Opinion
CV-21-00135-TUC-DCB (EJM)
02-22-2022
TMC Healthcare, Plaintiff, v. Continental Casualty Company, Defendant.
REPORT AND RECOMMENDATION
ERIC J. MARKOVICH, UNITED STATES MAGISTRATE JUDGE
Pending before the Court is Defendant Continental Casualty Company's Motion to Dismiss. (Doc. 20). Pursuant to the Rules of Practice of this Court, this matter was referred to the undersigned for a Report and Recommendation. (Doc. 10). The motion has been fully briefed, and the Court finds that oral argument would not aid its decision on this matter. See LRCiv 7.2(f). For the reasons stated below, the Magistrate Judge recommends that the District Court enter an ordering granting Defendant's Motion to Dismiss.
I. FACTUAL AND PROCEDURAL BACKGROUND
This insurance contract dispute arises out of Defendant Continental Casualty Company's (“Continental”) denial of coverage for Plaintiff TMC Healthcare's (“TMCH”) alleged losses arising from the SARS-CoV-2 virus (the “Coronavirus”) and the disease that it causes, Coronavirus Disease 2019 (“COVID-19”), and the alleged direct physical loss of or damage to property and business interruption they caused under the commercial property insurance policy Continental sold to TMCH (the “Policy”). (Doc. 17 ¶ 1). The Policy is an “all-risk policy” that provides coverage for all covered causes of loss, including direct physical loss or direct physical damage, unless the loss is specifically excluded or limited in the Policy. Id. ¶¶ 1, 6. TMCH alleges it is entitled to coverage under various policy provisions, including the Business Interruption (Gross Earnings) coverage, Extra Expense coverage, Denial of Access by Civil Authority and Ingress-Egress coverage, Contingent Business Interruption coverage, and Disease Contamination coverage. Id. at 46-50.
On May 5, 2020 TMCH gave notice to Continental of its losses from the Coronavirus and COVID-19. Id. ¶ 198. Continental issued letters on June 18, 2020 and August 12, 2020 denying coverage for TMCH's claims under the Policy and asserting that “TMCH has not reported any ‘direct physical loss of or damage to' to the properties for which TMCH has submitted claims.” Id. ¶¶ 201-03.
On February 26, 2021 TMCH filed suit in Pima County Superior Court, and on March 29, 2021 Continental removed the case to this Court. (Doc. 1). TMCH filed its First Amended Complaint (“FAC”) on May 14, 2021 and asserts two claims for relief: 1) a declaratory judgment pursuant to Fed.R.Civ.P. 57 and 28 U.S.C. § 2201 stating that the Policy covers the losses TMCH suffered and that Continental is responsible for fully and timely paying TMCH's claim; and 2) breach of contract for Continental's denial of TMCH's claim, and breach of the duty of good faith and fair dealing for Continental's failure to investigate TMCH's claim. (Doc. 17 at 58-59). TMCH alleges damages exceeding $60 million arising from the direct physical loss of or damage to its property caused by Coronavirus and COVID-19. Id. ¶ 4.
On June 11, 2021 Continental filed its motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6). (Doc. 20). Continental alleges that TMCH's FAC fails to state a valid claim for three reasons:
1. Under the Policy and applicable law, Plaintiff can recover only if it shows: direct physical loss of or damage to property at a location insured under the Policy; to property owned or operated by a supplier, customer, or dependent third-party; or to property within five miles of the insured location. Plaintiff does not plausibly allege any such physical loss or damage.
The overwhelming majority of courts have dismissed nearly identical claims, concluding the pandemic and associated governmental orders limiting business activities do not trigger coverage under insurance policies requiring direct physical loss of or damage to property;
2. Plaintiff does not plausibly allege a claim for breach of the duty of good faith and fair dealing because it is premised entirely on the false assumption Plaintiff is entitled to coverage under the Policy. Further, Plaintiff does not allege any facts supporting Plaintiff's conclusory allegations that Continental failed to investigate the claim; and
3. Plaintiff does not plausibly allege a declaratory judgment claim because that claim is duplicative of its breach-of-contract claim. Because Plaintiff's contract claim resolves all the issues identified in the declaratory judgment claim against Defendant, Plaintiff's declaratory judgment claim fails.Id. at 2-3. Continental further states that because TMCH fails to allege a claim within the Policy's grant of coverage, there is no need to evaluate exclusions; however, the Policy has multiple exclusions that would apply, such as the microbe exclusion. Id. at 24 n.8.
Both parties filed multiple notices of supplemental authority following the briefing of Continental's motion. As this Court has stated, “[t]he purpose of a Notice of Supplemental Authority is to inform the Court of a newly decided case that is relevant to the dispute before it, not a venue for submission of additional argument or factual evidence.” B St. Grill & Bar LLC v. Cincinnati Ins. Co., 525 F.Supp.3d 1008, 1013 (D. Ariz. 2021). Thus, to the extent that the parties have used the notices of supplemental authority to argue outside the pleadings, the undersigned disregards those arguments and recommends that the District Court strike Documents 33, 35, 37, 38, 40, and 41 from the record. See id. However, the undersigned has considered the cases cited by the parties in their notices. While the undersigned does not discuss all of the cases cited by the parties in their pleadings or notices, the undersigned has reviewed and considered the case law in issuing this Report and Recommendation and has cited to the authorities the undersigned finds persuasive.
II. STANDARD OF REVIEW
Pursuant to Fed.R.Civ.P. 12(b)(6), the Court may grant a motion to dismiss when the plaintiff fails to state a claim upon which relief can be granted. A complaint must contain a “short and plain statement of the grounds for the court's jurisdiction, ” a “short and plain statement of the claim showing that the pleader is entitled to relief, ” and “a demand for the relief sought.” Fed.R.Civ.P. 8(a). While Rule 8 does not demand factual allegations, “it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “Threadbare recitals of a cause of action, supported by mere conclusory statements, do not suffice.” Id.
A dismissal for failure to state a claim “is proper only where there is no cognizable legal theory or an absence of sufficient facts alleged to support cognizable legal theory.” Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001) (internal citation omitted); see also Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir. 1980) (Rule 12(b)(6) dismissal motion “can be granted only if it appears beyond doubt that the plaintiff can prove no set of facts in support of his or her claim.”). However, “the court [is not] required to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001).
To survive a motion to dismiss under Rule 12(b)(6), a pleading must allege facts sufficient “to raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). A claim must be plausible, allowing the court to draw the reasonable inference that the defendant is liable for the conduct alleged. Iqbal, 556 U.S. at 678. “The plausibility standard is not akin to a ‘probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. (quoting Twombly, 550 U.S. at 557). “Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief.” Iqbal, 556 U.S. at 678.
“In adjudicating a Rule 12(b)(6) motion to dismiss, . . . a court does not resolve factual disputes between the parties on an undeveloped record. Instead, the issue is whether the pleading states a sufficient claim to warrant allowing the [plaintiffs] to attempt to prove their case.” Coleman v. City of Mesa, 230 Ariz. 352, 363 (2012); see also Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001) (“factual challenges to a plaintiff's complaint have no bearing on the legal sufficiency of the allegations under Rule 12(b)(6)”), overruling on other grounds recognized by Jack Loumena v. Walter P. Hammon, 2015 WL 7180679 (N.D. Cal. Nov. 16, 2015). Thus, Continental's motion does not require the Court to make factual determinations regarding TMCH's losses, or whether Continental breached any duty in denying TMCH's claim. The Court only considers whether TMCH has sufficiently stated its claims to justify allowing those claims to move forward.
The Court must view the complaint in the light most favorable to the nonmoving party, with every doubt resolved on his behalf, and with that party's allegations taken as true. See Abramson v. Brownstein, 897 F.2d 389, 391 (9th Cir. 1990). Generally, the court only considers the face of the complaint when deciding a motion under Rule 12(b)(6). See Akhtar v. Mesa, 698 F.3d 1202, 1212 (9th Cir. 2012); Van Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir. 2002). Consideration of matters outside the pleading converts the Rule 12(b)(6) motion to a Rule 56 motion for summary judgment, unless one of two exceptions are met:
First, a court may consider material which is properly submitted as part of the complaint on a motion to dismiss without converting the motion to dismiss into a motion for summary judgment. If the documents are not physically attached to the complaint, they may be considered if the documents' authenticity ... is not contested and the plaintiff's complaint necessarily relies on them. Second, under Fed.R.Evid. 201, a court may take judicial notice of matters of public record.Lee, 250 F.3d at 688-89 (internal quotations and citations omitted); see also Harris v. Cnty. of Orange, 682 F.3d 1126, 1132 (9th Cir. 2012) (“documents not attached to a complaint may be considered if no party questions their authenticity and the complaint relies on those documents”). Here, the undersigned finds that the Court may consider the exhibits attached to the FAC, Continental's motion to dismiss, and TMCH's response, as TMCH's FAC necessarily relies on the documents and no party contests the documents' authenticity, and that by so doing the Court does not convert the motion to dismiss into a motion for summary judgment. However, the Court should decline to take judicial notice of the documents and should consider the documents “not for the truth of the facts recited therein, but for the existence of the [document], which is not subject to reasonable dispute over its authenticity.” Lee, 250 F.3d at 690. ...
III. DISCUSSION
TMCH's claims are premised on the argument that Coronavirus and/or COVID-19 caused direct “physical loss of or damage to property” (“PLOD”) at its covered locations. TMCH's FAC alleges that it experienced PLOD in at least four ways:
(1) over 550 TMCH employees tested positive for COVID-19 and TMCH treated over 3, 128 patients for COVID-19. This demonstrates both the certain or virtually certain presence of COVID-19 and/or the Coronavirus throughout its hospitals, primary and specialty physician practices, and other complementary services, in the air or on surfaces (whether in droplet nuclei, aerosols, droplets or otherwise);
(2) through state, local and agency governmental orders that drastically limited TMCH's use of its property (including, but not limited to, the prohibition of elective medical care procedures), causing TMCH to lose the normal use and function of its property (in either total or in part);
(3) through the need to modify physical behaviors through the use of social distancing, avoiding confined indoor spaces, and avoiding congregating in the same physical area as others, in order to reduce or minimize the potential for viral transmission; and
(4) through the need to mitigate the threat or actual physical presence of the Coronavirus on door handles, bedsheets, hospital gowns, bed railings, medical equipment, miscellaneous surfaces, in heating and air conditioning systems, and in or on any of the multitude of other places that the Coronavirus has been or could be found.(Doc. 17 ¶ 33). In its response to Continental's motion to dismiss, TMCH argues that its covered losses were caused by:
(i) the presence of Coronavirus and COVID-19 in and on TMCH's premises (hospitals, urgent care centers, and physicians' offices), which physically altered and damaged the air, rendering the property uninhabitable and unfit, in whole or in part, for its ordinary uses; and (ii) the government slowdown and closure orders issued in recognition of the presence of the virus that caused a physical loss of the property . . . .(Doc. 21 at 2); see also id. at 6-8 (alleging PLOD based on presence of Coronavirus on TMCH's property, Coronavirus/COVID-19 creating dangerous property conditions, and government orders causing loss of TMCH's property by limiting use of property); Id. at 16 (“The Presence of Hazardous/Toxic/Noxious Substances in Indoor Air-like Communicable Disease-Causes Physical Loss of or Damage to Property”); Id. at 23 (“The Government Orders Also Caused PLOD to TMCH's Property”). TMCH contends that the damages it sustained as a result of the PLOD caused by the Coronavirus and COVID-19 are covered under the Policy and, as such, Continental wrongly denied coverage for TMCH's claim and breached its duty of good faith and fair dealing by failing to conduct any investigation of the claim. Id. at 30-31.
The orders TMCH relies on are Executive Orders issued by Arizona Governor Doug Ducey, including the March 19, 2020 Order prohibiting all non-essential or elective surgeries, the March 26, 2020 Order requiring hospitals to increase bed capacity and optimize staffing levels, and the March 30, 2020 Order restricting Arizonans from leaving their homes for non-essential activities. (Doc. 17 ¶¶ 139-41).
See also id. ¶ 205 (TMCH alleges it has met the Policy's requirement of PLOD to its covered property based on these four factors).
Continental's position is that “[a]lthough COVID-19 is a dangerous condition that harms human health, it does not cause ‘direct physical loss of or damage to property' and, therefore, does not trigger coverage under a commercial property insurance policy like [TMCH's].” (Doc. 28 at 3). Continental argues that the Policy only provides coverage for lost business income when there is direct PLOD that causes a necessary interruption to the insured's business. (Doc. 20 at 2). Continental contends that TMCH does not plausibly allege any such physical loss or damage because TMCH's claims are based on local government restrictions that were implemented to reduce the impact of the pandemic and which economically impacted TMCH's business, but there was no physical alteration of TMCH's property. Id.; see also id. at 4 (“Nowhere in the FAC does Plaintiff allege any tangible alteration or damage to the physical property of any Covered Location.”). Continental further contends that even taking TMCH's allegations as true- that the presence of COVID-19 on its property and the limitations and requirements imposed by government orders limiting use of its property constitute direct PLOD- TMCH fails to present a plausible claim under the Policy because TMCH has not alleged a direct physical loss of or damage to property. Id. at 10. Continental alleges that the overwhelming majority of courts, including courts in this district, have dismissed claims similar to TMCH's and concluded that pandemic-related government orders do not trigger coverage under policies requiring direct PLOD, and that the weight of cases hold that PLOD requires “actual physical damage” to trigger coverage. Id. at 2, 11-17. Continental further argues that because TMCH fails to plead a plausible claim based on PLOD, TMCH's breach of the duty of good faith and fair dealing claim also fails because it cannot allege facts showing Continental acted unreasonably in denying TMCH's claim. Id. at 24.
After a careful review of the pleadings, and for the reasons explained below, the undersigned recommends that the District Court enter an order granting Continental's motion to dismiss.
A. Contract Interpretation
“Because this case was brought in federal district court based on this Court's diversity jurisdiction, Arizona law governs the interpretation of the contract.” Border Chicken AZ LLC v. Nationwide Mut. Ins. Co., 501 F.Supp.3d 699, 703 (D. Ariz. 2020).
“The interpretation of an insurance contract, including whether its terms are ambiguous or uncertain, is a question of law for the court to decide.” Thomas v. Liberty Mut. Ins. Co., 173 Ariz. 322, 324 (Ct. App. 1992). “If a policy is subject to ‘conflicting reasonable interpretations,' it is ambiguous.” Teufel v. Am. Fam. Mut. Ins. Co., 244 Ariz. 383, 385 (2018). Where there is ambiguous language, especially in an exclusionary clause, the court will interpret the language in favor of the insured. Thomas, 173 Ariz. at 325. “This rule applies, however, only if a provision is actually ambiguous.” Id. “Where the policy language is clear, a court may not take ‘the easy way out' by inventing ambiguity, and then resolving it to find coverage where none exists under the policy.” Id. (citation omitted).
When the language of an insurance policy is not facially ambiguous, the court must interpret the term “according to its ordinary meaning and effect” and “should examine the language from the standpoint of a person not trained in law or in the insurance business.” Thomas, 173 Ariz. at 325; Evans v. Safeco Life Ins. Co., 916 F.2d 1437, 1441 (9th Cir. 1990) (court must interpret terms of an insurance policy “in an ordinary and popular sense as would a [person] of average intelligence and experience” (alteration in original) (citation omitted)). “Generally, the insured bears the burden to establish coverage under an insuring clause, and the insurer bears the burden to establish the applicability of any exclusion.” Keggi v. Northbrook Prop. & Cas. Ins. Co., 199 Ariz. 43, 46 (Ct. App. 2000). Additionally, “[a]n insurer may limit its liability by imposing conditions and restrictions as long as those restrictions are not contrary to public policy.” Border Chicken, 501 F.Supp.3d at 703-04 (citation omitted).
Finally, “Arizona follows the principle of construction that, where various jurisdictions reach different conclusions as to the meaning, intent, and effect of the language of an insurance contract, a strong indication of ambiguity is established.” Fire Ins. Exch. v. Berray, 143 Ariz. 429, 432 (Ct. App. 1983), approved as modified, 143 Ariz. 361 (1984).
i. Physical Loss of or Damage to Property
Of material importance in the present case is the definition of “direct physical loss of or damage to property.” The Policy provides that: “Except as hereafter excluded and subject to the LIMITS OF LIABILITY in Section I.4. and all other policy provisions, this policy insures against risks of direct physical loss of or damage to property and/or interests described herein at covered Locations.” (Doc. 17 Ex. 1 at 20). Thus, if the presence of Coronavirus and COVID-19 on TMCH's property or the government orders limiting TMCH's use of its property do not constitute PLOD, TMCH cannot state a claim under any of the Policy's provisions.
The Policy's glossary does not define PLOD. As this Court recently noted, “[t]he phrase, ‘direct physical loss of or damage,' is infamously undefined in insurance policies.” Team 44 Restaurants LLC v. Am. Ins. Co., 2021 WL 4775106, at *2 (D. Ariz. Oct. 13, 2021). TMCH contends that the terms “physical, ” “loss, ” and “damage” are susceptible to more than one meaning and as such must be construed against Continental and in favor of TMCH. (Doc. 21 at 13). The undersigned disagrees.
The ordinary meaning of “physical” is “[o]f, relating to, or involving material things; pertaining to real, tangible objects.” Physical, BLACK'S LAW DICTIONARY (11th ed. 2019). “Loss” is “[t]he amount of financial detriment caused by . . . an insured property's damage, for which the insurer becomes liable” or “[t]he failure to maintain possession of a thing.” Loss, Id. An “actual loss” is “[a] loss resulting from the real and substantial destruction of insured property, ” Actual loss, Id., while a “total loss” is “[t]he complete destruction of insured property so that nothing of value remains and the subject matter no longer exists in its original form, ” Total loss, Id. “Damage” is “[l]oss or injury to . . . property; esp., physical harm that is done to something.” Damage, Id. “The requirement that the loss be ‘physical,' given the ordinary definition of that term, is widely held to exclude alleged losses that are intangible or incorporeal and, thereby, to preclude any claim against the property insurer when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property.” 10A Couch on Insurance § 148:46 (3d ed. 2020); see also Circle Block Partners, LLC v. Fireman's Fund Ins. Co., 2021 WL 3187521, at *4 (S.D. Ind. July 27, 2021) (“The adjectives ‘direct' and ‘physical' modify the noun ‘loss,' so the loss (harm or privation) must be both ‘direct' (marked by absence of an intervening force) and ‘physical' (of or relating to a material thing). As a result, ‘direct physical loss' to property requires a harmful alteration in the appearance, shape, color, composition, or other material dimension of the property . . . .” (citation omitted)), appeal filed, (7th Cir. Aug. 10, 2021); Dukes Clothing, LLC v. Cincinnati Ins. Co., 2021 WL 1791488, at *3 (N.D. Ala. May 5, 2021) (“both loss and damage to property must be ‘physical,' which is defined as ‘of or relating to matter or the material world; natural; tangible, concrete'” (quoting Physical, Oxford English Dictionary)), appeal filed, (11th Cir. June 8, 2021).
Here, the undersigned finds that giving the phrase “PLOD” its ordinary meaning and effect requires that there must be some actual, tangible, physical damage or alteration to the property. For example, “physical loss of' a property that is completely destroyed by fire, or “physical damage to” a property that is partially destroyed by fire. While TMCH contends that Continental could have included a structural alteration requirement in the Policy if it intended that both “loss” and “damage” must be physical, (Doc. 21 at 15), such language is unnecessary because there is no ambiguity in the phrase “PLOD” requiring a physical alteration to the property. See Michael Cetta, Inc. v. Admiral Indem. Co., 506 F.Supp.3d 168, 180 (S.D.N.Y. 2020) (concluding that “the terms ‘loss' and ‘damage' are not superfluous” where “‘loss' would extend to the complete destruction of property, whereas ‘damage' contemplates a lesser injury”); Crescent Plaza Hotel Owner L.P. v. Zurich Am. Ins. Co., 520 F.Supp.3d 1066, 1070 (N.D. Ill.) (the “plain wording of the phrase [direct physical loss or damage] requires either a permanent disposition of the property due to a physical change (‘loss'), or physical injury to the property requiring repair (‘damage')”), aff'd, 20 F.4th 303 (7th Cir. 2021); see also Dino Drop, Inc. v. Cincinnati Ins. Co., 544 F.Supp.3d 789, 797-98 (E.D. Mich. 2021) (“Most courts have held that ‘loss' and ‘damage' are distinguishable concepts even if they require tangible alteration to property, as [t]he ordinary usage of these terms . . . can only be reasonably construed as extending to events that impact the physical premises completely (loss) or partially (damage).” (alteration in original) (internal quotations and citation omitted)), appeal filed, 6th Cir. July 16, 2021); Dukes Clothing, 2021 WL 1791488 at *3 (“The court must read loss and damage as having distinct meanings so that neither term is superfluous. The court therefore interprets ‘damage' to be a lesser harm than ‘loss,' which results in total ruin.”); Malaube, LLC v. Greenwich Ins. Co., 2020 WL 5051581, at *7 (S.D. Fla. Aug. 26, 2020) (explaining that “‘direct physical' modifies both ‘loss' and ‘damage, '” so “any ‘interruption in business must be caused by some physical problem with the covered property'” (citation omitted)).
TMCH further contends that the “[dictionary definitions of the terms ‘physical' and ‘loss' establish that ‘physical loss of is reasonably read to encompass a material deprivation of use for a property's intended purpose” and that “there should be no doubt that TMCH was deprived of the full use of its property, and this loss of functionality should trigger coverage and is consistent with a reasonable reading of the policy language.” (Doc. 21 at 13). But whether a term can be “reasonably read” to have a certain meaning is not the standard for contract interpretation. See Border Chicken, 501 F.Supp.3d at 706 (“a policy term is not ambiguous . . . merely because one party assigns a different meaning to it in accordance with his or her own interest” (citation omitted)). Terms must be given their plain and ordinary meaning and the Court may not create ambiguity when the language is clear on its face. As this Court stated in Team 44 Restaurants, while acknowledging the Oklahoma District Court's frustration “that such a highly litigated phrase remains completely undefined in many insurance policies [, ] . . . it seems likely that this phrase remains undefined simply because so many courts find that the plain and ordinary meaning of direct physical loss is actual physical damage, not the loss of access or use.” 2021 WL 4775106 at *4 (emphasis added); see HILLBRO LLC v. Oregon Mut. Ins. Co., 2021 WL 4071864, at *11 (D. Or. Sept. 7, 2021) (“The plain meaning of the policy language and the multitude of cases interpreting identical and similar language make clear that ‘direct physical loss of or damage to property' does not include a loss of use or loss of functionality of undamaged property for its intended purpose.”), appeal filed, (9th Cir. Sept. 28, 2021); see also Dino Drop, 544 F.Supp.3d at 797 (“Were ‘physical loss' to encompass loss of use or functionality . . . the term ‘physical' would be rendered meaningless.”); Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 487 F.Supp.3d 834, 841 (N.D. Cal. 2020) (“some outside physical force must have induced a detrimental change in the property's capabilities before a plaintiff alleging loss of use can establish a ‘direct physical loss of property'”), aff'd, 15 F.4th 885 (9th Cir. 2021); Aggie Invs., L.L.C. v. Cont'l Cas. Co., 2022 WL 257439, at *2 (5th Cir. Jan. 26, 2022) (“Physical loss of property cannot reasonably be interpreted to mean loss of use . . . . Initially, that interpretation would render the adjective ‘physical' meaningless. By including ‘physical,' the policy necessarily contemplates a loss that is nonphysical (and thus excluded).”); Sandy Point Dental, PC v. Cincinnati Ins. Co., 488 F.Supp.3d 690, 693 (N.D. Ill. 2020) (finding direct physical loss “unambiguously requires some form of actual, physical damage to the insured premises to trigger coverage” and reasoning that “[t]he words ‘direct' and ‘physical,' which modify the word ‘loss,' ordinarily connote actual, demonstrable harm of some form to the premises itself, rather than forced closure of the premises for reasons extraneous to the premises themselves, or adverse business consequences that flow from such closure”), aff'dsub nom., 20 F.4th 327 (7th Cir. 2021); Pappy's Barber Shops, Inc. v. Farmers Grp., Inc. (“Pappy's I'), 487 F.Supp.3d 937, 943-44 (S.D. Cal. 2020) (“Under California law, losses from inability to use property do not amount to ‘direct physical loss of or damage to property' within the ordinary and popular meaning of that phrase. Physical loss or damage occurs only when property undergoes a ‘distinct, demonstrable, physical alteration.'” (citations omitted)); contra AC Ocean Walk, LLC v. Am. Guar. & Liab. Ins. Co., Case No. ATL-L-0703-21 (N.J.Super. Ct. Law Div. Atlantic Cnty. Dec. 22, 2021) (Doc. 41 Ex. 2 at 7, 11)(finding “direct physical loss or damage” is ambiguous and that policy language requiring a “‘direct physical loss' to warrant coverage may be satisfied if the property becomes unusable for its intended purpose, whether or not the property is altered by the COVID-19 virus”).
For case opinions not available on Westlaw and included as exhibits to the parties' pleadings, the undersigned cites to the page numbers as stated on the opinion, not the page number of the document in CM/ECF.
The undersigned's conclusion comports with this Court's recent decision in Team 44 Restaurants, wherein the Honorable Judge Humetewa noted that out of the hundreds of cases asking what the phrase “PLOD” means, “nearly every court comes to the same conclusion: it means the policies only cover actual physical damage to the property. Every Arizona court to reach the question agrees.” 2021 WL 4775106 at *2-3.,
See also Whiskey Row Nashville LLC v. Mt. Hawley Ins. Co., Super. Ct., Maricopa Cnty., No. CV 2020-013699, slip. op. at 8 (Sept. 22, 2021), wherein the court concluded that PLOD “requires either physical damage to property or tangible alteration, destruction or deprivation of possession of property.” The court found Nguyen v. Travelers Cas. Ins. Co. of Am., 541 F.Supp.3d 1200 (W.D. Wash. 2021) persuasive, wherein the district court found that COVID-19 does not cause direct physical damage to property because it is an airborne virus that hurts people, not property, and only lives briefly on non-organic surfaces and can be disinfected. The Whiskey Row court quoted Nguyen's reasoning that:
When combined with “direct” and “physical” the Court determines that, in its common usage, “loss” means that the alleged peril must set in motion events which cause the inability to physically own or manipulate the property, such as theft or total destruction.
This reasoning aligns with most of the federal courts who have confronted this question and held that “physical loss of'
requires tangible, material, discernable, or corporeal dispossession of the covered property, which COVID-19 does not cause.
...
In order to trigger coverage under a direct physical loss theory, an outside peril must cause an inability to interact with the property because of an alteration to its physical status. COVID-19, and more specifically the Governor's Proclamations, may have limited the uses of the property by preventing certain indoor activities previously conducted on the premises, but they did not cause dispossession of the buildings, chairs, dental tools, etc. As other courts have adeptly summarized, the “property did not change. The world around it did.”Whiskey Row, slip. op. at 7-8 (quoting Nguyen, 541 F.Supp.3d at 1216-1218 (citation omitted)).
A website has been established to track COVID-19-related commercial insurance coverage cases. The COVID Coverage Litigation Tracker shows that, as of the date of this ruling, the vast majority of the hundreds of cases involving COVID-19 insurance claims have been dismissed with prejudice. https://cclt.law.upenn.edu/judicial-rulings/ Such data belies TMCH's contention that the “dramatic schism in court holdings across the country itself strongly militates in favor of a finding that the undefined phrase ‘physical loss of or damage' is ambiguous under Arizona law.” (Doc. 21 at 23).
ii. The Presence of Coronavirus and COVID-19
The undersigned finds that the presence of Coronavirus and/or COVID-19 on TMCH's property, whether in the air or on surfaces, does not constitute direct PLOD within the meaning of the Policy. This is, at base, a simple question of whether the presence of an infectious virus in the air or on surfaces can cause physical loss of or physical damage to property. The commonsense and plain meaning of “physical” requires that the answer is “no.”
This Court's decision in B Street Grill is instructive. 525 F.Supp.3d. 1008. There, the plaintiff restaurant owners argued that their insurance policy covered lost income and extra expenditures resulting from the State of Arizona's mandate that restaurants suspend in-person dining services due to the COVID-19 pandemic. The plaintiffs alleged that the presence of the virus on or near their properties had rendered the properties unusable and non-functioning for their intended purposes and that the government restrictions had severely limited the functionality and habitability of their properties, thus constituting “direct accidental physical loss or accidental physical damage to their premises” within the policy's scope of coverage. Id. at 1011. In B Street, similar to the present matter, this Court noted that central to the policy was that the loss must be tied to “accidental physical loss or accidental physical damage” to the insured properties. Id. at 1013. The Court found its prior decision in White Mountain persuasive, noting that the language in both policies required physical loss or physical damage to property, and thus found that the policy in B Street “requires actual physical damage to the covered premises as a prerequisite of coverage.” Id. at 1015 (the Court further found that the policy language was unambiguous and “clearly requires direct accidental physical loss or accidental physical damage to property”). The B Street Court further found that the plaintiffs alleged “no facts showing their premises were physically damaged in any way” and thereby rejected plaintiffs' arguments that the presence of the virus on their properties and their lost income due to government COVID-19 restrictions constituted actual physical damage. Id. at 1015-16. The Court reasoned that “[t]he mere fact that Plaintiffs needed to clean surfaces that could host the virus does not constitute actual physical damage entitling them to coverage under the policy[;] Plaintiffs could easily remedy the problem by diligently cleaning, and clearly no repairs were needed.” Id. at 1016. The Court further noted that its decision “comports with that of Arizona courts interpreting Arizona insurance law and identical policy language[, ]” citing Klos Enterprises wherein the court concluded that “in order for there to be coverage, there must be direct physical loss or damage to the property, ” and was not persuaded that COVID-19 causes property damage by contaminating the property. Id.
White Mountain Comtys. Hosp. Inc. v. Hartford Cas. Ins. Co., 2015 WL 1755372 (D. Ariz. Apr. 17, 2015).
Klos Enterprises, LLC v. Cincinnati Ins. Co., Super. Ct., Maricopa Cnty, No. CV 2020010496 (Feb. 10, 2021).
Similarly, in TP Racing LLLP v. Am. Home Assurance Co., this Court found that the “physical presence of COVID-19 droplets on business premises does not, without more, qualify as direct physical loss or damage to that business.” 2021 WL 4851430, at *3 (D. Ariz. Oct. 13, 2021) (collecting cases), appeal filed, (9th Cir. Nov. 12, 2021). The Court reasoned that “[u]nlike an overtly corrosive, destructive, or otherwise tangibly damaging force or substance, COVID-19 droplets do not materially damage the surfaces upon which they land[, ]” and that plaintiff's “claim that virus droplets ‘structurally change' the surfaces upon which they land is belied by the ease with which the virus may be eliminated from any surface.” Id. at *3-4. The Court thus concluded that “infected individuals and unclean-but easily cleanable-surfaces do not constitute direct physical damage or loss to TP Racing's business premises, nor do these circumstances transform loss of use into direct physical damage or loss.” Id. at *4.
Other recent cases from courts within the Ninth Circuit have found the same. For example, in Unmasked Mgmt., Inc. v. Century-Nat'l Ins. Co., the court rejected the plaintiff restaurant owners' argument that the presence of COVID-19 in the air and on surfaces of their properties was sufficient to meet the requirement under California law that PLOD requires a “distinct, demonstrable, physical alteration” to property for coverage to attach. 514 F.Supp.3d 1217, 1225-26 (S.D. Cal. 2021), appeal filed, (9th Cir. Feb. 5, 2021). Citing cases reasoning that the presence of COVID-19 does not physically alter property because it can be cleaned and disinfected, the court concluded that the presence of COVID-19 could not have damaged plaintiffs' property “within the common understanding of that term.” Id. at 1226 (citation omitted); see also Pappy's Barber Shops, Inc. v. Farmers Grp., Inc. (“Pappy's II'), 491 F.Supp.3d 738, 740 (S.D. Cal. 2020) (“the presence of the virus itself, or of individuals infected [with] the virus, at Plaintiffs' business premises or elsewhere do not constitute direct physical losses of or damage to property”). Cases from other jurisdictions have reached the same conclusion. See, e.g., Circle Block, 2021 WL 3187521 at *6-7 (rejecting argument that PLOD was evidenced by COVID-19 particles attaching to the insured's property, which caused insured to incur expenses for cleaning and disinfecting property, because the policy “requires ‘direct physical loss or damage to property,' not merely a physical substance on property”); L&J Mattson's Co. v. Cincinnati Ins. Co., Inc., 536 F.Supp.3d 307, 314 (N.D. Ill. 2021) (Finding that “the presence of the virus in the air or on surfaces does not constitute physical damage or physical loss” because “[t]he presence of virus in the air does not physically damage any of the property at the premises. Nor does the presence of the virus on surfaces physically damage them.”); Sandy Point Dental, P.C. v. Cincinnati Ins. Co., 20 F.4th 327, 335 (7th Cir. 2021) (affirming district court's dismissal and denial of leave to file amended complaint, reasoning that: “Even if the virus was present and physically attached itself to Sandy Point's premises, Sandy Point does not allege that the virus altered the physical structures to which it attached, and there is no reason to think that it could have done so. While the impact of the virus on the world over the last year and a half can hardly be overstated, its impact on physical property is inconsequential: deadly or not, it may be wiped off surfaces using ordinary cleaning materials, and it disintegrates on its own in a matter of days.”); Dino Drop, 544 F.Supp.3d at 798 (where plaintiffs alleged virus could linger in the air and survive on surfaces for hours to weeks and caused physical alteration to plaintiffs' property by adhering to objects and surfaces, court found that “[t]he mere presence of the virus on the physical structure of the premises does not amount to direct physical loss, as coronavirus does not physically alter the appearance, shape, color, structure, or other material dimension of the property[;]” further, “the virus has no lasting physical impact-rather, it is ephemeral and dissipates within a span of hours to weeks[, ]” and “the virus may be eliminated simply by cleaning and disinfecting surfaces” (internal quotations and citation omitted)).
TMCH cites numerous studies to support its arguments that Coronavirus and COVID-19 create dangerous property conditions because airborne Coronavirus makes indoor air unsafe to breathe, Coronavirus makes objects and surfaces unsafe to touch, and not even extraordinary measures can remove Coronavirus from property. However, whether Coronavirus can “easily by cleaned, ” as Continental contends, or is extremely difficult to clean, as TMCH contends, the question remains whether the presence of Coronavirus or COVID-19 on TMCH's property constitutes physical loss of or damage to the property. As the cases noted above explain, it does not.
The undersigned finds Cinemark Holdings, Inc. v. Factory Mut. Ins. Co., 500 F. Supp. 3d 565 (E.D. Tex. 2021) distinguishable. There, Cinemark alleged that as a direct result of the damage COVID-19 caused to its property, it was forced to close its theaters and incurred business income losses. Id. at 567. The court distinguished Cinemark's claim from another Texas case where the court dismissed an insured's claim alleging PLOD based on COVID-19 and resulting government closure orders because “physical loss” requires a physical alteration of the property and the insured never alleged that COVID-19 entered its property. Id. at 568-69. The Cinemark Holdings court specifically found that Cinemark alleged “a different harm and is governed by different contract terms” because Cinemark alleged that “COVID-19 was actually present and actually damaged the property by changing the contents of the air[, ]” and because Cinemark's policy expressly covered loss and damages caused by communicable disease. Id. at 569. The court thus concluded that Cinemark had met its burden to defeat the defendant's Rule 12(c) motion. While TMCH focuses on Cinemark's allegation that COVID-19 was actually present on its property and damaged the air, equally important to the court's reasoning was that the policy at issue expressly included Communicable Disease Response and Interruption by Communicable Disease provisions, and both parties agreed that “communicable disease” encompassed COVID-19. Cinemark Holdings is thus inapposite here, where TMCH's Policy contains no similar provision, and where the Policy contains a “microbe exclusion” that arguably bars TMCH's claims.
The undersigned likewise finds other cases cited by TMCH from courts outside this District unpersuasive. See, e.g., Goodwill Indus. of Orange Cnty. v. Phila. Indem. Ins. Co., 2021 WL 476268 (Cal. Super. Jan. 28, 2021) (defendant filed demurrer alleging plaintiff failed to state sufficient facts to show direct physical loss to property because Coronavirus and COVID-19 do not physically alter structure; court found complaint sufficiently pled direct physical loss based on allegations that virus physically alters the air and surfaces which it attaches to, that virus was present on plaintiff's property, and that plaintiff had to conduct additional cleaning and sanitation to remove virus from physical surfaces at its property; court stated other California federal cases requiring a physical change or permanent dispossession of property to qualify as direct physical loss were not binding on it and were decided under a different standard); SWV Yankees, LLC v. CNA Financial Corp., No. 20 CV 2155 (Pa. Ct. Common Pleas Lackawanna Cnty. Aug. 4, 2021) (Doc. 30 Ex. 1 at 2-3) (stating that “[l]ong before the COVID-19 pandemic, federal and state courts in Pennsylvania established a ‘reasonable and realistic standard for identifying physical loss or damage' to property in cases ‘where sources unnoticeable to the naked eye' substantially reduce the use of covered property, and declared that an insured may satisfy the ‘direct physical loss or damage' requirement for insurance coverage if the infectious pathogen, disease-causing agent, or contaminant rendered the property ‘useless or uninhabitable,' or the property's functionality is ‘nearly eliminated or destroyed' by that invisible source[, ]” and finding insured sufficiently alleged PLOD under the “physical contamination theory” based on presence of virus on its property that rendered property unsafe and unfit for intended use); Life Time, Inc. v. Zurich Am. Ins. Co., No. 27-CV-20-10599 (Minn. Dist. Ct., Hennepin Cnty. Oct. 7, 2021) (Doc. 34 Ex 1 ¶ 16) (in denying motion to dismiss, court noted that while many courts in other states have required some structural change to show direct PLOD, “that is clearly not the law in Minnesota, as . . . [t]he law here is more nuanced”); Live Nation Ent., Inc. v. Factory Mut. Ins. Co., Case No. LA CV21-00862 JAK (KSx) (C.D. Cal. Feb. 3, 2022) (Doc. 43 Ex. 1 at 8) (recognizing that district courts within the Ninth Circuit have reached different conclusions as to whether the presence of COVID-19 can cause PLOD, but finding that “[t]he position that the presence of COVID-19 is a physical intrusion that affects the integrity of a property is the more persuasive one” and denying insurer's motion for judgment on the pleadings because “[t]he Complaint sufficiently alleges that infectious respiratory droplets, which transmit COVID-19, are physical objects that may alter the property on which they land and remain[, and a]ccepting the allegations in the Complaint as true, it cannot be determined as a matter of law that the presence of COVID-19 in Plaintiff's properties could not cause ‘physical loss or damage to property'”); Regents of Univ. Colo. v. Factory Mut. Ins. Co., Case No. 021CV30206 (Colo. Dist. Ct. Boulder Cnty. Jan. 26, 2022) (Doc. 42 Ex. 1 at 5) (where plaintiff alleged COVID-19 was identified in numerous university buildings, “it is at least plausible to conclude that a property could become so saturated with contaminated objects, aerosols, and droplets, that its buildings were uninhabitable ” (emphasis added)).
The undersigned further rejects TMCH's argument that the presence of COVID-19 should be considered like asbestos, ammonia, and other deadly airborne substances, where courts have found PLOD based on the presence of the substance in the air rendering the property uninhabitable or unfit for its intended use. (Doc. 21 at 16). To do so would make COVID-19 like all other deadly airborne viruses, such as the flu, and would thus render the terms of the Policy meaningless because there is clearly no intent that the Policy would cover the presence of any potentially deadly virus in the air at an insured's property. While the undersigned does not mean to diminish the seriousness of the pandemic or the lives lost, the presence of Coronavirus at a property, whether in the air or on surfaces, like other viruses, does not render the property uninhabitable or unusable. See TP Racing, 2021 WL 4851430 at *4 (rejecting plaintiff's argument that virus particles should be considered like “salmonella, lead, and pesticides, which certain courts have found to cause permanent physical loss” because in those cases the “contaminants all caused either a permanent loss of business property or required the business to fully shut down in order to perform remediations”); Circle Block, 2021 WL 3187521 at *7 (rejecting argument that COVID-19 particles are akin to other substances like bacteria, ammonia, and asbestos that courts have found to satisfy policies requiring physical harm because those cases “generally involve persistent physical contamination that requires repair or replacement, rather than cleaning and disinfecting, to remediate”); Whiskey Row, slip. op. at 9 (court rejected plaintiff's argument that physical damage is not limited to structural harm and noted cases plaintiff relied on involved some tangible impact on or contamination of the premises, such as drywall gasses or ammonia leaking into a property and rendering it uninhabitable); Dino Drop, 544 F.Supp.3d at 800 (“[T]he presence of COVID-19 at the premises is analogous to the presence of virus particles causing influenza or the common cold. Though each virus can be harmful and potentially deadly, no reasonable person would assert that their presence renders property uninhabitable or substantially unusable.”).
Finally, the undersigned rejects TMCH's argument that the need to modify physical behaviors at its properties and mitigate the threat or presence of Coronavirus and COVID-19 on its premises-such as by constructing barriers, modifying ventilation systems, adopting new cleaning procedures, and providing employees with PPE- constitutes PLOD. (Doc. 21 at 19-20). While TMCH contends that these physical modifications deprived it of the ordinary use of its property, it strains credulity to suggest that such modifications fall within the Policy's intent and scope of coverage for direct PLOD. “To provide this type of coverage, the court would, in effect, add terms to the policy, creating a new bargain that has no basis in the written agreement.” Gregorio v. GEICO Gen. Ins. Co., 815 F.Supp.2d 1097, 1106 (D. Ariz. 2011), aff'd, 535 Fed.Appx. 545 (9th Cir. 2013); see TP Racing, 2021 WL 4851430 at *4 (stating that “a commonsense interpretation of ‘alteration' does not equate to physical loss or damage” and finding alterations to business do not evidence that presence of virus caused PLOD); see also Dino Drop, 544 F.Supp.3d at 799 (finding plaintiffs failed to plausibly allege that they engaged in a “period of restoration” because cleaning and disinfecting property and remodeling and reconfiguring spaces “cannot reasonably be considered repairing, rebuilding, or replacing” as required under policy's provision for lost business income); Indep. Rest. Grp. v. Certain Underwriters at Lloyd's, London, 513 F.Supp.3d 525, 535 (E.D. Pa. 2021) (same); Cafe La Trova LLC v. Aspen Specialty Ins. Co., 519 F.Supp.3d 1167, 1181-82 (S.D. Fla. 2021) (rejecting argument that moving furniture and installing partitions is sufficient to trigger coverage for business income losses because suspension of operations was not caused by any physical damage, but rather economic losses were caused by the pandemic and related government orders, and further finding that rearranging of furniture and installation of partitions cannot “reasonably be described as repairing, rebuilding, or replacing” (citation omitted)).
iii. Local Government Orders
The undersigned finds that TMCH fails to allege a plausible claim that it suffered PLOD based on pandemic-related government orders. TMCH relies primarily on three orders issued by Governor Ducey: 1) the March 19, 2020 Order prohibiting all nonessential and elective surgeries to conserve PPE and other resources; 2) the March 26, 2020 Order requiring hospitals to implement emergency preparedness plans, optimize staffing, and increase bed capacity by 50% to ensure Arizonans had access to treatment for COVID-19; and 3) the March 30, 2020 “stay at home” Order restricting Arizonans from leaving their homes for non-essential activities to help slow the spread of COVID-19 and directing businesses to implement social distancing and sanitation measures. (Doc. 20 Exs. 2-4). While these orders may have temporarily limited TMCH's ability to use its property or required changes in the way that it normally operated, they did not cause actual physical loss or damage to TMCH's property within the meaning of the Policy.
As an initial matter, the undersigned notes that the “evacuation or decontamination order” language in the Policy that TMCH relies on specifically and only applies to the Disease Contamination Coverage provision. The Disease Contamination Coverage- Property Damage and Time Element Combined provision of the Health Care Endorsement states that:
If as a result of an evacuation or decontamination order at a location by the National Center for Disease Control, authorized public health official or governmental authority because of the discovery or suspicion of a communicable disease or the threat of the spread of a communicable disease, the Insurer will pay for:
(1) direct physical loss of or damage to covered property; and
(2) the necessary and reasonable costs incurred by the Insured to:
(a) evacuate the contaminated location, if required by the governmental authority;
(b) decontaminate or dispose of contaminated covered property;
(c) test after disposal, repair, replacement or restoration of damaged property is completed; and
(d) pay employee overtime costs associated with providing additional care to patients affected by a communicable disease.(Doc. 17 Ex. 1 at 58). Thus, coverage under this provision requires a decontamination or evacuation order that the government issues at a covered location because of a communicable disease, and then in such a situation, the Policy would cover direct PLOD (and other necessary and reasonable costs as stated in the provision) that results from the government order. TMCH makes an illogical argument that because the Policy contains this provision, the Policy therefore recognizes that communicable disease causes PLOD and that communicable disease is a “peril insured against” that triggers the Policy's coverages. (Doc. 21 at 11-12, 14). This is a gross misstatement of the actual language of the Policy and the Disease Contamination Coverage-Property Damage and Time Element Combined provision, and the undersigned rejects TMCH's argument. See Gregorio, 815 F.Supp.2d at 1106 (“To provide this type of coverage, the court would, in effect, add terms to the policy, creating a new bargain that has no basis in the written agreement.”).
Regardless of whether the Disease Contamination Coverage-Property Damage and Time Element Combined provision applies in this case, which the undersigned does not find, TMCH's argument is that it suffered direct PLOD within the meaning of the Policy based on “the government slowdown and closure orders issued in recognition of the presence of the virus that caused a physical loss of [TMCH's] property.” (Doc. 21 at 2); see also id. at 8-9, 23. The weight of cases addressing this argument holds otherwise.
“Arizona caselaw distinguishes circumstantial loss of use from ‘direct physical loss or damage,' and this distinction is persuasively applied throughout the country.” TP Racing, 2021 WL 4851430 at *4 (collecting cases). This Court has found that pandemic-related closure orders causing temporary loss of use of a business are insufficient to allege direct PLOD. Id. at *5 (citing White Mountain and rejecting cases cited by plaintiff that “physical loss or damage need not be tangible” as “unpersuasive outliers”); see also id. at *4 n.4 (distinguishing Cibus LLC v. Eagle W. Ins. Co., 2021 WL 1566306, at *6 (D. Ariz. Jan. 21, 2021), “in which a magistrate judge in this district reasoned via report and recommendation that suspension of business due to the COVID-19 pandemic could qualify as direct physical loss . . . [because] the district judge that reviewed this magistrate's report declined to adopt [that] portion” of the R&R in Cibus LLC v. Capital Ins. Grp., 2021 WL 1100376, at *2 (D. Ariz. Mar. 23, 2021)); Team 44 Restaurants, 2021 WL 4775106 at *4 (stating that “the Court will join the majority of courts across the country, not only because of the persuasive weight that such a majority carries, but also because of the Court's independent analysis” to conclude that PLOD means “only actual physical damage” and cannot be evidenced by “government action temporarily limiting the use of space”); Accents of Sterling, Inc. v. Ohio Sec. Ins. Co., 2021 WL 2117180, at *3 (D. Mass. May 25, 2021) (applying Arizona contract law and determining that insured's inability to use property due to Governor Ducey's order closing non-essential businesses did “not amount to a ‘physical loss of or damage to' the Property, given the plain meanings of ‘physical loss' or ‘damage.'”).
Numerous other courts agree. See, e.g., Goodwill Indus. of Cent. Okla., Inc. v. Phila. Indem. Ins. Co., 21 F.4th 704, 710 (10th Cir. 2021) (finding business did not suffer a “direct physical loss of' property when it suspended operations due to shutdown orders because policy “unambiguously only covered losses stemming from physical alteration or tangible dispossession of property [and n]either occurred here” and stating the court's conclusion was supported by “the decisions of every other circuit and the vast majority of district courts to address this issue”); 10012 Holdings, Inc. v. Sentinel Ins. Co., Ltd., 21 F.4th 216, 222 (2d Cir. 2021) (rejecting insured's argument that “‘physical loss' must mean ‘loss of physical possession and/or direct physical deprivation'- in other words, loss of use” and holding that “the terms ‘direct physical loss' and ‘physical damage' . . . do not extend to mere loss of use of a premises, where there has been no physical damage to such premises; those terms instead require actual physical loss of or damage to the insured's property”); Terry Black's Barbecue, L.L.C. v. State Auto. Mut. Ins. Co., 22 F.4th 450, 455-56 (5th Cir. 2022) (orders suspending in-person dining did not cause insured to suffer “direct physical loss” to property because “direct physical loss” requires proof of tangible physical alteration or deprivation of property and insured's claimed loss was about inability to provide dine-in services-“[t]his economic loss, however, did not have any tangible effect on the property or restaurants”); Aggie Invs., 2022 WL 257439 at *1-2 (a “‘direct physical loss of property' . . . requires a tangible alteration or deprivation of property”; thus, whether government orders require a business “to cease one kind of service or all of its services, that order is not a tangible alteration or deprivation of property”); Live Nation Ent., Inc. v. Factory Mut. Ins. Co., Case No. LA CV21-00862 JAK (KSx) (C.D. Cal. Feb. 3, 2022) (Doc. 43 Ex. 1 at 8) (finding complaint failed to sufficiently allege that government closure orders directly caused PLOD where orders temporarily restricted plaintiff's use of property but did not physically alter property or permanently take property from plaintiff, and noting the Ninth Circuit in Mudpie declined to interpret direct PLOD to be synonymous with “loss of use”); Barbizon Sch. of San Francisco, Inc. v. Sentinel Ins. Co., 530 F.Supp.3d 879, 887-88 (N.D. Cal. 2021) (economic losses stemming from business interruptions and closures as a result of pandemic-related orders did not constitute direct PLOD because virus did not physically alter property, tangibly injure property's physical structure, or render property completely useless or uninhabitable); Unmasked Mgmt., 514 F.Supp.3d at 1223-24 (rejecting plaintiff restaurant owners' arguments that government closure orders prohibiting inperson dining and presence of COVID-19 on their properties caused loss of use and functionality of properties; court reasoned that PLOD provisions “generally require that there be a ‘distinct, demonstrable, physical alteration' to the property for coverage to attach” and “[t]he loss of use or functionality of the covered property alone is not sufficient to trigger coverage” and that courts applying California law “have all but universally rejected” these same arguments as lacking the requisite physical alteration necessary to show PLOD); Pappy's II, 491 F.Supp.3d at 740 (denying motion to file amended complaint because the presence of the virus on property does not constitute PLOD, and even if it did, the “cause of Plaintiffs' business income losses was the COVID-19 Civil Authority Orders themselves, which . . . were ‘precautionary measures taken by the state to prevent the spread of COVID-19 in the future' and therefore not issued as a result of loss or damage to property at Plaintiffs' premises or elsewhere”; thus, “[n]o amount of artful pleading by Plaintiffs can state a plausible claim that they suffered any business income losses due to direct [PLOD] at their premises, or due to civil authority orders prohibiting access to Plaintiffs' premises due to direct physical loss or damage to property elsewhere, as required for coverage under the Policy” (citation omitted)); Pappy's 1, 487 F.Supp.3d at 944 (“An insured cannot recover by attempting to artfully plead temporary impairment to economically valuable use of property as physical loss or damage.” (citation omitted)); Mudpie, 487 F.Supp.3d at 839-41 (retailer's inability to operate and occupy its premises following issuance of pandemic stay-at-home orders did not constitute direct PLOD where there was no permanent dispossession of property, nothing for retailer to fix, replace, or disinfect to regain occupancy, and no outside physical force that “induced a detrimental change in the property's capabilities”); Hillcrest Optical, Inc. v. Cont'l Cas. Co., 497 F.Supp.3d 1203, 1211 (S.D. Ala. 2020) (where statewide order temporarily postponed medical procedures, court rejected plaintiff's argument that inability to use property was a direct physical loss because “Plaintiff's loss of usability did not result from an immediate occurrence which tangibly altered its property . . . [r]ather, Plaintiff was only temporarily precluded from performing routine medical procedures while the Order was in effect”); L&J Mattson's Co., 536 F.Supp.3d at 315 (loss of use based on government closure orders did not constitute physical loss to property).
While TMCH relies on the court's finding in Studio 417 that the insureds adequately alleged a direct physical loss within the meaning of the policy based on government orders requiring closure of businesses, the District of Nevada has noted that “Studio 417 . . . is a heavily criticized, out-of-circuit opinion that is explicitly at odds with decisions in the Ninth Circuit . . . .” Circus Circus LV, LP v. AIG Specialty Ins. Co., 525 F.Supp.3d 1269, 1277 (D. Nev. 2021); see also Circle Block, 2021 WL 3187521 at *6 (rejecting insured's argument that “direct physical loss” is satisfied when there is a loss of the property's usefulness or function for normal purposes and stating “there is not the split of authority that Circle Block imagines. Instead, ‘the overwhelming majority of courts have found no coverage when interpreting similar language,' and most courts that have considered the question have found similar phrases unambiguous.” (citation omitted)).
Studio 417, Inc. v. Cincinnati Ins. Co., 478 F.Supp.3d 794 (W.D. Mo. 2020).
Here, based on the authorities discussed above, none of the orders TMCH relies on rendered its property unusable, uninhabitable, or unfit for its intended purpose, nor did the orders cause a physical loss of TMCH's property. See Unmasked Mgmt., 514 F.Supp.3d at 1225 (distinguishing case where court found “direct physical loss” requirement could be met absent any physical alteration to the property if the insured was “permanently dispossessed” of that property). The Governor's orders recognized the importance of treating COVID-19 and ensuring hospitals were adequately equipped to do so. The undersigned thus rejects TMCH's argument that “the orders are a recognition that the property was unsafe and unfit for its ordinary uses due to the presence of the communicable disease” and, “within the ordinary meaning of the word ‘loss,' deprived TMCH of the use of its properties for their intended purposes or severely limited such use.” (Doc. 21 at 24) (emphases removed). TMCH's argument that the Governor's orders deprived it of the ability to use its property for its “most lucrative business-i.e., elective procedures” (Doc. 21 at 25), is not unlike the arguments put forth by restaurants asserting claims for lost business income due to pandemic-related orders that suspended in-person dining or temporarily closed restaurants entirely. Such “loss of use” arguments have been widely rejected by this Court and others around the country.
Further, even if the Disease Contamination Coverage-Property Damage and Time Element Combined provision did apply here, none of the orders TMCH relies on can reasonably be construed as “evacuation or decontamination” orders based on the plain meaning and common understanding of those terms. The undersigned thus rejects TMCH's argument that a “fair reading” of the Governor's orders is that they required “evacuation” of non-COVID-19 patients to free up beds for COVID-19 patients and required “decontamination” by mandating that TMCH rid its premises of Coronavirus and COVID-19. (Doc. 21 at 29). This interpretation goes beyond the plain and ordinary meaning of “evacuation” and “decontamination, ” asking the Court to find ambiguity in these terms when there is none in order to interpret the Policy in favor of coverage. See Thomas, 173 Ariz. at 325. Specifically, the March 26, 2020 Order requiring hospitals to implement their emergency preparedness plans, develop criteria and processes to relieve excess burden on emergency departments, optimize staffing, and increase bed capacity did not require TMCH to evacuate non-COVID-19 patients to free up beds for COVID-19 patients; rather, the order directed hospitals to effectively utilize their resources to ensure Arizonans had access to treatment for COVID-19. And it would be absurd to interpret the March 19, 2020 Order prohibiting non-essential and elective surgeries to conserve hospital resources and the March 30, 2020 “stay at home” Order as requiring any sort of “evacuation” or “decontamination.” While TMCH contends that the March 30, 2020 Order required it to comply with guidelines issued by the U.S. Department of Labor and Arizona Department of Health Services incorporating Centers for Disease Control publications on employer procedures and infection prevention (Doc. 21 at 23), the Governor's Order directing businesses to implement social distancing and sanitation measures in accordance with those authorities did not require TMCH to decontaminate its property within the common meaning of that term.
iv. Conclusion
In sum, the undersigned finds that based on the plain meaning of direct “physical loss of or damage to property, ” TMCH has not stated a plausible claim for relief under the Policy because neither the presence of COVID-19 and/or Coronavirus at its covered locations nor the government orders TMCH relies on constitute PLOD. The Court therefore does not need to address each of the specific policy provisions TMCH relies on because the Policy only insures “against risks of direct physical loss of or damage to property and/or interests described herein at covered Locations.” (Doc. 17 Ex. 1 at 20).
Although the parties do not argue this issue in their briefs, the undersigned further finds that, based on the plain meaning of the terms, the Policy's microbe exclusion would likely also bar TMCH's claims. The “Group 1. Exclusions” portion of the policy states:
Unless otherwise provided for and limited in Section 1.4., this Policy excludes loss or damage directly or indirectly caused by or resulting from any of the following regardless of (a) the cause of the excluded event; or (b) other causes of the loss; or (c) any other causes or events, whether or not insured under this Policy, which may have contributed concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurred suddenly or gradually, involved isolated or widespread damage, arose from natural or external forces, or occurred as a result of any combination of any of the following:
h. Fungi, Wet Rot, Dry Rot and Microbes,
(1) The presence, growth, proliferation, spread or any activity of Fungi, wet rot, dry rot or Microbes, , all whether direct or indirect, proximate or remote or in whole or in part caused by, contributed to or aggravated by any physical damage insured by this policy;
(2) Any government or regulatory directive or request that the Insured or anyone acting under the Insured's direction or control test for, monitor, clean up, remove, contain, treat, detoxify or neutralize any Fungi, wet rot, dry rot or Microbes.(Doc. 17 Ex. 1 at 32-33). The Policy defines “microbe” as “[a]ny non-fungal microorganism or non-fungal, colony-form organism that causes infection or disease.” Id. at 46. Giving these terms their ordinary meaning and effect, as the Court must when interpreting an insurance contract, the undersigned submits that the Policy's microbe exclusion would bar TMCH's alleged losses. See, e.g., InformedHealth.org, What are microbes?, Cologne, Germany: Institute for Quality and Efficiency in Health Care (IQWiG), https://www.ncbi.nlm.nih.gov/books/NBK279387/ (last updated Aug. 29, 2019) (“Some microbes make us sick, others are important for our health. The most common types are bacteria, viruses and fungi. . . . Many viruses are responsible for diseases. Some are harmless and only trigger a minor cold, while others can cause serious diseases like AIDS.”); Types of microorganisms, Britannica, https://www.britannica.com/science/microbiology/Protozoa (last visited Feb. 19, 2022) (the “major groups of microorganisms . . . [are] bacteria, archaea, fungi (yeasts and molds), algae, protozoa, and viruses); Viruses, Microbiology Society, https://microbiologysocietv.org/why-microbiology-matters/what-is- microbiology/viruses.html' (last visited Feb. 19, 2022) (“Viruses are the smallest of all the microbes.”); Viruses, Bacteria and Fungi: What's the Difference?, Cedars Sinai (Jun. 17, 2020), https://www.cedars-sinai.org/blog/germs-viruses-bacteria-fungi.html (“Each of us shares our air, food, water and shelter with tiny colonies of microorganisms that include viruses, bacteria and fungi. Most of these miniscule microbes are harmless, but some are pathogens-the kind that can make you sick, such as the novel coronavirus that causes COVID-19.”); What Counts as a Microbe?, American Society for Microbiology (April 11, 2021), https://asm.org/Articles/2021/April/What-Counts-as-a- Microbe#:~:text=As%20knowledge%20of%20the%20microbial, as%20infectious%20par ticles%2C%20like%20viruses (“As knowledge of the microbial world has expanded, words like ‘microbe' or ‘microorganism' are still used as blanket terms that could refer to individuals from various groups, such as bacteria, fungi, viruses or protozoa.”). Further, even assuming as true TMCH's argument that the Policy does not specifically exclude viruses or pandemics, that does not equate to a finding that coverage for viruses or pandemics is included in the Policy. See B St. Grill, 525 F.Supp.3d at 1016 (where plaintiffs argued the policy did not contain an exclusion for viruses or communicable diseases, this Court was “not persuaded that Plaintiffs allegations could trigger coverage” because “Plaintiffs have not shown that their injury should be covered by the policy in the first instance”; “[t]herefore, the Court cannot conclude that the policy should be construed against [the insurer] due to its failure to exclude viruses or diseases under the policy.”).
B. Breach of the Duty of Good Faith and Fair Dealing
“There is a covenant of good faith and fair dealing inherent in every contract which requires that ‘neither party [ ] act to impair the right of the other to receive the benefits which flow from their agreement or contractual relationship.'” Thomas v. Wells Fargo Bank, Nat. Ass'n., 866 F.Supp.2d 1101, 1106 (D. Ariz. 2012) (quoting Rawlings v. Apodaca, 151 Ariz. 149, 153-54 (1986)). “[T]ort recovery for breach of the implied covenant is well established in actions brought on insurance contracts[.]” Id. at 1107.
Insurers in Arizona have “an obligation to immediately conduct an adequate investigation, act reasonably in evaluating the claim, and act promptly in paying a legitimate claim.” Lennar Corp. v. Transamerica Ins. Co., 227 Ariz. 238, 242 (Ct. App. 2011) (citation omitted). Thus, “[t]o prove the tort of bad faith in Arizona, an insured must first show the absence of a reasonable basis for denying benefits and then demonstrate that the insurance company either knew or recklessly disregarded the fact that it did not have a reasonable basis for denying benefits.” Gregorio, 815 F.Supp.2d at 1107; see also Lennar Corp., 227 Ariz. at 242 (An insurer “breaches its duty of good faith and fair dealing if it ‘intentionally denies, fails to process or pay a claim without a reasonable basis.'” (citation omitted)); Noble v. Nat. Life Ins. Co., 128 Ariz. 188 (1981) (recognizing tort claim for insurer's bad-faith refusal to pay a valid claim). “The first prong of the test for bad faith is an objective test based on reasonableness. The second prong is a subjective test, requiring the plaintiff to show that the defendant insurance company committed consciously unreasonable conduct.” White Mountain, 2015 WL 1755372 at *4 (citation omitted).
“If the actions taken on the part of the insurance company denying the claim were objectively reasonable, then the insurance company will not be found to have acted in bad faith.” Gregorio, 815 F.Supp.2d at 1107. Further, “[m]ere negligence or inadvertence is not sufficient-the insurer must intend the act or omission and must form that intent without reasonable or fairly debatable grounds.” Id. (citation omitted). However, “if an insurer acts unreasonably in the manner in which it processes a claim, it will be held liable for bad faith without regard to its ultimate merits.” Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 238 (2000) (internal quotations and citation omitted); see also White Mountain, 2015 WL 1755372 at *4 (“An insurer may be liable for bad faith even if it has not breached the insurance contract itself.”).
Here, the undersigned finds that Continental's decision to deny coverage was not without a reasonable basis. There is no controlling authority requiring Continental to provide coverage for TMCH's claimed losses under the Policy, and Continental's decision is consistent with the overwhelming majority of court decisions on this issue. Thus, because TMCH has not pled a plausible claim for breach of contract-because TMCH's alleged losses do not fall within the Policy's scope of coverage for PLOD- TMCH cannot plausibly allege that Continental had no reasonable basis to deny its claim. See White Mountain, 2015 WL 1755372 at *5 (where there was nothing in the record to demonstrate that insurer's reason for denying coverage was objectively unreasonable, plaintiff's claim for coverage was thus fairly debatable, and “there is no bad faith on the part of an insurer based on denial of coverage if it believed the claim to be fairly debatable”); see also Gregorio, 815 F.Supp.2d at 1107-08 (where the policy language was plain and unambiguous and did not provide the plaintiff with coverage, insurer had an objectively reasonable basis to deny claim).
As stated above, the undersigned rejects TMCH's contention that the Policy expressly recognizes that communicable disease causes PLOD; thus, TMCH cannot plausibly allege that Continental breached its duty by denying coverage on this basis.
Nor has TMCH alleged any facts to state a claim for relief above a speculative level based on Continental's alleged failure to investigate TMCH's claim. Here, as in White Mountain, while TMCH contends Continental acted in bad faith when it failed to send someone out to investigate TMCH's claim, “there is no evidence that further investigation would have revealed relevant facts that would have led to . . . benefits being paid.” 2015 WL 1755372 at *5.
Accordingly, the undersigned finds that this claim should be dismissed.
C. Declaratory Judgment
The Declaratory Judgment Act provides that “[i]n a case of actual controversy within its jurisdiction, . . . any court of the United States . . . may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” 28 U.S.C. §2201. However, the “Act does not grant litigants an absolute right to a legal determination[; rather, t]he decision to grant declaratory relief is a matter of discretion.” United States v. Washington, 759 F.2d 1353, 1356 (9th Cir. 1985).
Further, the Declaratory Judgment Act does not in itself create a separate cause of action, but rather a claim for declaratory relief must be tied to an independent substantive claim. See, e.g., Silvas v. GMAC Mortg., LLC, 2009 WL 4573234, at *6 (D. Ariz. Dec. 1, 2009) (“declaratory judgments are remedies for underlying causes of action, but they are not separate causes of action”), as amended (Jan. 5, 2010); Shroyer v. New Cingular Wireless Servs., Inc., 622 F.3d 1035, 1044 (9th Cir. 2010) (“Because we affirm the district court's dismissal of the fraud and unfair competition claims, we affirm the dismissal of the claims for declaratory relief on those claims.”).
Here, TMCH states an underlying substantive claim for breach of contract. Because the undersigned recommends that the District Court grant Continental's motion to dismiss, TMCH's claim for declaratory relief should also be dismissed.
IV. RECOMMENDATION
Accordingly, the Magistrate Judge RECOMMENDS that the District Court enter an order GRANTING Defendant's Motion to Dismiss. (Doc. 20).
Pursuant to 28 U.S.C. §636(b), any party may serve and file written objections within fourteen days after being served with a copy of this Report and Recommendation. A party may respond to another party's objections within fourteen days after being served with a copy thereof. Fed.R.Civ.P. 72(b). No reply to any response shall be filed. See id. If objections are not timely filed, then the parties' rights to de novo review by the District Court may be deemed waived. See United States v. Reyna-Tapia, 328 F.3d 1114, 1121 (9th Cir. 2003) (en banc). 32