Susan Spath Hegedus, Inc. v. ACE Fire Underwriters Ins. Co.

538 F.Supp.3d 457

SUSAN SPATH HEGEDUS, INC., d/b/a Kern & Co., and on behalf of those similarly situated, Plaintiff,

v.ACE FIRE UNDERWRITERS INSURANCE COMPANY, Defendant.

CIVIL ACTION No. 20-2832

United States District Court, E.D. Pennsylvania.

Filed May 7, 2021

Kelly K. Iverson, Gary F. Lynch, Carlson Lynch, LLP, Pittsburgh, PA, for Plaintiff.

Daniel M. Petrocelli, Richard B. Goetz, O'Melveny & Myers LLP, Los Angeles, CA, Eric D. Freed, Charles J. Jesuit, Jr., Stephen S. Kempa, Stephen A. Cozen, Cozen & O'Connor, Philadelphia, PA, for Defendant.

MEMORANDUM

Schiller, District Judge

Presently before the Court is Defendant ACE Fire Underwriters Insurance Company's ("ACE") motion to dismiss Plaintiff's Complaint for failure to state a claim upon which relief can be granted. Plaintiff filed a claim for, inter alia , business income coverage from ACE after its retail furniture business was forced to close in March 2020 pursuant to an order issued by the Governor of California in the early days of the COVID-19 pandemic. ACE denied Plaintiff's claim for coverage, and Plaintiff filed suit. This case requires the Court to interpret an "all risk" Businessowners’ Insurance Policy to determine whether Plaintiff has suffered a loss that ACE must cover.

The over-100-page Policy at issue here can only be described as a labyrinth of pages, paragraphs, and pronouncements. The terms of the Policy require the insured to fall down a rabbit hole and wander through a vast thicket of verbiage that would leave even the most careful reader mystified by the mazes of pages to be pieced together and deciphered in order to determine if there is coverage on the other side. For the reasons that follow, Defendant's motion will be denied.

I. FACTUAL BACKGROUND

Plaintiff is a California corporation that operates an interior design/retail furniture business with two locations in California. Plaintiff purchased an "all risk" commercial policy of insurance from Defendant ("the Policy"). (Compl. ¶¶ 13, 16.)

A. Plaintiff's Losses and Claim

In response to the COVID-19 pandemic, on March 4, 2020, Governor Gavin Newsom declared a state of emergency for California. On March 19, 2020, he issued a statewide stay-at-home order, shuttering non-essential businesses. (Id. ¶ 31.) The stay-at-home order permitted exceptions for 16 critical infrastructure sectors identified by the federal government, but Plaintiff's business did not fall within those exceptions. (Id. ¶ 32.) On April 10, 2020, the County of San Diego entered a stay-at-home order, which stated "the actions required by this Order are necessary to reduce the number of individuals who will be exposed to COVID-19, and ... will help preserve critical and limited healthcare capacity in the county and will save lives." (Id. ¶ 33.) On May 7, 2020, Governor Newsom issued an order permitting gradual reopening of the state. (Id. ¶ 34.) Plaintiff's two locations, each located in San Diego County, remained closed from March 20, 2020 until May 22, 2020. (Id. ¶ 42).

Plaintiff filed a claim under the Policy for lost business income and related coverages, and Defendant denied Plaintiff's claim by letter dated April 24, 2020. (Compl. Ex. B [Denial Letter].) Defendant stated that Plaintiff's losses were not covered by the Policy because they did not arise from any direct physical loss or damage and were barred by the Policy's Virus Exclusion. (Compl. ¶ 45.) Here, Plaintiff seeks a declaration that coverage exists under the Policy and seeks damages for Defendant's alleged breach of contract. Plaintiff alleges that the Policy "provides broad property insurance coverage for all non-excluded, lost business income[.]" (Id. ¶ 3.) The Complaint alleges that Plaintiff "has incurred, and continues to incur, among other things, a substantial loss of business income and extra expenses covered under the Policy." (Id. ¶ 43.) Specifically, Plaintiff's allegations are primarily related to coverage for Business Income and Extra Expense, but the Complaint also contains allegations related to the Policy's Additional Coverages for Action of Civil Authority and Business Income from Dependent Properties as "additional bas[e]s for coverage under the Policy[.]" (Compl. ¶¶ 43-49.) Plaintiff's Complaint alleges that the government orders, in and of themselves, caused a loss of business income for which Defendant must pay. (Id. ¶ 46.) Alternatively, Plaintiff alleges, "to the extent the orders themselves are not found to be a Covered Cause of Loss, the COVID-19 pandemic and ubiquitous nature of the coronavirus caused direct physical loss of or damage to the Covered Property." (Id. ¶ 47.) Finally, Plaintiff alleges that the Virus Exclusion does not apply, and/or "does not preclude coverage for Plaintiff's claim under the Policy." (Id. ¶¶ 51-52.)

B. The Motion to Dismiss

Defendant argues that Plaintiff has not alleged a claim that falls within the scope of the Policy coverage because its losses were caused by a virus, which is excluded. "[R]ewriting clear and unambiguous contractual language is not the solution to the extraordinary problems arising from the coronavirus pandemic," Defendant cautions the Court. (Def.’s Mot. to Dismiss at 1.) Defendant argues that Plaintiff cannot amend to avoid the Virus Exclusion, so its Complaint should be dismissed with prejudice. (Id. at 13.) ACE's motion does not address "whether the SARS-CoV-2 virus is in fact capable of causing ‘direct physical loss of or damage to property,’ but [Defendant] reserves the right to do so should that issue become relevant." (Id. at 5 n.3.) Plaintiff's Complaint does not allege the presence of the virus at either of Plaintiff's business locations, so the Court does not consider the precise issue Defendant has reserved to be relevant to disposition of this motion. Moreover, in its reply, Defendant contends that "[a]lthough not the basis of ACE's motion ... California law[ ] holds that physical loss or damage occurs only when property undergoes a ‘distinct, demonstrable, physical alteration.’ " (Def.’s Reply Br. in Supp. Mot. to Dismiss [Def.’s Reply] at 1.)

Plaintiff opposes Defendant's motion to dismiss by arguing the Complaint states a claim for coverage and the virus exclusion does not bar Plaintiff's claims. Plaintiff notes that ambiguous language in insurance policies must be interpreted in favor of the insured and exclusions to coverage must be construed narrowly against the insurer. (Pl.’s Resp. in Opp'n to Def.’s Mot. to Dismiss [Pl.’s Opp'n] at 2.) Plaintiff argues, "[w]hile the virus and its propensities were considerations taken into account by government officials, the causal chain begins, and ends, with the issuance of the closure orders that deprived Plaintiff of its use of its property." (Id. ) Plaintiff argues what caused the loss is a question of fact that should not be decided at this early stage of the litigation. (See id. at 9.) Additionally, according to Plaintiff, if a loss is caused by a combination of covered and excluded causes, coverage exists as long as the covered risk was the most important cause or the "efficient proximate cause" of the loss. (Id. at 11.) Plaintiff further argues that California courts consistently decline to enforce contractual provisions that seek to circumvent the efficient proximate cause doctrine. (Id. at 10-11).

II. STANDARD OF REVIEW

In deciding a motion to dismiss for "failure to state a claim upon which relief can be granted," the Court must accept as true all factual allegations in the complaint and make all reasonable inferences in favor of the plaintiff. Fed. R. Civ. P. 12(b)(6) ; McDermott v. Clondalkin Group, Inc. , 649 F. App'x 263, 266 (3d Cir. 2016). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 557, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). The plausibility requirement "asks for more than a sheer possibility that a defendant has acted unlawfully." Id. When a pleading draws a conclusion that does not logically follow from the alleged facts themselves, the conclusion is not a factual allegation entitled to an assumption of truth. See Morrow v. Balaski , 719 F.3d 160, 165 (3d Cir. 2013).

III. DISCUSSION

The pandemic-era situation presented in this case, as it relates to business losses, is unprecedented in modern history. The economic costs and burdens placed on businesses by the pandemic are enormous. Upon review of the record and the case law, the Court finds that the losses alleged in Plaintiff's Complaint plausibly fall within the scope of the Policy. Further, Defendant has not established that the Virus Exclusion unambiguously applies to or bars coverage for Plaintiff's alleged losses. Thus, its motion will be denied.

To explain how the Court arrived at this decision, first, the Court will review the standard to state a claim for insurance coverage under California law. Next, the Court will explain the general structure and content of the "all risk" Businessowners Policy issued to Plaintiff by Defendant—endeavoring to unravel a spool of string¹ as it traverses the labyrinth in order to map a path through. Then, the Court will explain why, for the purpose of Business Income and related coverages, the language "direct physical loss of or damage to property at the described premises" is ambiguous. Finally, the Court will explain why it rejects Defendant's argument that the Virus Exclusion unambiguously bars coverage for Plaintiff's alleged losses.

A. Stating a Claim for Coverage Under California Law

Defendant contends that California law applies here, because in insurance coverage cases, courts apply the law of "the state which the parties understood was to be the principal location of the insured risk during the term of the policy." (Def.’s Mot. To Dismiss at 8.) For the...