Spirit Realty Capital, Inc. v. Westport Ins. Corp.

568 F.Supp.3d 470

SPIRIT REALTY CAPITAL, INC., Plaintiff,

v.WESTPORT INSURANCE CORPORATION, Defendant.

21-CV-2261 (JMF)

United States District Court, S.D. New York.

Signed October 21, 2021

Amber S. Finch, Reed Smith LLP, Los Angeles, CA, Thomas Connor O'Carroll, Reed Smith LLP, San Francisco, CA, Anthony Crawford, Reed Smith LLP, New York, NY, for Plaintiff.

Aidan Middlemiss McCormack, Mark Leslie Deckman, DLA Piper US LLP, New York, NY, for Defendant.

OPINION AND ORDER

JESSE M. FURMAN, United States District Judge:

This case is the latest in an ever-increasing line of insurance coverage disputes arising out of the COVID-19 pandemic. Plaintiff Spirit Realty Capital, Inc. ("Spirit"), a real estate investment trust, brings claims against Defendant Westport Insurance Corporation ("Westport"), challenging the latter's denial of coverage for lost rental income and other losses during the pandemic. Westport now moves, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss Spirit's Complaint, arguing, among other things, that Spirit's losses are not covered because COVID-19 did not cause "physical loss or damage" to any of the insured properties. For the reasons that follow, the Court agrees and therefore grants Westport's motion.

BACKGROUND

Spirit is a real estate investment trust that holds ownership interests in approximately 2,000 commercial properties throughout the United States. ECF No. 1 ("Compl."), ¶ 14. It leases or rents its properties to commercial tenants, which include restaurants, movie theaters, convenience stores, gyms, supermarkets, and the like. Id. ¶¶ 14-15. During the COVID-19 pandemic, many of Spirit's properties were subject to state and local government orders requiring businesses to close to the public or otherwise alter their operations. Id. ¶¶ 25-35. As a result, many tenants were unable to pay rent, causing Spirit to lose in excess of $11 million in rental income alone. Id. ¶¶ 50-51. Spirit alleges that many of its properties "have documented the confirmed presence of COVID-19," id. ¶ 45, and that "Spirit's own employees who work at its headquarters ... have also contracted COVID-19 during the pandemic," id. ¶ 46.

Spirit held an "all-risks" insurance policy from Westport (the "Policy"), which included coverage for the properties in which Spirit holds an ownership interest. Id. ¶ 52. To the extent relevant here, the Policy "insures all risks of direct physical loss or damage to insured property while on insured location(s)." ECF No. 1-1 ("Policy"), at 10; see also id. at 39, 44 (providing "Time Element" coverage for lost profits "directly resulting from direct physical loss or damage insured" by the Policy, including loss of rental income if rental properties suffer "physical loss or damage"). ¹

The Policy also contains "Communicable Disease" provisions, which provide coverage for certain costs (lost profits, "cleanup," and "reputation management") "[i]f an insured location ... has the actual and not suspected presence of a communicable disease and access to the insured location is limited, restricted, or prohibited by ... an order of an authorized governmental agency regulating the actual not suspected presence of communicable disease." Policy 28, 47. The Policy does not, however, insure against "delay or loss of market" or "interruption of business," id. at 53, and it contains certain exclusions, including, as relevant here, for "[l]oss or damage due to the discharge, dispersal, seepage, migration, release or escape of contaminants," id. at 54, including "virus[es]," id. at 69; and loss or damage that consists of "mold, mildew, fungus, spores or other microorganism of any type," id. at 54.

Spirit filed a claim for losses during the pandemic, which Westport denied in full. Compl. ¶¶ 86, 89. This litigation — alleging a claim for breach of contract and seeking a declaratory judgment that Spirit's losses are covered under the Policy, id. ¶¶ 94-107 — followed.

LEGAL STANDARDS

A Rule 12(b)(6) motion tests the legal sufficiency of a complaint and requires a court to determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a plausible claim for relief. See Ashcroft v. Iqbal , 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In reviewing a Rule 12(b)(6) motion, a court is limited to "a narrow universe of materials." Goel v. Bunge, Ltd. , 820 F.3d 554, 559 (2d Cir. 2016). In particular, a court may consider only: (1) "the factual allegations in the ... complaint, which are accepted as true"; (2) "documents attached to the complaint as an exhibit or incorporated in it by reference"; (3) "matters of which judicial notice may be taken"; and (4) "documents either in plaintiff[’s] possession or of which plaintiff[ ] had knowledge and relied on in bringing suit." Roth v. CitiMortgage Inc. , 756 F.3d 178, 180 (2d Cir. 2014) (per curiam) (cleaned up).² To survive such a motion, however, the plaintiff must plead sufficient facts "to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937.³

DISCUSSION

Policy exclusions aside, whether Spirit's claims are covered turns on two questions: (1) whether the claims are for "direct physical loss or damage to Insured Property" and (2) whether the claims fall within the scope of the Policy's Communicable Disease provisions. For the reasons that follow, the Court concludes that the answer to both questions is no.

A. Direct Physical Loss or Damage

First, Spirit fails to plausibly allege that the presence of COVID-19 virus in the air and on surfaces constitutes "direct physical loss or damage to Insured Property" within the meaning of the Policy, as necessary to trigger coverage by Westport. See ECF No. 18 ("Def.’s Mem."), at 13 (emphasis omitted). Spirit concedes, as it must, that "the term ‘physical loss or damage’ does require some form of ‘actual physical damage to the insured premises.’ " Pl.’s Mem. 11; see, e.g. , Roundabout Theatre Co. v. Cont'l Cas. Co. , 302 A.D.2d 1, 7, 751 N.Y.S.2d 4 (2002) (holding that coverage for "direct physical loss or damage" does not include mere "loss of use"); see also Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co. , 17 F. Supp. 3d 323, 331 (S.D.N.Y. 2014) (under New York law " ‘direct physical loss or damage’ ... unambiguously[ ] requires some form of actual, physical damage to the insured premises").⁴ Relying on cases holding that "physical loss or damage" can occur when particulates or other microscopic matter are physically present at a covered property, however, Spirit insists that the necessary "damage need not be structural or visible" to be covered. Pl.’s Mem. 11 (citing Parks Real Est. Purchasing Grp. v. St. Paul Fire & Marine Ins. Co. , 472 F.3d 33, 48 (2d Cir. 2006) ; Port Auth. of New York & New Jersey v. Affiliated FM Ins. Co. , 311 F.3d 226, 236 (3d Cir. 2002) ). And, it continues, the physical presence of COVID-19 at its insured properties suffices.

The Court is unpersuaded. First, the overwhelming weight of precedent, both from lower New York courts and district courts in this Circuit, holds that COVID-19 does not qualify as "physical loss or damage." See, e.g. , 6593 Weighlock Drive, LLC v. Springhill SMC Corp. , 71 Misc.3d 1086, 147 N.Y.S.3d 386, 393 (N.Y. Sup. Ct. 2021) ; Visconti Bus Serv., LLC v. Utica Nat'l Ins. Grp. , 71 Misc.3d 516, 142 N.Y.S.3d 903, 917 (N.Y. Sup. Ct. 2021) ; Sharde Harvey, DDS, PLLC v. Sentinel Ins. Co. , No. 20-CV-3350 (PGG) (RWL), 2021 WL 1034259, at *9 (S.D.N.Y. Mar. 18, 2021) ; DeMoura v. Cont'l Cas. Co. , 523 F. Supp. 3d 314, 321-22 (E.D.N.Y. 2021) ; Social Life Magazine v. Sentinel Ins. Co. , No. 20-CV-3311 (VEC), 2020 WL 2904834 (S.D.N.Y. May 14, 2020). The Second Circuit has not yet ruled on the issue, but several other Circuits have reached the same conclusion under the laws of other states. See Oral Surgeons, P.C. v. Cincinnati Ins. Co. , 2 F.4th 1141, 1145 (8th Cir. 2021) (Iowa law); Gilreath Fam. & Cosm. Dentistry, Inc. v. Cincinnati Ins. Co. , No. 21-11046, 2021 WL 3870697 (11th Cir. Aug. 31, 2021) (per curiam) (Georgia law); Santo's Italian Cafe LLC v. Acuity Ins. Co. , 15 F. 4th 398, 404–05 (6th Cir. 2021) (Ohio law); Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am. , 15 F. 4th 885, 892–93 (9th Cir. 2021) (California law).

Spirit argues that this avalanche of authority is distinguishable because it alleges the actual presence of COVID-19 on its properties via "infected droplets" and "fomites," not merely that its properties were rendered unusable by state and local government orders responding to the pandemic. Pl.’s Mem. 12-16; see also Compl. ¶¶ 45-46 (alleging the confirmed presence of COVID-19 at Spirit properties). But in the cases on which Spirit relies, the particulates or other microscopic matter at issue caused alterations to the property that persisted over time. See Parks Real Est. Purchasing Grp. , 472 F.3d at 36 (noting that "particulate matter" resulting from the collapse of the World Trade Center "penetrated the Building and settled in its mechanical and electrical systems" and caused damage); Port Auth. of New York & New Jersey , 311 F.3d at 232 ("When the presence of large quantities of asbestos in the air of a building is such as to make the structure uninhabitable and unusable, then there has been a distinct loss to its owner."). Here, by contrast, there is no allegation that COVID-19 "penetrated" the property or rendered it "unhabitable"; Spirit merely alleges that the virus was present on surfaces in some of its properties temporarily.⁵ As Judge Rakoff has observed, "the coronavirus — unlike invisible fumes and chemicals — does not ‘persist’ and irreversibly alter the...