Opinion
Case No. 4:21-CV-00268-BCW
2022-03-31
CLUB PILATES FRANCHISE LLC, et al., Plaintiffs, v. ARCH INSURANCE COMPANY, Defendants.
Christopher R. Mosley, Pro Hac Vice, Sherman & Howard LLC, Denver, CO, Michael O. Fawaz, Pro Hac Vice, Howard & Howard Attorneys PLLC, Royal Oak, MI, Kristie Blunt Welder, Welder Blunt Welder & Associates, LLC, Kansas City, MO, for Plaintiffs. Christina Wahl, David F. Oliver, James M. Humphrey, Berkowitz Oliver LLP, Kansas City, MO, Julie E. Nevins, Pro Hac Vice, Laura E. Besvinick, Pro Hac Vice, Strook, Miami, FL, for Defendants.
Christopher R. Mosley, Pro Hac Vice, Sherman & Howard LLC, Denver, CO, Michael O. Fawaz, Pro Hac Vice, Howard & Howard Attorneys PLLC, Royal Oak, MI, Kristie Blunt Welder, Welder Blunt Welder & Associates, LLC, Kansas City, MO, for Plaintiffs.
Christina Wahl, David F. Oliver, James M. Humphrey, Berkowitz Oliver LLP, Kansas City, MO, Julie E. Nevins, Pro Hac Vice, Laura E. Besvinick, Pro Hac Vice, Strook, Miami, FL, for Defendants.
ORDER
BRIAN C. WIMES, UNITED STATES DISTRICT JUDGE
Before the Court is Defendant Arch Insurance Company's Motion to Dismiss. (Doc. #21). The Court, being duly advised of the premises, grants said motion.
BACKGROUND
On April 23, 2021, Plaintiffs, who are owners and operators of various types of gyms and fitness studios, filed a class action complaint against Defendant Arch Insurance Company ("Arch") alleging Arch's improper denial of Plaintiffs’ claims for certain property insurance coverage when Plaintiffs’ business operations were interrupted by closure orders issued by state and local governments to prevent the spread of SARS-CoV-2. (Doc. #1).
On July 12, 2021, the following named Plaintiffs filed their First Amended Class Action Complaint against Arch: (1) Club Pilates Franchise LLC; (2) Cyclebar Franchising LLC; (3) Stretch Lab Franchise LLC; (4) Row House Franchise LLC; (5) PB Franchising LLC; (6) Yoga Six Franchise LLC; (7) AKT Franchise LLC; (8) Stride Franchise LLC; (9) David Wolk d/b/a/ DMWCP, LLC; (10) DMWCP2, LLC d/b/a/ Club Pilates, Syosset-Woodbury; (11) Hitzemann Ventures, LLC d/b/a StretchLab Dilworth; (12) Hitzemann Ventures Two, LLC d/b/a StretchLab; (13) Sutherin Financial Services LLC; (14) Manchester One LLC; (15) Manchester Two LLC; (16) RH 209, LLC d/b/a Ken Caryl; (17) Treadblu, LLC d/b/a STRIDE Jacksonville Beach; (18) 6PK Fitness, LLC d/b/a AKT Mason; (19) Rose Ventures Corp. d/b/a Pure Barre Westford MA; and (20) Cats, Naps, and Tapbacks, LLC d/b/a Cyclebar Santa Monica. (Doc. #18 at 1-2).
These Plaintiffs, on behalf of themselves and all others similarly situated, (collectively, "Plaintiffs") allege claims against Arch for Arch's failure to provide insurance coverage for Plaintiffs’ losses attributable to the COVID-19 pandemic. (Doc. #18) ("This action arises out of [Arch's] failure to provide insurance coverage for covered losses caused by the novel SARS-COV-2 coronavirus, the Pandemic spawned by the virus, and the resulting orders by state and local governments.").
Under the allegations of the amended complaint, Plaintiffs allege they were insured under the same insurance program through Arch and were each issued policies that "were materially identical to the coverages that Plaintiffs seek in this lawsuit under an endorsement specifically designated by Arch as the "Xponential Fitness Endorsement." This Endorsement provides for "Business Income and Extra Expense" coverage under specific circumstances." (Doc. #18-1 at 30). The Arch insurance policy issued to one of the named plaintiffs, David Wolk d/b/a DMWCP, LLC, is attached to the complaint (Doc. #18-1). The policy states coverage for "sports equipment and contents" at a specific location and includes the Endorsement with a section for "Business Income and Extra Expense" under which Plaintiffs allege Arch owes coverage.
Xponential Fitness, LLC is the parent holding company of: (1) Club Pilates Franchise LLC; (2) Cyclebar Franchising LLC; (3) Stretch Lab Franchise LLC; (4) Row House Franchise LLC; (5) PB Franchising LLC; (6) Yoga Six Franchise LLC; (7) AKT Franchise LLC; and (8) Stride Franchise LLC (collectively, "Franchisor Plaintiffs"). The other named plaintiffs are franchisees of these Franchisor Plaintiffs: (a) David Wolk d/b/a/ DMWCP, LLC; (b) DMWCP2, LLC d/b/a/ Club Pilates, Syosset-Woodbury; (c) Hitzemann Ventures, LLC d/b/a StretchLab Dilworth; (d) Hitzemann Ventures Two, LLC d/b/a StretchLab; (e) Sutherin Financial Services LLC; (f) Manchester One LLC; (g) Manchester Two LLC; (h) RH 209, LLC d/b/a Ken Caryl; (i) Treadblu, LLC d/b/a STRIDE Jacksonville Beach; (j) 6PK Fitness, LLC d/b/a AKT Mason; (k) Rose Ventures Corp. d/b/a Pure Barre Westford MA; and (l) Cats, Naps, and Tapbacks, LLC d/b/a Cyclebar Santa Monica. (Doc. #18 at 1-2) (collectively, "Franchisee Plaintiffs").
Under the allegations of the complaint, Xponential negotiated with Arch for the Endorsement that is part of the Arch insurance coverage agreement between Arch and each plaintiff and/or prospective class member, upon which each plaintiff and/or prospective class member now alleges claims for coverage against Arch.
Plaintiffs allege they are entitled to coverage under the Endorsement's "Business Income and Extra Expense" provision. In its entirety, section 13 of the Endorsement for "Business Income and Extra Expense" states as follows.
13. Business Income and Extra Expense
a. Coverage is extended to cover "Business Income" / "Extra Expense" incurred when your covered property is damaged by a Covered Cause of Loss.
We will pay any "Extra Expense" to continue your normal operations:
(1) at the described premises; or
(2) at replacement premises or temporary locations; including:
(a) relocation expenses; and
(b) costs to equip or operation the replacement or temporary locations; and
We will also pay for any corresponding "Extra Expense" to minimize the suspension of your normal operations if you cannot continue them.
b. We will pay for the actual loss of "Business Income" you sustain and necessary "Extra Expense" caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss. The coverage for "Business Income" will begin 72 hours after the time of that action and will apply for a period of up to three consecutive weeks after coverage begins. The coverage for "Extra Expense" will begin immediately after the time of that action and will end: (1) 3 consecutive weeks after the time of that action; or (2) When your "Business Income" coverage ends; whichever comes first.
c. The following, when used in this section, are defined as follows:
(1) "Business Income" means Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred during the "period of restoration;" and continuing normal operating expenses including payroll.
(2) "Extra Expense" means necessary expenses you incur during the "Period of Restoration" that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.
(3) "Period of Restoration" means the period of time that:
(a) Begins with the date of physical loss or damage caused by or resulting from any Covered Cause of Loss; and
(b) Ends on the date when the property should be repaired, rebuilt or replaced with reasonable speed and similar quality;
(c) "Period of Restoration" does not include any increased period required due to the enforcement of any ordinance or law that regulates the construction, use or repair, or requires the tearing down of any property; or requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants.
(d) The expiration date of this policy will not cut short the "Period of Restoration."
d. The most we will pay under this section is $100,000 for any one occurrence. No coinsurance shall apply to this coverage. This limit applies in addition to the applicable Limit of Insurance shown in the Declarations.
(Doc. #18-1 at 30).
Plaintiffs allege, based on this language of the Endorsement, Arch agreed to pay the actual loss of "Business Income" and "Extra Expense" caused by an "action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises." (Doc. #18 at 15). "Ultimately, per the express provisions of the Xponential Fitness Endorsements, Arch Insurance Company explicitly agreed to provide insurance coverage for actions of civil authority – or actions by state, local, or federal government – that prohibited access to Plaintiffs’ properties ["Closure Orders"], through no fault of their own related to shutdown orders issued to prevent the spread of deadly diseases, such as COVID-19." (Doc. #18 at 15).
Plaintiffs, on behalf of themselves and all others similarly situated, allege seven claims for coverage against Arch under the "Business Income and Extra Expense" provision in connection with Closure Orders and the interruption of business stemming from the COVID-19 pandemic: (I) declaratory judgment that Plaintiffs’ Business Income losses are insured losses; (II) breach of contract for Arch's denial of Plaintiffs’ claims for Business Income losses; (III) declaratory judgment that Plaintiffs’ Extra Expense losses are insured losses; (IV) breach of contract for Arch's denial of Plaintiffs’ claims for Extra Expense losses; (V) declaratory judgment that Plaintiffs’ Civil Authority losses are insured losses; (VI) breach of contract for Arch's denial of Plaintiffs’ claims for Civil Authority losses; and (VII) vexatious refusal to pay under Mo. Rev. Stat. § 375.420 for Arch's bad faith denial of Plaintiffs’ covered losses. (Doc. #18).
On August 11, 2021, Arch filed the instant motion to dismiss under Fed. R. Civ. P. 12(b)(1) and Fed. R. Civ. P. 12(b)(6). (Doc. #21). In addition to filing suggestions in support of its motion, Arch filed a declaration from Stephanie Lizotte, Arch's Assistant Vice President, Liability Claims Director (Doc. #23) with the Arch insurance policies for the Franchisee Plaintiffs (Docs. #23-1-#23-10). The declaration and attached policies pertain to Arch's argument that the complaint should be dismissed in part for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1). In particular, Arch argues the Franchisor Plaintiffs lack standing.
Arch also filed a "Request for Judicial Notice in Support of Motion to Dismiss" (Doc. #24) with attached Closure Orders for Kansas City, MO (Doc. #24-1); Louisiana (Doc. #24-2); Mississippi (Doc. #24-3); New Mexico (Doc. #24-4); West Virginia (Doc. #24-5); Colorado (Doc. #24-6); New York City, NY (Doc. #24-7); Broward County, FL (Doc. #24-8); Washington (Doc. #24-9); Indiana (Doc. #24-10); New Orleans, LA (Doc. #24-11); North Carolina (Doc. #24-12); and Los Angeles, CA (Doc. #24-13). Plaintiffs indicated no objection to the Court taking judicial notice of the Closure Orders. (Doc. #37 at 11). To the extent a ruling is required on Arch's request for judicial notice, with Plaintiffs having no objection, the Court grants the request and takes judicial notice of the Closure Orders.
Arch also seeks dismissal of the complaint in its entirety under Fed. R. Civ. 12(b)(6) for failure to state a claim. Arch argues Plaintiffs’ claims should be dismissed because Business Income, Extra Expense, and/or Civil Authority coverage are triggered only a "Covered Cause of Loss," which Plaintiffs have not and cannot plausibly allege because the presence of COVID-19 is not "Direct Physical Loss Or Damage to Covered Property."
ANALYSIS
A. Arch's motion to dismiss in part for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1) for the Franchisor Plaintiffs’ lack of standing is granted.
Arch argues the Franchisor Plaintiffs’ claims should be dismissed for lack of standing under Fed. R. Civ. P. 12(b)(1). In opposition, the Franchisor Plaintiffs argue Arch's motion should be denied because the Franchisor Plaintiffs are "interested parties" under the Declaratory Judgment Act of 1934, 28 U.S.C. § 2201, such that subject matter jurisdiction is conferred through Counts I, III, and V seeking declaratory judgment.
A motion for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1) can be facial or factual in nature. Titus v. Sullivan, 4 F.3d 590, 593 (8th Cir. 1993). In the context of a facial challenge, the complaint's factual allegations are presumed true and the Court's review is limited to the face of the complaint to see whether an "element necessary for subject matter jurisdiction" is missing. Id. In the context of a factual challenge, the Court may consider matters outside the pleadings, "no presumptive truthfulness attaches to plaintiff's allegations, and "the existence of disputed material facts will not preclude the trial court from evaluating for itself the merits of jurisdictional claims." " Titus, 4 F.3d at 594 n.1.
Here, Arch argues the complaint should be, to the extent it is alleged by the Franchisor Plaintiffs, dismissed for lack of subject matter jurisdiction because the Franchisor Plaintiffs lack standing to sue for coverage under the Endorsement. (Doc. #22). To establish standing, a plaintiff must demonstrate the following: (1) he suffered an "injury in fact" (2) the injury suffered is fairly traceable to the conduct of the defendant and (3) the injury suffered through the conduct of the defendant is likely to be "redressed by a [favorable] decision." Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992). An injury in fact is "an invasion of a legally protectable interest which is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical." Id. (citations omitted).
Arch argues the Franchisor Plaintiffs lack standing because they were not party to, nor intended beneficiaries of, the insurance contracts upon which Plaintiffs’ coverage claims are based. (Doc. #22) (citing ITT Hartford Life & Annuity Ins. Co. v. Amerishare Inv's, Inc., 133 F.3d 664, 669 (8th Cir. 1998)) ("In general, a stranger to a contract has no rights under the contract unless the third party is an intended beneficiary of the contract, or there is a duty owed to a third party that is discharged by the contract."). In support of this argument, Arch filed the insurance policies issued to the Franchisee Plaintiffs to demonstrate the Franchisor Plaintiffs are not named insureds under the policies under which Plaintiffs seek coverage. Additionally, Arch filed the Lizotte Declaration to demonstrate the underwriting materials do not contemplate the Franchisor Plaintiffs as intended beneficiaries of the Arch insurance policies.
In opposition to Arch's motion, Plaintiffs make no attempt to counter Arch's factual challenge. Instead, Plaintiffs argue only that they are "interested parties" seeking a declaration under § 2201 because, pursuant to Franchise Agreements that are not part of the record, they have an interest in any policy proceeds paid to the Franchisee Plaintiffs.
As the party seeking to assert federal jurisdiction, Plaintiffs bear the burden to demonstrate federal subject matter jurisdiction exists by a preponderance of the evidence. Iowa League of Cities v. E.P.A., 711 F.3d 844, 870 (8th Cir. 2013). Under the circumstances presented here, the Court cannot find the Franchisor Plaintiffs have met this burden for at least two reasons.
First, in the context of Arch's factual challenge, the Franchisor Plaintiffs are not entitled to the benefit of any factual inferences arising from the complaint's allegations, and the Court can consider other documents to determine whether subject matter jurisdiction exists. Titus, 4 F.3d at 594 n.1. The Franchisor Plaintiffs do not and cannot dispute they are not named insured under the Arch policies upon which Plaintiffs sue; rather, the named insureds under the Arch policies are the Franchisee Plaintiffs. (Doc. #23-1-#23-10). Moreover, the Franchisor Plaintiffs do not provide any Franchise Agreement or other factual basis from which to infer the Franchisor Plaintiffs were an intended beneficiary under the Arch policies issued to the Franchisee Plaintiffs. Consequently, because the Franchisor Plaintiffs are not parties to or intended beneficiaries of the Arch policies on which Plaintiffs’ claims are based, the Franchisor Plaintiffs lack standing to assert the claims alleged in the complaint.
Second, despite the Franchisor Plaintiffs’ contrary assertions, § 2201 does not expand federal jurisdiction. Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671, 70 S.Ct. 876, 94 L.Ed. 1194 (1950). "In a case of actual controversy within its jurisdiction ... any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such a declaration, whether or not further relief is or could be sought." 28 U.S.C. § 2201(a). The Franchisor Plaintiffs argue the existence of subject matter jurisdiction because they are "interested part[ies]" seeking relief under a federal statute. The Franchisor Plaintiffs overlook, however, § 2201(a) ’s requirement of an "actual controversy." Aetna Life Ins. Co. of Hartford, Conn. v. Haworth, 300 U.S. 227, 239-40, 57 S.Ct. 461, 81 L.Ed. 617 (1937) ("actual controversy" requirement same as Article III's "case or controversy" requirement).
Based on the record, because the Franchisor Plaintiffs are not party to the insurance contracts and because the Franchisor Plaintiffs are not identified as intended beneficiaries of the insurance contracts, the Franchisor Plaintiffs lack standing. Even assuming the Franchisor Plaintiffs have a financial interest in Plaintiffs’ claims, the Franchisor Plaintiffs have presented no evidence to demonstrate an actual, cognizable claim against Arch. Arch's motion to dismiss the Franchisor Plaintiffs’ claims for lack of standing is granted.
B. Arch's motion to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim is granted.
Arch argues each of Plaintiffs’ claims should be dismissed under Fed. R. Civ. P. 12(b)(6) for failure to state a claim. First, Arch argues Plaintiffs’ claims for declaratory judgment and breach of contract alleging "Business Income" or "Extra Expense" coverage (Counts I, II, III, and IV) should be dismissed because Plaintiffs do not plausibly allege that the presence of the COVID-19 virus in their facilities physically altered their sports equipment and contents, and, therefore, no "Business Income" or "Extra Expense" coverage is available. Second, Arch argues Plaintiffs’ claims for declaratory judgment and breach of contract alleging Civil Authority coverage (Counts V and VI) should be dismissed because Plaintiffs do not plausibly allege the Closure Orders prohibited access to their facilities or "direct physical loss of or damage to property" elsewhere. Third, Arch argues Count VII should be dismissed because Plaintiffs do not plausibly allege vexatious refusal under Mo. Rev. Stat. § 375.420 where Arch's denial of coverage is based on the unambiguous language of the policy.
"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, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. In considering a motion to dismiss, the district court "accept[s] as true all factual allegations in the light most favorable to the nonmoving party, [but] need not accept as true a plaintiff's conclusory allegations or legal conclusions drawn from the facts." Glick v. W. Power Sports, Inc., 944 F.3d 714, 717 (8th Cir. 2019).
General rules of contract interpretation apply to the interpretation of an insurance policy. Johnson v. Safeco Ins. Co. of Ill., 983 F.3d 323, 329 (8th Cir. 2020) (citing Todd v. Mo. United Sch. Ins. Council, 223 S.W.3d 156, 160 (Mo. 2007) ). When interpreting an insurance contract, the Court reads the policy as a whole to discern the intent of the parties, giving effect to the parties’ intent by enforcing the contract as written. Stotts v. Progressive Classic Inc., 118 S.W.3d 655, 662 (Mo. Ct. App. 2003).
If, as a matter of law, a contract is unambiguous, it will be enforced as written. Owners Inc. Co. v. Craig, 514 S.W.3d 614, 617 (Mo. 2017). But if there exists "duplicity, indistinctness, or uncertainty in the meaning of the language in the policy" or if the policy language is "reasonably open to different constructions" the contract is ambiguous as a matter of law. Allstate Indem. Co. v. Rice, 755 F.3d 621, 624 (8th Cir. 2014) (citations omitted).
If an ambiguity exists, the ambiguity is construed against the insurer and in favor of the insured. United Fire & Cas. Co. v. Titan Contractors Serv., 751 F.3d 880, 887 (8th Cir. 2014). Absent an ambiguity, however, the party asserting coverage bears the burden to demonstrate coverage exists under the policy terms. Id.
Plaintiffs allege coverage under three aspects of the Endorsement's "Business Income and Extra Expense" provision. Counts I and II pertain to "Business Income" coverage. Counts III and IV pertain to "Extra Expense" coverage. Counts V and VI pertain to "Civil Authority" coverage. Count VII pertains to Arch's bad faith refusal to pay coverage under "Business Income," "Extra Expense," or "Civil Authority."
With all reasonable factual inferences drawn in Plaintiffs’ favor for purposes of the motion to dismiss, Plaintiffs and Arch specifically negotiated the Endorsement to provide additional or other coverage. Plaintiffs purchased insurance from Arch for sports equipment and the contents of their gym facilities (Doc. #18-1 at 25), and the Endorsement "change[d] the policy" (Doc. #18-1) to provide the following additional or other coverage.
In pertinent part, the Endorsement states:
A. Coverage
We will pay for loss of or damage to Covered Property from any of the Covered Causes of Loss.
1. Covered Property
Covered Property ... means the property described in the Declarations ...
2. Property Not Covered
Covered Property does not include:
a. Real Property ...
b. Aircraft, Motor Vehicles ....
3. Covered Causes of Loss
Covered Causes of Loss means Direct Physical Loss Or Damage to Covered Property except those causes of loss listed in the Exclusions.
[....]
13. Business Income and Extra Expense
[....]
B. Exclusions
1. [...]
2. We will not pay for loss or damage caused by or resulting from any of the following:
a. Denting, chipping, marring, scratching.
b. Delay, loss of use, loss of market or any other consequential loss. [...]
3. We will not pay for loss or damage caused by or resulting from any of the following.
But if loss or damage by a Covered Cause of Loss results, we will pay for the loss or damage caused by the Covered Cause of Loss.
a. Wear and tear, depreciation.
b. Any quality in the property that causes it to damage or destroy itself, hidden or latent defect, gradual deterioration.
c. Mechanical breakdown.
d. Insects, vermin or rodents.
e. Corrosion or rust
(Doc. #18-1 at 27-33).
1. Arch's motion to dismiss Counts I, II, III, and IV is granted.
The Court first considers whether Plaintiffs’ claims for coverage under the "Business Income" and/or "Extra Expense" provisions state claims to relief that are sufficient under Fed. R. Civ. P. 12(b)(6). For Counts I, II, III, and IV, Plaintiffs allege the "Business Income" / "Extra Expense" provisions cover Plaintiffs’ alleged losses attributable to the COVID-19 pandemic. Under the Endorsement, "[c]overage is extended to cover ‘Business Income’ / ‘Extra Expense’ incurred when your covered property is damaged by a Covered Cause of Loss." (Doc. #18-1 at 30). "Covered Causes of Loss means Direct Physical Loss Or Damage to Covered Property except those causes of loss listed in the Exclusions." (Doc. #18-1 at 30). The Exclusions exclude coverage for Covered Causes of Loss caused by or resulting from "denting, chipping, marring, scratching", delay, loss of use, loss of market or any other consequential loss. (Doc. #18-1 at 32). Thus, based on the foregoing, Plaintiffs Counts I, II, III, and IV allege Business Income / Extra Expense coverage because Plaintiffs’ respective covered gym equipment was damaged by presence of COVID-19 at their facilities.
Under the plain language of the Endorsement, however, Business Income and/or Extra Expense coverage is triggered only if the alleged damages are attributable to a Covered Cause of Loss, which requires "Direct Physical Loss Or Damage to Covered Property," that is not otherwise excluded. The dispositive issue is whether Plaintiffs have plausibly alleged the requisite Direct Physical Loss Or Damage to their insured property by alleging COVID-19's presence at their facilities.
Because "Direct Physical Loss Or Damage" is not defined by the policy, Plaintiffs argue they have plausibly alleged a Covered Cause of Loss, thus triggering Business Income / Extra Expense coverage. Though the Endorsement does not define "Direct Physical Loss Or Damage", the Endorsement is unambiguous that a Covered Cause of Loss requires loss or damage to covered property, and that loss or damage must be physical. "Physical" means "of or relating to natural science," and/or "having material existence: perceptible especially through senses and subject to the laws of nature" and/or "of or relating to material things." Physical , Merriam-Webster, https://www.merriam-webster.com/dictionary/physical; (Docs. #22 at 11, #37 at 15).
In consideration of a similar phrase in an insurance policy, the Eighth Circuit found "there must be some physicality to the loss or damage of property - e.g., a physical alteration, physical contamination, or physical destruction." Oral Surgeons, P.C. v. Cin. Ins. Co., 2 F.4th 1141, 1144 (8th Cir. 2021) (interpreting "direct loss to property," with "loss" defined as "accidental physical loss or accidental physical damage"). Further, the surrounding language supports construing Direct Physical Loss Or Damage to require some tangible impact. Monday Rests., LLC v. Intrepid Ins. Co., No. 4:20-CV-1015-SNLJ, 2021 WL 2222692, at *4 (E.D. Mo. June 2, 2021). For example, the "period of restoration" language refers to the repair, rebuild, or replacement of property, which implies an underlying physical change. (Doc. #18-1 at 30).
Applying this construction, then, Plaintiffs have not plausibly alleged a Covered Cause of Loss because they have not plausibly alleged their gym equipment was physically damaged by the presence of COVID-19 on it or in the area around it. Zwillo V, Corp. v. Lexington Ins. Co., 504 F Supp. 3d 1034, 1040-41 (W.D. Mo. 2020) (interpreting "direct physical loss of or damage to property") (collecting cases). Though Plaintiffs support their assertions with legal authority from other district courts, the majority of district courts that have considered similar insurance coverage phrases and similar business interruption allegations have held that the presence of COVID-19 on property is not a direct physical loss or damage to property because there results no physical alteration to the property. See Seoul Taco Holdings, LLC v. Cin. Ins. Co., 538 F.Supp.3d 926, 933–34 (E.D. Mo. 2021) ; MMMMM DP, LLC v. Cin. Ins. Co., No. 4:20-CV-00867-SEP, 2021 WL 2075565, at *4 (E.D. Mo. May 24, 2021) ; Sandy Point Dental, PC v. Cin. Ins. Co., 488 F. Supp. 3d 690, 694 (N.D. Ill. 2020) ; Pappy's Barber Shops, Inc. v. Farmers Grp., Inc., 487 F. Supp. 3d 937, 943 (S.D. Cal. 2020) ; Mena Catering, Inc. v. Scottsdale Ins. Co., 512 F. Supp. 3d 1309, 1318 (S.D. Fla. 2021) ; Legal Sea Foods, LLC v. Strathmore Ins. Co., 523 F. Supp. 3d 147, 151-53 (D. Mass. 2021) ; Univ. of St. Thomas v. Amer. Home Assur. Co., No. H-20-2809, 2021 WL 3129330, at *5 (S.D. Tex. July 23, 2021).
The Court joins with the majority of courts to consider the issue to conclude that the presence of COVID-19 does not equate to the physical loss, damage, or alteration or property. Because coverage under the Business Income / Extra Expense provisions requires Direct Physical Loss Or Damage to covered property, Plaintiffs, in alleging the presence of COVID-19, have not plausibly alleged that coverage exists under the Endorsement's Business Income / Extra Expense provisions. To the extent Plaintiffs argue a loss of business attributable to COVID-19 at its facilities, such loss requires an underlying Direct Physical Loss Or Damage to Covered Property that Plaintiffs have not and cannot plausibly allege. Likewise, to the extent Plaintiffs allege Business Income / Extra Expense coverage for costs necessitated by the presence of COVID-19, i.e. air filtration systems and cleaning products, Plaintiffs have not and cannot plausibly allege any underlying physical alteration or loss to covered property that is a Covered Cause of Loss under the plain language of the policy. Consequently, Arch's motion to dismiss Counts I, II, III, and IV for failure to state a claim is granted.
2. Arch's motion to dismiss Counts V and VI is granted.
Arch argues Plaintiffs’ Counts V and VI alleging Civil Authority coverage should be dismissed for failure to state a claim because Plaintiffs have not plausibly alleged the application of the Civil Authority coverage provision. The Endorsement states Arch "will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of [C]ivil [A]uthority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss." (Doc. #18-1 at 30).
Plaintiffs allege Civil Authority coverage applies because the Closure Orders implemented in response to COVID-19 prohibited access to their respective facilities, and Plaintiffs’ business operations were interrupted due to the presence of COVID-19 in locations other than Plaintiffs’ facilities.
First, as discussed above, Civil Authority coverage arises only under any Covered Cause of Loss, which requires Direct Physical Loss Or Damage, which Plaintiffs have not plausibly alleged through the presence of COVID-19 at their facilities. Second, Plaintiffs do not allege "direct physical loss of or damage to property other than at the described premises" by alleging the presence of COVID-19 elsewhere, because the presence of COVID-19 does not equate to direct physical loss of or damage to other property. Finally, while the Closure Orders may have interrupted Plaintiffs’ operations, they did not prohibit access to Plaintiffs’ premises. For these reasons, Plaintiffs have not and cannot plausibly allege the Civil Authority provision provides coverage. Arch's motion to dismiss Counts V and VI is granted.
For all of these reasons, Plaintiffs have not plausibly alleged coverage under the Endorsement's provisions for Business Income coverage, Extra Expense coverage, or Civil Authority coverage. Arch denied coverage under these terms consistent with plain meaning of the policy. Because Arch's denial of coverage is reasonable under the policy, Plaintiffs do not plausibly allege a claim for vexatious refusal to pay under Mo. Rev. Stat. 375.420 and Count VII is likewise dismissed. State Farm Mut. Auto Ins. Co. v. Shahan, 141 F.3d 819, 824 (8th Cir. 1998) (no vexatious refusal where denial of coverage based on unambiguous language). Accordingly, it is hereby
ORDERED Defendant Arch Insurance Company's Motion to Dismiss (Doc. #21) is GRANTED. The amended complaint (Doc. #18) is DISMISSED.
IT IS SO ORDERED.