JUDGES: Hon. W. Scott Gwin, P.J., Hon. Patricia A. Delaney, J., Hon. Earle E. Wise, J.

OPINION

Gwin, P.J.

{¶1} Appellant appeals the April 30, 2021 judgment entry of the Delaware County Court of Common Pleas granting appellee's motion for judgment on the pleadings.

Facts & Procedural History

{¶2} Appellant Sanzo Enterprises, LLC, d/b/a Play it Again Sports, filed a complaint against Erie Indemnity Company a/k/a Erie Insurance Company on July 28, 2020. Subsequently, the parties filed a "stipulated substitution of party by interlineation," substituting appellee Erie Insurance Exchange as the defendant in the case.

{¶3} The following facts are contained in appellant's complaint.

{¶4} Appellant operates a store in Westerville that sells sports equipment and apparel. In March of 2020, the Governor declared a state of emergency due to the COVID-19 pandemic, and the Ohio Director of Health directed appellant, as a non-essential business, to "cease all activities within the State except minimum basic operations." Appellant depends, in part, on consumers selling their used sports equipment for resale. Due to the Executive Orders ("Orders"), customers were unable to bring their sporting goods to the store, causing inventory of used goods to run low. As a result of the Orders, appellant "suffered severe interruption to the business and critical loss of income."

{¶5} Appellant was insured by appellee's UltraPack Policy for the period of July 31, 2019 to July 31, 2020. Appellant paid all of the premiums due on the policy. The policy is an "all risk" insurance policy. Under the terms of the policy, appellee agreed to "pay for direct physical ‘loss’ of or damage to the Covered Property at the premises." The policy contains an income protection provision, an extra expense provision, and a civil authority provision.

{¶6} Appellant summarized its coverage as follows, "when a peril insured against – such as a global health crisis and governmental shutdown of Plaintiff's business – causes ‘direct physical loss of or damage to’ Plaintiff's property, Defendant is obligated to pay Plaintiff for its loss of income, and the extra expenses it incurs, during the time its business operations are interrupted."

{¶7} Appellant made a claim on April 15, 2020 under the policy for losses suffered as a result of the Orders. Appellee denied coverage on April 21, 2020, stating there was no "direct physical loss to [Plaintiff's] building or business personal property."

{¶8} Appellant alleges in its complaint that it suffered "loss of" and "damage to" its property because appellant and its customers were separated from appellant's business, which greatly reduced appellant's business income. Further, that the events "impaired the value of the business and prevented it from serving its normal function." Appellant further alleges its damages are "physical" because its employees and customers were unable to be physically present on the property, meaning appellant had been physically deprived of its business and property. According to the complaint, "the global pandemic and Executive Orders caused Plaintiff to suffer direct physical loss of and damage to its property because the Executive Orders deprived Plaintiff and consumers of access to its buildings and prohibited Plaintiff from operating its business causing the function and value of Plaintiff's business property to be nearly eliminated or destroyed."

{¶9} Appellant's complaint includes four counts: (1) breach of contract, coverage of property damage claims; (2) breach of contract, civil authority claims; (3) declaratory judgment that the policy was triggered by direct physical loss and/or damage to Plaintiff's property and the property of others of others; and (4) bad faith.

{¶10} Attached to appellant's complaint is the insurance policy and the letter appellee sent to appellant denying coverage.

{¶11} Appellee filed an answer to appellant's complaint on August 26, 2020.

{¶12} Appellee filed a motion for judgment on the pleadings pursuant to Civil Rule 12(C) on October 20, 2020. Appellee argued that, even assuming the truth of the allegations in appellant's complaint, appellant's claims fail as a matter of law because: (1) the business-income and extra-coverage provisions in the policy only apply if the property sustains physical loss or damage, which, under Ohio law, requires a physical alteration of property adversely affecting its structural integrity and the complaint only alleges economic loss, not physical alteration of the property or loss of structural integrity; (2) the policy's civil authority coverage applies only when there is physical damage to property other than the insured's premises and appellant's complaint does not allege damage to property other than its premises, and does not allege any dangerous conditions or prohibited access, and (3) appellant's bad faith claim is meritless.

{¶13} Appellant filed a memorandum in opposition on November 3, 2020. Appellant argued the policy provides separate coverage if there is a "loss of property," and there was a "loss of property" when appellant was deprived of the normal use and functionality of its premises after the Orders shut down its business for two months.

{¶14} In its memorandum in opposition, appellant alleges that it attempted to operate its business curbside while the Orders were in effect, and the Health Department ordered appellant to stop those operations. In a footnote, appellant states, "Sanzo did not include this fact in its Complaint because it did not believe it necessary to plead every fact that supports its claim. Should the Court decide Sanzo may not prove facts that were not pleaded, Sanzo seeks leave to amend its complaint."

{¶15} Appellant also argued in its memorandum in opposition that it properly alleged coverage under the civil authority provision. In a footnote, appellant states, "should the Court find it necessary, Sanzo can amend its Complaint to allege the presence of COVID within one mile of Sanzo's premises. A Google Map search reveals several doctor's offices, a Walgreens, a medical supply store, grocery stores, hair and nail salons * * * within one mile of Sanzo's premises. Due to the widespread nature of the COVID pandemic, it is highly likely that many of those locations had COVID on their premises."

{¶16} Appellee filed a reply on November 10, 2020. Both parties filed notices of supplemental authority.

{¶17} The trial court issued a detailed judgment entry on April 30, 2021, granting appellee's motion for judgment on the pleadings.

{¶18} The court construed the words in the policy in accordance with their ordinary meanings, and found "direct physical loss of or damage to" the insured property means immediate, material, tangible harm to or deprivation of the insured property. The court further found that additional text in the policy supports the interpretation, such as: the extra-expense sub-section stating coverage is triggered by "loss" or "damage to property on the premises described in the Declarations from a peril insured against"; the period of restoration coverage that provides appellee will "pay the cost to repair or replace your covered property and the amount to research, replace, or restore * * *"; the exclusion of "loss or damage caused directly or indirectly by the enforcement of or compliance with any law or ordinance regulating the construction, use, or repair of any property"; and the exclusion of "loss due to delay or loss of market" from income-protection coverage.

{¶19} The trial court also found that the case law applying Ohio law to similar insurance policies supports appellee's interpretation of the policy language, citing the Eighth District case of Mastellone , and citing cases from multiple federal courts in Ohio that rely on Mastellone when interpreting insurance policies under Ohio law to determine whether businesses are entitled to coverage as a result of COVID-19 pandemic orders.

{¶20} The trial court stated appellant has not alleged that the Orders caused any material, tangible, or structural harm to the store. The court determined that the Orders did not physically deprive appellant of access to its store; rather, it prohibited appellant from conducting its usual business during the time period. Further, none of the consequences of the Orders caused material or tangible harm to or deprivation of appellant's store and they only limited how appellant could utilize the store. Appellant maintained possession of the insured premises and appellant has not alleged that there were any material or tangible changes in the condition of the store.

{¶21} The trial court also found the lack of a virus exclusion in the policy unpersuasive to appellant's argument, noting that several courts have applied Ohio law to commercial insurance policies that contain a virus exclusion and have independently found that "direct physical loss of or damage to" insured property requires material, physical harm to the property.

{¶22} The trial court concluded appellant had not alleged sufficient facts to demonstrate it suffered the kind of tangible, material, or structural deprivation of or harm to its store that would trigger coverage under the policy for "direct physical loss of or damage to" the property; thus, appellee is entitled to judgment on appellant's claim for...