Las Vegas Business Court Permits Covid-19 Business Interruption Insurance Coverage Suit to Proceed

Las Vegas Business Court Judge Mark R. Denton issued an order last week denying an insurer’s efforts to dismiss a Covid-19 business interruption insurance coverage suit.  A copy of the Complaint in JGB Vegas Retail Lessee, LLC v. Star Surplus Lines Ins. Company can be found here, and a copy of Judge Denton’s Order can be found here.

JGB’s Complaint

The Complaint alleges that Las Vegas based JGB Vegas Retail Lessee, LLC owns Grand Bazaar Shops.  Grand Bazaar “owns a large, open-air mall with over thirty-five restaurants and shops, located on the [Las Vegas] Strip at the entrance of Bally’s Hotel & Casino Las Vegas.” These businesses did a brisk daily business.

In March 2020, Nevada’s governor issued the first of a number of stay-at-home orders shutting down non-essential businesses, including most of the Grand Bazaar stores. The shops that were allowed to remain open could only do so on a limited basis, and saw precipitous drops in business.

The governor’s order included a statement that the coronavirus had the “ability to survive on surfaces for indeterminate periods of time render[ing] some property unusable.”

JGB alleged “the presence of the coronavirus and the resulting COVID-19 disease have caused direct physical loss and/or damage to JGB’s property….” JGB pleads “[o]vernight, the Grand Bazaar Shops went from a busy, bustling destination for shopping and entertainment to a virtual ghost-town.” The prohibited businesses lost money and JGB lost rental income, among other things.

JGB alleged it purchased all risks business interruption insurance from Starr, with policy limits exceeding $33 million. It pleaded coverage for losses (1) “directly resulting from the interruption of JGB’s normal business operations”; (2) “caused by restriction of access to property, including specifically if caused by an order issued by a civil authority”; (3) “resulting from the untenantability of JGB’s premises”; and (4) “Extra expenses incurred to continue business as nearly normal as practicable.”

JGB claims Starr unreasonably denied coverage by taking the position “there was no evidence that an order of civil authority was issued because of alleged ‘loss or damage to property,’ or that any order prohibited access to JGB’s insured property….” JGB specifically pleads Starr asserted there was “no actual physical loss or damage … identified …. Rather, it appears that [JGB’s] claim is based on the loss of the ability to use the premises because of the March 18, 2020 State of Nevada Emergency Order.” Further, “Starr contended that coverage could not be afforded to JGB because ‘there [wa]s no mention of the [State of Nevada] orders having been issued because of physical loss or damage.’”

The complaint alleges the Starr policy “covers the property insured hereunder against all risks of direct physical loss or damage to covered property while at INSURED LOCATIONS occurring during the Term of this POLICY, except as hereinafter excluded or limited.” INSURED LOCATIONS include “any LOCATION listed on the latest SCHEDULE OF LOCATIONS submitted to and accepted by the COMPANY [Starr] as of the Policy inception date [and] includes the area within one thousand (1,000) feet of such LOCATION, all within the Coverage Territory as well as any building bounded on all sides by public streets, clear land space or open waterways.”

“[T]he Policy’s Business Interruption Section provides that Starr will pay for ‘Loss directly resulting from necessary interruption of the Insured’s NORMAL business operations caused by direct physical loss or damage to real or personal property covered herein . . . arising from a peril insured against hereunder and occurring during the term of this POLICY; all while located at INSURED LOCATIONS.’”

The Starr policy also addresses civil authority closures: “This POLICY is extended to include, starting at the time of physical loss or damage, the actual loss sustained by the Insured, resulting directly from an interruption of business as covered hereunder, during the length of time, not exceeding the number of days shown under TIME LIMITS stated in the Declarations, when, as a direct result of damage to or destruction of property within one (1) statute mile of an INSURED LOCATION by the peril(s) insured against, access to such described premises is specifically prohibited by order of civil or military authority.”

JGB sued for breach of contract, a declaratory judgment that it is entitled to the full amount of all risks coverage for its losses, violations of Nevada’s Unfair Claims Practices Act, and breach of the covenant of good faith and fair dealing. Starr moved to dismiss these claims before Judge Denton in the Clark County Business Court.

Judge Denton’s Decision

First, it should be noted that under Nevada law to survive a motion to dismiss, unlike the federal Twombly/Iqbal standards for plausible pleadings, “[a] complaint need only set forth sufficient facts to demonstrate the necessary elements of a claim for relief so that the defending party has adequate notice of the nature of the claim and relief sought.”

Breach of Contract Claims Survives

Judge Denton first observed the policy’s coverage language:

  1. “[T]he property insured hereunder against all risks of direct physical loss or damage to covered property while at INSURED LOCATIONS occurring during the Term of this POLICY, except as hereinafter excluded or limited.”
  2. “The Policy also provides certain ‘TIME ELEMENT’ coverages for business interruption losses; the main section provides coverage for ‘[l]oss directly resulting from necessary interruption of the Insured’s NORMAL business operations caused by direct physical loss or damage to real or personal property covered herein[.]’”
  3. “Also included in the TIME ELEMENT COVERAGE is ‘Interruption by Civil or Military Authority.’”

He next looks at the alleged facts.

  1. “JGB’s Complaint alleges the physical presence and known facts about the coronavirus, including that it spreads through infected droplets that ‘are physical objects that attach to and cause harm to other objects’ based on its ability to ‘survive on surfaces’ and then infect other people.”
  2. “[B]y March 11, 2020, COVID-19 was present at the Mirage casino, within one mile from JGB’s Grand Bazaar Shops.”
  3. “[B]ased on these facts and the location and characteristics of the Grand Bazaar Shops … it was ‘highly likely that the novel coronavirus that causes COVID-19 has been present on the premises of the Grand Bazaar Shops, thus damaging the property JGB had leased to its tenants.’”
  4. “The Complaint also states that because the presence of COVID-19 at or near the Grand Bazaar Shops and Governor Sisolak’s March 20, 2020 Order restricting and prohibiting access to non-essential business, the Grand Bazaar Shops were forced to close and the few restaurants that remained open were severely limited in their operations, resulting in significant losses.”

Direct Physical Loss Adequately Pleaded

Judge Denton finds these allegations sufficient to establish a claim that JGB’s losses stem “from the direct physical loss and/or damage to property from COVID-19 to trigger Starr’s obligations under the property and TIME ELEMENT coverage provisions in the Policy, including coverage for general business interruption and Interruption by Civil or Military Authority.” Judge Denton looks to a federal decision out of Missouri’s Western District, Studio 417, Inc. v. Cincinnati Ins. Co., for guidance. A copy of that Missouri federal opinion can be found here.

In Studio 417, the plaintiff adequately stated a claim by alleging:

  1. There was “direct physical loss, because [the insured] alleged that the virus ‘is a physical substance,’ which ‘live[s] on’ and is ‘active on inert physical surfaces,’”
  2. “[T]hat ‘it is likely that customers, employees, and/or other visitors to the insured properties were infected with COVID-19 and thereby infected the insured properties with the virus’” and
  3. That “‘the presence of COVID-19 “renders physical property in their vicinity unsafe and unusable.”’”.

Pollution Exclusion does not Bar Coverage

The policy also included a pollution exclusion for “contamination”.  Pollutant and Contaminant are defined terms, and include “any solid, liquid, gaseous or thermal irritant or CONTAMINANT including, but not limited to, smoke, vapor, soot, fumes, acids, alkalis, chemicals, virus, waste ….”

Starr focused on the word “virus” to argue the exclusion’s clear application, but this argument failed. Judge Denton cited the legal principles that the insurer bears the burden of proving an exclusion’s application, and that the insurer arguing for an exclusion’s application “must (1) write the exclusion in obvious and unambiguous language in the policy, (2) establish that the interpretation excluding covering under the exclusion is the only interpretation that could fairly be made, and (3) establish that the exclusion clearly applies to this particular case.”

Judge Denton concludes: “Starr has not shown that it is unreasonable to interpret the Pollution and Contamination Exclusion to apply only to instances of traditional environmental and industrial pollution and contamination that is not at issue here, where JGB’s losses are alleged to be the result of a naturally-occurring, communicable disease.” The word “virus” did not save the day for Starr.  Judge Denton favorably quotes from a recent Florida federal case, Urogynecology Specialist of Fla. LLC v. Sentinel Ins. Co., for the principle that “[d]enying coverage for losses stemming from COVID-19, however, does not logically align with the grouping of the virus exclusion with other pollutants such that the Policy necessarily anticipated and intended to deny coverage for these kinds of business losses.” A copy of this Florida case can be found here.

Finally, Judge Denton allowed the Unfair Claim Practices Act and good faith and fair dealing claims to proceed.

Again, a copy of Judge Denton’s Order can be found here.