Starr Surplus Lines Ins. Co. v. Eighth Judicial Dist. Court of Nev.

535 P.3d 254

STARR SURPLUS LINES INSURANCE CO., Petitioner,

v. The EIGHTH JUDICIAL DISTRICT COURT of the State of Nevada, IN AND FOR the COUNTY OF CLARK; and the Honorable Mark R. Denton, District Judge, Respondents,andJGB Vegas Retail Lessee, LLC, Real Party in Interest.

No. 84986

Supreme Court of Nevada.

Filed September 14, 2023

Lewis Roca Rothgerber Christie LLP and Daniel F. Polsenberg and Abraham G. Smith, Las Vegas; Clyde & Co US LLP and Amy M. Samberg and Lee H. Gorlin, Las Vegas, for Petitioner.

Latham & Watkins LLP and John M. Wilson, San Diego, California; Lemons, Grundy & Eisenberg and Robert L. Eisenberg, Reno, for Real Party in Interest.

Christian Kravitz Dichter Johnson & Sluga, LLC, and Tyler J. Watson, Las Vegas; Robinson & Cole LLP and Wystan Michael Ackerman, Hartford, Connecticut, for Amicus Curiae American Property Casualty Insurance Association.

McDonald Carano LLP and Adam D. Hosmer-Henner, Chelsea Latino, and Jane E. Susskind, Reno, for Amicus Curiae Nevada State Medical Association.

Kemp Jones, LLP, and Don Springmeyer, Las Vegas; Reed Smith LLP and David M. Halbreich, Amber S. Finch, Margaret C. McDonald, and Katherine J. Ellena, Los Angeles, California, for Amicus Curiae Panda Restaurant Group, Inc.

Brownstein Hyatt Farber Schreck, LLP, and Frank M. Flansburg, III, Las Vegas; Covington & Burling LLP and Wendy L. Feng, San Francisco, California, for Amicus Curiae Boyd Gaming Corporation.

Pisanelli Bice, PLLC, and James J. Pisanelli and Debra L. Spinelli, Las Vegas; Reed Smith LLP and John N. Ellison and Richard P. Lewis, New York, New York, for Amicus Curiae United Policyholders.

Brownstein Hyatt Farber Schreck, LLP, and Frank M. Flansburg, III, Las Vegas; Latham & Watkins LLP and Brook B. Roberts, John M. Wilson, and Corey D. McGhee, San Diego, California, and Christine G. Rolph, Washington, D.C., for Amicus Curiae Caesars Entertainment, Inc.

Brownstein Hyatt Farber Schreck, LLP, and Frank M. Flansburg, III, Las Vegas, for Amicus Curiae Golden Entertainment, Inc.

Snell & Wilmer, LLP, and Patrick G. Byrne, Las Vegas, for Amicus Curiae Wynn Resorts, Limited.

Kemp Jones, LLP, and Michael J. Gavan, Las Vegas, for Amicus Curiae Hilton Worldwide Holdings, Inc.

Messner Reeves LLP and Renee M. Finch, Las Vegas, for Amici Curiae Bloomin’ Brands, Inc.; Circus Circus LV, LP; Restaurant Law Center; and Treasure Island, LLC.

BEFORE THE SUPREME COURT, EN BANC.

OPINION

By the Court, CADISH, J.:

Real party in interest JGB Vegas Retail Lessee, LLC, owns and operates a retail shopping mall on the Las Vegas Strip. When COVID-19 forced JGB to shut down abruptly, it suffered significant economic losses. It now seeks to recoup those losses under its commercial property insurance policy, arguing that the presence of COVID-19 on the property created the requisite "direct physical loss or damage" covered under the policy. We consider whether that policy provides such coverage. As a matter of law, we conclude it does not.

FACTS AND PROCEDURAL HISTORY

Petitioner Starr Surplus Lines Insurance Co. provides commercial property insurance. JGB, which owns and operates the "Grand Bazaar Shops" (the Shops) on the Las Vegas Strip, is one of Starr's policyholders. The "perils insured against" under the policy's general coverage grant include "all risks of direct physical loss or damage to covered property while at INSURED LOCATIONS occurring during the Term of this POLICY, except as hereinafter excluded or limited."

The policy also includes a business interruption section, providing coverage for "[l]oss directly resulting from necessary interruption of the Insured's NORMAL business operations caused by direct physical loss or damage to real or personal property covered herein, ... arising from a peril insured against hereunder" during the term of the policy and while located at insured locations. In addition, the business interruption coverage extends to losses from interruption by civil or military authority, meaning those losses sustained "when, as a direct result of damage to or destruction of property within" one mile of the Shops "by the peril(s) insured against, access to such described premises is specifically prohibited by order of civil or military authority." This business interruption insurance falls within the policy's time element coverage, which generally permits recovery for "loss resulting from the inability to put damaged property to its normal use." See 5 New Appleman on Insurance Law Library Edition , § 41.01[2][a] (Jeffery E. Thomas, ed., 2022).

Other time element provisions extend coverage even further. Relevant here, this includes coverages like the extra expense, ingress/egress, and rental value endorsements.¹ Though these endorsements provide coverage for various losses, coverage under each one is contingent on the losses being caused by the perils insured against: "direct physical loss or damage to covered property." Moreover, most of these provisions impose a period of indemnity beginning "with the date of direct physical loss or damage by any of the perils covered herein" and ending "on the date when the damaged or destroyed property at the INSURED LOCATION should be repaired, rebuilt or replaced with the exercise of due diligence and dispatch."²

Despite broad coverage, the policy also contains multiple exclusions. The pollution and contamination exclusion, for example, bars coverage for "loss or damage caused by or resulting from any of the following regardless of any cause or event contributing concurrently or in any other sequence to the loss":

1. contamination;

2. the actual or threatened release, discharge, dispersal, migration or seepage of POLLUTANTS at an INSURED LOCATION during the Term of this POLICY ....

Thus, loss or damage caused by pollution or contamination is excluded. And the policy further defines those excluded pollutants or contaminants as including viruses:

The term "POLLUTANTS" or "CONTAMINANTS" shall mean any solid, liquid, gaseous or thermal irritant or CONTAMINANT including, but not limited to, smoke, vapor, soot, fumes, acids, alkalis, chemicals, virus, waste, (waste includes materials to be recycled, reconditioned or reclaimed) or hazardous substances as listed in the Federal WATER Pollution Control Act, Clean Air Act, Resource Conservation and Recovery Act of 1976, and Toxic Substances Control Act, or as designated by the U.S. Environmental Protection Agency.

The COVID-19 pandemic began a few months into the policy term, during which the SARS-CoV-2 virus rapidly spread infection throughout the country. As a result, several of JGB's tenants closed their businesses, and by March 2020, Nevada's Governor mandated that all nonessential businesses close to prevent the virus's spread. (Restaurants, we note, were allowed to provide take-out and delivery services during the shutdown.) By June 2020, the Shops were allowed to reopen, subject to restrictions designed to reduce the spread of the virus. Some of JGB's tenants never reopened.

The closures resulted in economic strife for both JGB and its tenants. Reopening required additional expenses, too: JGB and its tenants installed sanitizer stations, social-distancing signs, and plexiglass and performed regular cleanings to reduce the chance of spreading the virus at the Shops. Amidst the closures and accompanying economic troubles, JGB filed a claim with Starr. It sought coverage for lost business income, extra expenses, and any other applicable coverage "[i]n connection with the recent shutdowns, closures, and other directives."

Starr later responded to JGB's claim with a reservation of rights letter, raising concerns about whether coverage existed. Thereafter, JGB filed suit against Starr for breach of contract, declaratory judgment, violations of the Nevada Unfair Claims Practices Act, and breach of the covenant of good faith and fair dealing The complaint chiefly alleged that it was "highly likely" that COVlD-19 was present on the premises of the Shops, "thus damaging the property that JGB leased to its tenants" and warranting business interruption and other time element coverage under the policy. Meanwhile, Starr formally denied JGB's claim.

Discovery proceeded revealing (1) how the COVID-19 virus spreads in aerosolized form: (2) that SARS-CoV-2 is a physical particle that can deposit onto property for several days, which can then transmit from the infected property as a "fomite"; (3) confirmed cases of COVID-19 at the Shops and statistical modeling indicating a strong likelihood that individuals with COVID-19 were at the Shops before and after the Governor's first closure order; (4) the associated likelihood that these infected individuals rapidly redeposited. SARS-CoV-2 onto the Shops’ property; and (5) various measures used by JGB and its tenants to reduce the chance of catching or spreading the virus. Nevertheless, Starr moved for summary judgment, arguing that the presence of COVID-19 did not amount to the "direct physical loss or damage" needed for coverage as a matter of law. It added that loss of use cannot qualify because it is mere economic loss. Further, Starr argued that coverage for loss or damage caused by a "virus" was precluded under the policy's express exclusions.

In opposition, JGB argued that the plain and ordinary meaning of "direct physical loss or damage" mandated coverage. JGB pointed to its undisputed scientific evidence showing that the SARS-CoV-2 virus is a physical particle that can "land on and attach to property and last for days," can "remain infectious while suspended in air as well as on property," and cannot be removed with routine cleaning. Collectively, it contended that this evidence indicated how the virus both damaged the Shops and rendered the Shops unsafe for their purpose, so as to amount to "direct physical loss or damage."

Following a hearing, the district court granted the motion in part and denied it in part. It concluded that "whether COVID-19, or the virus that causes it, does or does not...