Court Opinion

ID: 9351754
Source: CourtListenerOpinion
Date Created: 2023-01-03 17:00:23.210298+00
Date Added: 2024-06-11T17:02:35.215102
License: Public Domain

Appellate Case: 21-1359            Document: 010110791750   Date Filed: 01/03/2023   Page: 1
                                                                                    FILED
                                                                        United States Court of Appeals
                                             PUBLISH                            Tenth Circuit

                           UNITED STATES COURT OF APPEALS                      January 3, 2023
                                                                            Christopher M. Wolpert
                                 FOR THE TENTH CIRCUIT                          Clerk of Court
                             _________________________________

  SAGOME, INC., d/b/a L’Hostaria,

         Plaintiff - Appellant,

  v.                                                             No. 21-1359

  THE CINCINNATI INSURANCE
  COMPANY,

         Defendant - Appellee.

  ------------------------------

  UNITED POLICYHOLDERS;
  AMERICAN PROPERTY CASUALTY
  INSURANCE ASSOCIATION,

         Amici Curiae.
                             _________________________________

                         Appeal from the United States District Court
                                 for the District of Colorado
                           (D.C. No. 1:21-CV-00097-WJM-GPG)
                           _________________________________

 Bradley A. Levin (Susan S. Minamizono with him on the briefs), Levin Sitcoff Waneka
 PC, Denver, Colorado, for Plaintiff-Appellant.

 Daniel G. Litchfield (Alan I. Becker and Michael P. Baniak, Litchfield Cavo LLP,
 Chicago, Illinois, and Conor P. Boyle, Hall & Evans LLC, Denver, Colorado, with him
 on the brief) for Defendant-Appellee.

 Timothy M. Garvey, McDermott Law, LLC, Denver, Colorado, filed an Amicus Curiae
 Brief for United Policyholders, in support of Appellants.
Appellate Case: 21-1359    Document: 010110791750       Date Filed: 01/03/2023   Page: 2

 Laura A. Foggan, Crowell & Moring LLP, Washington, DC, and Wystan Ackerman,
 Robinson & Cole LLP, Hartford, Connecticut, filed an Amicus Curiae Brief for
 American Property Casualty Insurance Association in support of Appellee.

                          _________________________________

 Before HARTZ, TYMKOVICH, and MATHESON, Circuit Judges.
                   _________________________________

 TYMKOVICH, Circuit Judge.
                   _________________________________

       Like many businesses during the COVID-19 pandemic, Sagome, Inc.’s

 restaurant, L’Hostaria, suffered significant financial losses from reduced customer

 traffic and government lockdowns and restrictions. And like many businesses, it

 sought to recover under its comprehensive general insurance policy. And like many

 insurers, The Cincinnati Insurance Company denied coverage because the virus did

 not impose physical loss or damage as required by the policy.

       Sagome sued, but the district court concluded its financial losses were not

 covered. Addressing Sagome’s coverage under Colorado law, we agree and affirm.

 COVID-19 did not cause Sagome to suffer a qualifying loss because there was never

 any direct physical loss or damage to L’Hostaria.

                                  I. Background

       Sagome operated L’Hostaria in Aspen, Colorado. Cincinnati insured

 Sagome throughout 2020. The insurance policy provided Cincinnati would “pay

 for direct ‘loss’” to Sagome’s covered property “caused by or resulting from any

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 Covered Cause of Loss.” 1 Supp. App. 30. In turn, “‘Loss’ mean[t] accidental

 physical loss or accidental physical damage.” Supp. App. 65 (emphases added).

 The policy did not define “physical loss” or “physical damage.”

       Additionally, the policy provided that Cincinnati would pay for lost

 business income if Sagome suspended operations during a “period of restoration”

 if the suspension was “caused by or result[ed] from a Covered Cause of Loss.” 2

 Supp. App. 45 (internal quotation marks omitted). The “period of restoration”

 ended when the property “should be repaired, rebuilt or replaced with reasonable

 speed and similar quality,” when business “resumed at a new permanent

 location,” or on a specified date, whichever occurred first. 3 Supp. App. 68. And

       1
         The policy provided, “We will pay for direct ‘loss’ to Covered Property at
 the ‘premises’ caused by or resulting from any Covered Cause of Loss.” Supp. App.
 30.
       2
           The policy provided,

                We will pay for the actual loss of “Business Income” and
                “Rental Value” you sustain due to the necessary
                “suspension” of your “operations” during the “period of
                restoration”. The “suspension” must be caused by direct
                “loss” to property at a “premises” caused by or resulting
                from any Covered Cause of Loss.

 Supp. App. 45.
       3
           The policy provided the period of restoration

                [e]nds on the earlier of: (1) The date when the property at
                the “premises” should be repaired, rebuilt or replaced with
                reasonable speed and similar quality; (2) The date when
                business is resumed at a new permanent location; or (3)

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 the policy included civil authority coverage that was triggered when a covered

 loss damaged other property, causing the government to prohibit access to

 Sagome’s property. 4

       COVID-19 struck in March 2020, and the resulting government orders

 caused Sagome to temporarily close. It was able to reopen in late April with

               The number of consecutive months after the date of direct
               physical “loss” indicated in the Schedule of this
               endorsement.

 Supp. App. 68.
       4
           The policy provided,

               When a Covered Cause of Loss causes damage to property
               other than Covered Property at a “premises”, we will pay
               for the actual loss of “Business Income” and necessary
               Extra Expense you sustain caused by action of civil
               authority that prohibits access to the “premises”, provided
               that both of the following apply: (a) Access to the area
               immediately surrounding the damaged property is
               prohibited by civil authority as a result of the damage; and
               (b) The action of civil authority is taken in response to
               dangerous physical conditions resulting from the damage
               or continuation of the Covered Cause of Loss that caused
               the damage, or the action is taken to enable a civil
               authority to have unimpeded access to the damaged
               property. This Civil Authority coverage for “Business
               Income” will begin immediately after the time of that
               action and will apply for a period of up to 30 days from the
               date of that action. This Civil Authority coverage for
               Extra Expense will begin immediately after the time of that
               action and will end: 1) 30 consecutive days after the time
               of that action; or 2) When your “Business Income”
               coverage ends; whichever is later.

 Supp. App. 46.
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 limited curbside pickup and outdoor dining, and it could later operate limited indoor

 dining.

       Sagome provided timely notice of its losses to Cincinnati, which denied

 coverage. Sagome sued, alleging breach of contract, bad faith, and violation of

 Colorado insurance law. It also sought a declaratory judgment that its losses were

 covered.

       Cincinnati successfully moved for Rule 12(b)(6) dismissal. Fed. R. Civ. P.

 12(b)(6). The district court concluded COVID-19 did not physically damage

 Sagome’s property. And “because no neighboring properties suffered physical loss

 triggering coverage,” Sagome was not entitled to civil authority coverage. App. 86.

 Deeming any amendment futile, the court dismissed with prejudice.

                                    II. Analysis

       Sagome contends the insurance policy covered losses resulting from the

 COVID-19 pandemic. According to Sagome, it is entitled to coverage because

 physical loss or damage includes loss of use when property is rendered unsafe and

 dangerous. As we explain, this reading does not comport with the policy’s plain

 language and is not compelled by Colorado law.

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       A. The Policy

       As an initial matter, whether COVID-19 causes direct physical loss or

 damage under a property insurance policy is an open question in Colorado. 5

 Relying on relevant precedent from Colorado and other jurisdictions, we answer

 that question in the negative and conclude Sagome was not covered.

       We review a Rule 12(b)(6) dismissal de novo and apply the same standards

 as the district court. Mayfield v. Bethards, 826 F.3d 1252, 1255 (10th Cir. 2016).

 To survive, “a complaint must allege facts that, if true, state a claim to relief that

 is plausible on its face.” Id. (internal quotation marks omitted). We view the

 alleged facts “in the light most favorable to the plaintiff.” Id. Because the policy

 covers a Colorado restaurant, we apply Colorado law. See Berry & Murphy, P.C.

 v. Carolina Cas. Ins. Co., 586 F.3d 803, 808 (10th Cir. 2009).

       Under Colorado law, “[w]e construe an insurance policy according to

 principles of contract interpretation,” giving effect to the parties’ intentions and

       5
          We note that every circuit to have addressed this question has found COVID-
 19 does not cause physical loss or damage under similar policy language. See, e.g.,
 SAS Int’l, Ltd. v. Gen. Star Indem. Co., 36 F.4th 23 (1st Cir. 2022) (Massachusetts
 law); 10012 Holdings, Inc. v. Sentinel Ins. Co., 21 F.4th 216 (2d Cir. 2021) (New
 York law); Uncork and Create LLC v. Cincinnati Ins. Co., 27 F.4th 926 (4th Cir.
 2022) (West Virginia law); Ferrer & Poirot, GP v. Cincinnati Ins. Co., 36 F.4th 656
 (5th Cir. 2022) (per curiam) (Texas law); Santo’s Italian Café, LLC v. Acuity Ins.
 Co., 15 F.4th 398 (6th Cir. 2021) (Ohio law); Sandy Point Dental, P.C. v. Cincinnati
 Ins. Co., 20 F.4th 327 (7th Cir. 2021) (Illinois law); Oral Surgeons, P.C. v.
 Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021) (Iowa law); Mudpie, Inc. v.
 Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir. 2021) (California law);
 Goodwill Indus. of Cent. Okla., Inc. v. Phila. Indem. Ins. Co., 21 F.4th 704 (10th
 Cir. 2021) (Oklahoma law), cert. denied, 142 S. Ct. 2779 (2022); Henry’s La.
 Grill, Inc. v. Allied Ins. Co. of Am., 35 F.4th 1318 (11th Cir. 2022) (Georgia law).
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 reasonable expectations. Hoang v. Assurance Co. of Am., 149 P.3d 798, 801

 (Colo. 2007). We enforce the policy’s plain language unless it is ambiguous,

 which occurs when “it is susceptible to more than one reasonable interpretation.”

 Id.

       In another COVID-19 case, we recently addressed the meaning of “direct

 physical loss” under Oklahoma law. Goodwill Indus. of Cent. Okla., Inc. v.

 Phila. Indem. Ins. Co., 21 F.4th 704 (10th Cir. 2021), cert. denied, 142 S. Ct.

 2779 (2022). There, Goodwill Industries sought to recover under similar policy

 language after it closed stores to comply with government orders. Id. at 708.

 Relying on dictionary definitions, we concluded “a ‘direct physical loss’ requires

 an immediate and perceptible destruction or deprivation of property.” Id. at 710.

 But since COVID-19 did not destroy any property, and Goodwill Industries

 “never lost physical control of its buildings or merchandise from its stores,” we

 found no coverage. Id. A contrary conclusion would have required us to

 improperly “ignore the word ‘physical.’” Id. at 711. We noted the policy’s

 period of restoration clause bolstered our conclusion because Goodwill Industries

 “had nothing to repair, rebuild, or replace before it could resume operations.” Id.

 To the contrary, it “simply had to wait until the government lifted the

 restrictions.” Id.

       Sagome posits a few reasons why Goodwill Industries is inapplicable.

 First, it asserts the Goodwill Industries court was not bound by the relevant

 Colorado precedent of Western Fire Insurance Co. v. First Presbyterian Church,

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 437 P.2d 52 (Colo. 1968). But as we explain below, Western Fire does not compel

 a different result. Second, it asserts Goodwill Industries did not allege the virus

 was on its premises. The pertinent question, however, is not simply whether

 COVID-19 was present, but whether it caused physical loss or damage. Third,

 Sagome notes that unlike its policy, Goodwill Industries’ policy contained a virus

 exclusion. True, but we only analyzed the exclusion as an alternative basis for

 finding no coverage. Goodwill Indus., 21 F.4th at 712. Finally, Sagome asserts

 the Colorado Supreme Court takes a more skeptical approach to insurance

 contracts than the Oklahoma Supreme Court. But both Colorado and Oklahoma

 law require us to give an unambiguous policy term its plain, ordinary meaning.

 See Hoang, 149 P.3d at 801; Bituminous Cas. Corp. v. Cowen Constr., Inc., 55

 P.3d 1030, 1033 (Okla. 2002). And doing so here establishes COVID-19 did not

 cause direct physical loss. It did not destroy Sagome’s property. Goodwill

 Indus., 21 F.4th at 710. And Sagome’s “temporary inability to use its property

 for its intended purpose”—a fully-functioning restaurant—was not a qualifying

 loss. Id. at 711.

       For the same reasons, Sagome did not suffer “direct physical damage.”

 Webster’s Third New International Dictionary (2002) defines “direct” as “marked by

 absence of an intervening agency, instrumentality, or influence: immediate”;

 “physical” as “of or relating to natural or material things as opposed to things mental,

 moral, spiritual, or imaginary”; and damage as “injury or harm to person, property, or

 reputation.”

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       For Sagome to be covered, COVID-19 had to injure or harm its property in

 some physical manner. But Sagome did not—and could not—plead such damage,

 because COVID-19 does not physically injure or harm property. Most courts have

 agreed that this type of policy language does not cover COVID-19 losses. See, e.g.,

 Dukes Clothing, LLC v. Cincinnati Ins. Co., 35 F.4th 1322, 1328 (11th Cir. 2022)

 (Alabama law) (finding the insured “did not state a claim that COVID-19 caused

 physical damage to its property because (1) COVID-19 does not physically alter the

 property it rests on; and (2) COVID-19 particles can be removed from a surface by

 standard cleaning measures”); Ferrer & Poirot, GP v. Cincinnati Ins. Co., 36 F.4th

 656, 660 (5th Cir. 2022) (per curiam) (Texas law) (internal quotation marks omitted)

 (“While COVID-19 has wrought great physical harm to people, it does not physically

 damage property within the plain meaning of physical.”); Verveine Corp. v.

 Strathmore Ins. Co., 184 N.E.3d 1266, 1276 (Mass. 2022) (internal quotation

 marks omitted) (concluding COVID-19’s “mere presence does not amount to loss

 or damage to the property”).

       In defining “physical loss” and “physical damage,” Sagome primarily relies

 on the fact that the virus is physical in the sense it is tangible, attaches to

 property, and causes disease. But that interpretation improperly isolates

 “physical” from “loss” and “damage.” See U.S. Fid. & Guar. Co v. Budget Rent-

 A-Car Sys., Inc., 842 P.2d 208, 213 (Colo. 1992). For coverage, the loss or

 damage itself must be physical, not simply stem from something physical.

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        As in Goodwill Industries, the period of restoration clause reinforces that

  Sagome did not suffer a covered loss: There was nothing to restore or repair or any

  need to move before recommencing business. 21 F.4th at 711. Once the government

  allowed Sagome to resume selling food, it did. Sagome pled that when it “was

  allowed to partially reopen its business, it undertook some repairs and alterations on

  the premises.” App. 21. But it did not connect this standalone allegation to COVID-

  19. Even viewing the facts in Sagome’s favor, it would be unreasonable to infer

  COVID-19 caused Sagome to repair its premises because the virus did not cause any

  physical loss or damage to repair. See Cherokee Nation v. Lexington Ins. Co., __

  P.3d __, 2022 WL 4138429, at *5 (Okla. Sept. 13, 2022) (concluding various

  COVID-19 modifications “constitute[d] measures to stop the spread of the virus from

  one person to another, not repairs to or replacement of damaged or lost property”).

        Sagome’s reliance on the civil authority clause is similarly inapplicable. The

  provision provided that Cincinnati would pay for lost business income if the

  government prohibited access to L’Hostaria because a covered loss damaged other

  property. But Sagome only alleged COVID-19 damaged other property, which was

  not a covered loss.

        B. Western Fire

        Sagome primarily relies on a Colorado case, Western Fire, 437 P.2d at 56.

  Sagome interprets it to stand for the proposition “that ‘direct physical loss’ in a

  property insurance policy does not require visible physical alteration of property.”

  Aplt. Br. at 16 n.3. In Western Fire, the fire department ordered a church to close its

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  building because gasoline in the soil and the resulting vapors “infiltrated and

  contaminated” the building’s “foundation and halls and rooms.” 437 P.2d at 54

  (internal quotation marks omitted). The church claimed it suffered a “direct physical

  loss” under its insurance policy, and a jury agreed. Id. at 53 (internal quotation

  marks omitted).

        Upholding the verdict, the Colorado Supreme Court observed the loss of

  use could not “be viewed in splendid isolation, but must be viewed in proper

  context.” Id. at 55. Doing so showed it was the consequence “of the fact that

  because of the accumulation of gasoline around and under the church building[,]

  the premises became so infiltrated and saturated as to be uninhabitable, making

  further use of the building highly dangerous.” Id. And that “equate[d] to a direct

  physical loss.” Id.

        No Colorado appellate court has since relied on Western Fire, although the

  case has been invoked in other jurisdictions in COVID-19 insurance suits. Courts

  have generally distinguished it. See, e.g., Sandy Point Dental, P.C. v. Cincinnati

  Ins. Co., 20 F.4th 327, 334 (7th Cir. 2021) (“But the gas infiltration . . . led to

  more than a diminished ability to use the property. It was so severe that it led to

  complete dispossession—something easily characterized as a ‘direct physical

  loss.’”); Santo’s Italian Café, LLC v. Acuity Ins. Co., 15 F.4th 398, 404–05 (6th

  Cir. 2021) (“[E]ach case [finding loss of use may be a physical loss] involved

  property that became practically useless for anything.”); Hill and Stout, PLLC v.

  Mut. of Enumclaw Ins. Co., 515 P.3d 525, 533 (Wash. 2022) (distinguishing

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  Western Fire because the property in the instant case was not “rendered unsafe or

  uninhabitable because of a dangerous physical condition”).

        We relied on Western Fire in an unrelated context. In Adams-Arapahoe

  Joint School District No. 28-J v. Continental Insurance Co., we upheld the

  finding of a covered loss where a small portion of the insured’s corroded roof

  collapsed. 891 F.2d 772 (10th Cir. 1989). We agreed with the district court that

  the policy covered “the entire corroded area, because the corrosion made the

  school unsafe and unusable.” Id. at 777–78 (citing W. Fire, 437 P.2d at 55).

        We find Western Fire distinguishable in this context. 6 The Colorado

  Supreme Court emphasized there was no direct physical loss “until the

  accumulation of gasoline under and around the church built up to the point that

  there was such infiltration and contamination . . . of the church building as to

  render it uninhabitable and make the continued use thereof dangerous.” W. Fire,

  437 P.2d at 55. Here, Sagome pled that COVID-19—which can cause illness—

  was in its restaurant. 7 But it did not plead that COVID-19 built up to the point of

        6
          A Colorado state trial court has recently relied on Western Fire to deny an
  insurer’s motion for partial judgment on the pleadings. Regents of the Univ. of Colo.
  v. Factory Mut. Ins. Co., No. 2021CV30206, 2022 WL 245327, at *4 (Colo. 20th Jud.
  Dist. Ct. Jan. 26, 2022). In a case involving a university seeking to recover its
  COVID-19 losses, the court observed, “[I]t is at least plausible to conclude that a
  property could become so saturated [from COVID-19] with contaminated objects,
  aerosols, and droplets, that its buildings were uninhabitable.” Id. Given our
  understanding of Western Fire, we do not find this assessment persuasive.
        7
          Sagome did not allege with specificity that COVID-19 was present and
  transmitted in L’Hostaria. But even accepting its threadbare pleading, Sagome loses.
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  making its property “uninhabitable.” Nor could it. COVID-19 did not affect

  Sagome’s property like the gasoline in Western Fire and “render [the] restaurant

  unsafe and unusable for any and all purposes whatsoever.” GPL Enter., LLC v.

  Certain Underwriters at Lloyd’s, 276 A.3d 75, 87 (Md. Ct. Spec. App. 2022); see

  also Neuro-Commc’n Servs., Inc. v. Cincinnati Ins. Co., __ N.E.3d __, 2022 WL

  17573883, at *6 (Ohio Dec. 12, 2022) (noting COVID-19 did not render the

  insured’s premises “wholly uninhabitable”). Indeed, Sagome continued to use its

  property after the initial shutdown, even though COVID-19 presumably remained

  or was transmitted by infected individuals.

        And, notably, the church in Western Fire recovered “the cost of remedying

  the infiltration and contamination.” 437 P.2d at 54. Although Sagome may have

  taken steps to clean surfaces in its restaurant or otherwise remove COVID-19, its

  remediation efforts were not like those required in Western Fire. See Verveine

  Corp., 184 N.E.3d at 1276 (“While saturation, ingraining, or infiltration of a

  substance into the materials of a building or persistent pollution of a premises

  requiring active remediation efforts is sufficient to constitute ‘direct physical loss

  of or damage to property,’ evanescent presence is not.”).

        The gasoline in Western Fire led to a total physical loss of use; the church

  could not use the building until the gasoline was cleaned up. Similarly, the

  corrosion in Adams-Arapahoe made the school “unsafe and unusable.” 891 F.2d

  at 777 (emphasis added). Western Fire establishes that in Colorado there may be

  a total physical loss when property is rendered unusable or uninhabitable, a

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  conclusion in line with other jurisdictions. See, e.g., Murray v. State Farm Fire

  and Cas. Co., 509 S.E.2d 1, 17 (W. Va. 1998) (“Losses covered by the policy,

  including those rendering the insured property unusable or uninhabitable, may

  exist in the absence of structural damage to the insured property.”); Port Auth. of

  N.Y. and N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002) (New

  York and New Jersey law) (“When the presence of large quantities of asbestos in

  the air of a building is such as to make the structure uninhabitable and unusable,

  then there has been a distinct loss to its owner.”). But Sagome’s property was

  never rendered uninhabitable or unusable. Sagome did not suffer a total or even

  partial physical loss.

        In sum, Sagome was not covered under the policy’s plain language, and

  Western Fire does not change that conclusion.

        C. Certification

        Sagome requests we ask the Colorado Supreme Court whether COVID-19’s

  presence constitutes physical loss or damage under an insurance policy governed

  by Colorado law. Because we could rely on relevant precedent from Colorado

  and other jurisdictions to answer the determinative state-law question,

  certification is unnecessary.

                                  III. Conclusion

        For the foregoing reasons, we affirm the district court and deny Sagome’s

  certification motion.

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