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CAJUN CONTI LLC, Cajun Cuisine 1 LLC, and Cajun Cuisine LLC d/b/a Oceana Grill v. CERTAIN UNDERWRITERS AT LLOYD'S, LONDON and Governor John B. Edwards in his official capacity as Governor of the State of Louisiana, and The State of Louisiana
Cajun Conti LLC, Cajun Cuisine I LLC, and Cajun Cuisine LLC d/b/a Oceana Grill (hereinafter collectively “Oceana”) filed a petition for declaratory judgment regarding an all-risks insurance policy they purchased from Certain Underwriters at Lloyd's, London (Lloyd's). In their petition, the appellants sought a declaration that the insurance policy provided coverage for any loss or damage caused by direct physical loss of or damage to their insured premises as a result of continuous contamination by COVID-19. Lloyd's argued that contamination due to COVID-19 did not constitute “direct physical loss or damage” and filed a motion for summary judgment, which the trial court denied. After a bench trial, the trial court denied Oceana's petition for declaratory judgment. Oceana subsequently appealed this judgment.
Upon review, we conclude that the insurance policy is ambiguous and capable of more than one reasonable interpretation in regards to the coverage of lost business income. Due to the existing ambiguity in the relevant policy language, the contract should be interpreted in favor of the appellants. Therefore, we reverse the trial court's judgment.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
Oceana is the owner and operator of Oceana Grill in the French Quarter of New Orleans. Prior to the onset of the COVID-19 pandemic, Oceana Grill employed 200 staff members and could accommodate up to 500 guests at a time. After the emergence of the COVID-19 pandemic, on March 16, 2020, the mayor of New Orleans prohibited non-emergency public and private social gatherings and limited restaurant operations to take-out and delivery services via an emergency proclamation. As time passed, the mayor issued other proclamations facilitating the return of in-person dining at different occupancy levels. Additionally, the Centers for Disease Control (“CDC”) issued guidelines and procedures for restaurants and bars to abate the spread of the contagious virus on their properties.
Oceana closed the Oceana Grill dining rooms on March 16, 2020, in compliance with the mayor's proclamation, and reopened on May 16, 2020, in keeping with updated mayoral guidelines. The guidelines envisioned a phased reopening plan based on the prevalence of COVID-19 in the city. The May reopening of Oceana Grill was undertaken with a 75% diminishment of the property's normal capacity. Capacity increased on June 13, 2020 and on October 3, 2020, but the property still operated at 40%-45% under capacity due to the spread of COVID-19 in the city. To mitigate the spread of COVID-19 particles within its property, Oceana modified seating arrangements, decreased the number of tables and floor area available for patrons, and implemented measures to sanitize surfaces.
On March 16, 2020, Oceana filed a petition for declaratory judgment seeking a declaration from the district court that a policy issued to it by Lloyd's covered certain losses related to the pandemic. The policy in question is an all-risks commercial insurance policy with a $91,000 premium. The policy covers losses due to “direct physical loss of or damage to” the insured property. Lost business income and extra expenses are covered for losses sustained due to necessary suspensions of the property's operations during the “period of restoration.” The “period of restoration” is defined as commencing seventy-two hours after the physical loss or damage occurs and continuing until the date when the property is “repaired, rebuilt, or replaced with reasonable speed and similar quality” or when business is “resumed at a new permanent location.”
Oceana's initial petition sought a declaration that the policy contained coverage “for any future civil authority shutdowns of restaurants in the New Orleans area due to physical loss from Coronavirus contamination and that the policy provides business income coverage in the event that the coronavirus has contaminated the insured premises.” In subsequent amendments, Oceana sought a declaration that the policy provided coverage for any loss or damage caused by “direct physical loss of or damage to” their insured premises as a result of continuous contamination by COVID-19.
In response, Lloyd's filed a motion for summary judgment arguing that the claims are not covered because contamination due to coronavirus did not constitute “direct physical loss of or damage to” property. Lloyd's contended that the petition lacked any genuine issues of material fact and that it was entitled to summary judgment as matter of law. The trial court denied Lloyd's motion for summary judgment and held a bench trial. Following the trial, the trial court rendered judgment denying Oceana's petition for declaratory judgment. Oceana filed the present appeal.
Standard of Review
Trial courts possess great discretion in considering petitions for declaratory relief. Deep South Center for Envtl. Justice v. Council of City of New Orleans, 19-0774, p. 17 (La. App. 4 Cir. 2/12/20), 292 So. 3d 973, 984 (citing Delta Admin. Servs., L.L.C. v. Limousine Livery, Ltd., 15-0110, p. 6 (La. App. 4 Cir. 6/17/15), 216 So. 3d 906, 910). Appellate courts review these decisions under an abuse of discretion standard. Id. The Louisiana Code of Civil Procedure Article 1872 authorizes the use of declaratory judgment proceedings in construing contracts.
Legal questions of contractual interpretation are subject to de novo review by appellate courts. Armstrong Airport Concessions v. K-Squared Restaurant, LLC, 15-0375, p. 9 (La. App. 4 Cir. 10/28/15), 178 So. 3d 1094, 1101 (citing Subervielle v. State Farm Mut. Auto. Ins. Co., 08-0491, p. 2 (La. App. 4 Cir. 1/7/09), 32 So. 3d 811, 812). “Appellate courts apply the ‘manifest error’ or ‘clearly wrong’ standard when reviewing a trial court's findings of fact.” Greenblatt v. Sewerage & Water Board of New Orleans, 19-0694, p. 3 (La. App. 4 Cir. 12/20/19), 287 So. 3d 763, 766 (citing Rosell v. ESCO, 549 So. 2d 840, 844 (La. 1989) (citations omitted)).
“Thus, applying these precepts to the case sub judice, this Court must determine whether the district court abused its discretion in granting the declaratory judgment and whether the district court's review and analysis of the contract was legally correct.” Brady v. Pirner, 18-0556, p. 11 (La. App. 4 Cir. 12/5/18), 261 So. 3d 867, 874-75.
Insurance policies should be interpreted under ordinary rules of contract interpretation. Sumner v. Mathes, 10-0438, p. 5 (La. App. 4 Cir. 11/24/10), 52 So. 3d 931, 934 (citing Peterson v. Schimek, 98-1712, pp. 4-5 (La. 3/2/99), 729 So. 2d 1024, 1028-29). The rules of contractual interpretation are laid out in the Louisiana Civil Code. Pursuant to La. C.C. art 2047, the “words of a contract are given their generally prevailing meaning”, while “[w]ords of art and technical terms must be given their technical meaning when the contract involves a technical matter.” The words used in insurance policies are to be interpreted “in their plain, ordinary and popular sense.” Central Louisiana Elec. Co., Inc. v. Westinghouse Elec. Corp., 579 So. 2d 981, 986 (La. 1991) (citing Muse v. Metropolitan Life Ins. Co., 193 La. 605, 192 So. 72 (1939)).
“Words susceptible of different meanings must be interpreted as having the meaning that best conforms to the object of the contract.” La. C.C. art 2048. “A doubtful provision must be interpreted in light of the nature of the contract, equity, usages, the conduct of the parties before and after the formation of the contract, and of other contracts of a like nature between the same parties.” La. C.C. art. 2053.
If a contractual provision is susceptible of different meanings, it “must be interpreted with a meaning that renders it effective and not with one that renders it ineffective.” La. C.C. art 2049. In other words, “[i]nsurance policies should be construed to effect, rather than to deny coverage.” Davis v. Nola Home Construction, L.L.C., 16-1274, p. 14 (La. App. 4 Cir. 6/14/17), 222 So. 3d 833, 844 (citing Supreme Services and Specialty Co., Inc. v. Sonny Greer, Inc., 06-1827, p. 6 (La. 5/22/07), 958 So. 2d 634, 638). However, efforts to interpret insurance contracts must not be undertaken in “an unreasonable or strained manner” so as to “enlarge or to restrict its provisions beyond what is reasonably contemplated by unambiguous terms.” Sumner, 10-0438, p. 5, 52 So. 3d at 934 (citing Rolston v. United Services Automobile Ass'n, 06-0978, p. 4 (La. App. 4 Cir. 12/13/06), 948 So. 2d 1113, 1117).
A contractual term is “not automatically considered ambiguous merely because it is not defined in the contract.” Sumner, 10-0438, p. 6, 52 So. 3d at 935. “However, if the insurance policy is susceptible to two or more reasonable interpretations, then it is considered ambiguous and must be liberally interpreted in favor of coverage.” Supreme Services, 06-1827, p. 6, 958 So. 2d at 638 (citing Reynolds v. Select Properties, Ltd., 93-1480 (La. 4/11/94), 634 So. 2d 1180, 1183; Newby v. Jefferson Parish Sch. Bd., 99-0098 (La. App. 5 Cir. 6/1/99), 738 So. 2d 93).
Additionally, when a contractual term is adjudged to be ambiguous, parole evidence becomes admissible “to clarify the ambiguity and to show the intention of the parties. Dixie Campers, Inc. v. Vesely Co., 398 So. 2d 1087, 1089 (La. 1981) (citing White v. Rimmer & Garrett, Inc., 340 So. 2d 283 (La. 1976); Gulf States Finance Corp. v. Airline Auto Sales, Inc., 248 La. 591, 181 So. 2d 36 (1965); Moreau v. Otis Elevator Co., 531 F. 2d 311 (5th Cir. 1976)).
“It is well settled that a court of appeal may not set aside a trial court's or a jury's finding of fact in the absence of ‘manifest error’ or unless it is ‘clearly wrong.’ ” Snider v. Louisiana Medical Mut. Ins. Co., 14-1964, p. 5 (La. 5/5/15), 169 So. 3d 319, 323 (citing Rosell v. ESCO, 549 So. 2d 840, 844 (La. 1989)). The appellate court must review the entirety of the record to evaluate “whether the fact-finder's conclusion was a reasonable one.” Id. (citing Clay v. Our Lady of Lourdes Regional Medical Center, 11-1797 (La. 5/8/12), 93 So. 3d 536, 543).
Assignments of Error
In their first assignment of error, the appellants claim that the district court erred in concluding that their premises did not sustain a direct physical loss or damage under the terms of the contract as a result of continuous contamination by the COVID-19 coronavirus. In their second assignment of error, the appellants argue, in the alternative, that the district court erred in concluding that the commercial property policy that the appellee drafted and sold to Oceana was not ambiguous. The appellants further argue that this ambiguity requires the court to liberally construe the policy in favor of coverage.
The question posed by the appellants in their first assignment of error is a factual one, subject to the manifest error/clearly wrong standard of review. Gordon v. Gordon, 16-0008, p. 2 (La. App. 4 Cir. 6/8/16), 195 So.3d 687, 688-89 (citing Hall v. Folger Coffee Co., 03-1734, p. 9 (La. 4/14/04), 874 So. 2d 90, 98). However, the question of whether ambiguity exists in the policy terms is a legal question requiring an examination of the contractual language and subject to de novo review. Armstrong Airport Concessions, 15-0375, p. 9, 178 So. 3d at 1101 (citation omitted). These two assignments of error were propounded in the alternative. We focus on the question of ambiguity, as we believe it resolves the matter at hand.
The policy at issue is an “all-risk” commercial insurance policy that covered the appellants’ loss of business income sustained due to necessary “suspension” of operations during the “period of restoration.” The “suspension” must be caused by “direct physical loss of or damage to the property.” “All-risk” insurance policies cover all risks “unless clearly and specifically excluded.” Widder v. Louisiana Citizens Prop. Ins. Corp., 11-0196, p. 4 (La. App. 4 Cir. 8/10/11), 82 So. 3d 294, 296, writ denied, 11-2336 (La. 12/2/11), 76 So. 3d 1179. The policy does not define “direct physical loss” or “damage.”
The Supreme Court of Louisiana has previously defined the meaning of “direct,” in relation to “loss or damage” in an insurance contract, as signifying “immediate or proximate as distinguished from remote.” Central Louisiana Elec. Co., Inc., 579 So. 2d at 985 n. 8 (citing Lorio v. Aetna Ins. Co., 255 La. 721, 232 So. 2d 490 (1970)). The appellants discussed this Court's examination of what constitutes “direct physical loss of or damage to the property” in Widder v. Louisiana Citizens Prop. Ins. Corp., a residential lead contamination case.
Widder held that physical damage was not necessary to trigger coverage in a homeowner policy because the insured property was “rendered unusable or uninhabitable.” Widder, 11-0196, p. 4, 82 So. 3d at 296 (citing In re Chinese Manufactured Drywall Products Liability Litigation, 759 F. Supp. 2d 822 (E.D. La. 2010); Ross v. C. Adams Construction & Design, 10-852 (La. App. 5 Cir. 6/14/11), 70 So. 3d 949). Widder's holding relies on a line of defective drywall cases wherein drywall installed on insured property was physically intact, but its inherent defects required that it be replaced in order for the property to be usable. The appellee asserts that Widder and associated drywall cases do not apply to the facts herein because the appellants continued operations with employees and some patrons, and the property was not uninhabitable or useless as it was in Widder and the drywall cases.
However, the policy covers the loss of business income due to necessary “suspension” of operations caused by “direct physical loss of or damage to the property.” “Suspension” is defined in the policy as the “slowdown or cessation of your business activities.” Therefore, under the terms of the contract, the complete cessation of operations and an uninhabitable property are not prerequisites to payment for business losses suffered due to the suspension of operations caused by “direct physical loss of or damage to the property.” Suspension includes the slowdown of business activities, which occurred here, as well as the complete cessation of business operations which occurs when a property is entirely uninhabitable.
The appellee also argues that Widder's holding is inapposite because this matter deals with a business property policy, not a homeowner policy, and a viral contagion, not defective drywall. However, it is possible to review conceptual commonalities between different types of insurance policies without inappropriately extending a court's holding. The central inquiry remains focused upon “the words of the contract” itself. See La. C.C. art 2047. “Most importantly, a contract ‘must be interpreted in a common-sense fashion, according to the words of the contract their common and usual significance.’ ” Prejean v. Guillory, 10-0740, p. 7 (La. 7/2/10), 38 So.3d 274, 279 (quoting Lambert v. Maryland Cas. Co., 418 So. 2d 553, 559 (La. 1982)).
The appellee notes that the insurance policies in the drywall cases “all define ‘property damage’ to include loss of use of tangible property.” In re Chinese Manufactured Drywall Prods. Liab. Litig., 759 F. Supp. 2d 822, 832 (E.D. La. 2010). The appellee argues that this language is distinct from the present case, where the loss itself must be “physical.” The appellee points to recent cases in other jurisdictions that have interpreted “physical” in relation to coronavirus claims as requiring a tangible or corporeal loss of property or damage. The cases referenced by the appellee are not binding upon this Court.
Moreover, many cases in other jurisdictions have reached a contrary conclusion and extended coverage to losses arising from disease-causing agents with a tangible physical form but which are, nevertheless, not discernible with the naked human eye. See Port Authority of N.Y. and N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 235-36 (3d Cir. 2002) (holding that “physical loss or damage” exists if asbestos fibers contaminate the insured property such that it is uninhabitable, “or if there is an imminent threat of the release of a quantity of asbestos fibers that would cause a loss of utility”); See Farmers Ins. Co. of Or. v. Trutanich, 123 Or. App. 6, 858 P.2d 1332, 1335 (1993) (finding that odor is a “physical” trait because it damaged the insured property and concluding that the “cost of removing the odor is a direct physical loss”); See Matzner v. Seaco Ins. Co., No. CIV. 96-0498-B, 1998 WL 566658, at *4 (Mass. Super. 1998) (ruling that “carbon-monoxide contamination constitutes ‘direct physical loss of or damage to’ property”). This Court, in Widder, joined this line of cases extending coverage for a broader array of losses caused by disease-causing agents with a tangible, but microscopic, physical form.
The appellee further contends that this Court has previously rejected the argument that “physical loss of or damage to” was ambiguous in a business interruption suit. Yount v. Lafayette Ins. Co., 08-0380 (La. App. 4 Cir. 1/28/09), 4 So. 3d 162. In Yount, a doctor sued for property damage and economic losses suffered after her medical office was damaged in Hurricane Katrina. Id., 08–0380, p. 3, 4 So. 3d at 165. The policy provided coverage for lost business income due to suspension of business activities “caused by direct physical loss of or damage to property.” Id., 08–0380, p. 4, 4 So. 3d at 166. The doctor argued that the policy language was ambiguous because it could be “interpreted to mean the plaintiff need only suffer damage to the insured property, not necessarily direct or physical.” Id., 08-0380, p. 9, 4 So. 3d at 168. The doctor took the position that in the policy provision requiring “physical loss of or damage to the property,” the words “direct physical” only modified “loss,” and not “damage.” Id.
This Court held that “the policy provision at issue to be clear and unambiguous as applied under the facts of this case.” Id., 08-0380, p. 10, 4 So. 3d at 169 (emphasis added). Consequently, Yount does not stand for the proposition that the terms “physical loss of or damage to” are not ambiguous. Rather, the Court held that, under the facts of that case, and in the context of the specific ambiguity argument proffered by the policyholder in Yount, the terms were not ambiguous. Id.
Under the facts of this viral contagion case, an equal level of clarity is absent. One reasonable interpretation of the provision is that suspension of business operations due to “direct physical loss of or damage to the property” means the loss of the property's full use, as the appellants argue. In this case, the appellants were unable to fully utilize the insured property due to the viral particles inside the property. The physical presence of these viral particles necessitated diminished capacity, constant decontamination efforts, and caused a slowdown of their business.
The appellants closed their dining rooms on March 16, 2020, and reopened on May 16, 2020. They reopened with a 75% diminishment of the restaurant's capacity due to the prevalence of COVID-19, in compliance with government mandates. Capacity increased on June 13, 2020 and on October 3, 2020, but the property still operated at 40%-45% under capacity due to the ongoing omnipresence of the coronavirus.
The appellants presented the testimony of Doctor Lemuel Moye, accepted as an expert in general medicine, biostatistics, epidemiology, and virology. Dr. Moye found that there was an “overwhelming probability” that there were people in the restaurant infected with COVID-19 at all times relevant to this suit. Dr. Moye further testified that viral particles can remain in the air for over an hour and can contaminate surfaces.
Although the appellee's expert witness testified that there have been no known infections caused by interactions between humans and an inanimate surface, the appellants demonstrated that contagion-causing viral particles persisted in the air of the premises. The physical presence of COVID-19 substantially diminished the usable space of the property, as tables needed to be pushed farther apart, and resulted in economic losses due to the slowdown of the appellants’ business. Stated differently, the physical presence of infectious viral particles decreased the habitable portion of the insured property and caused a slowdown of business activities.
Another reasonable interpretation of the provision is that the suspension of business operations due to “direct physical loss of or damage to the property” requires the full loss of the property's use, a situation distinct from the loss of the property's full use. Under this scenario, the appellants would have had to shut down their restaurant completely for some period of time in order to qualify for coverage.
“Ambiguity in an insurance policy must be resolved by construing the policy as a whole; one policy provision is not to be construed separately at the expense of disregarding other policy provisions.” La. Ins. Guar. Ass'n v. Interstate Fire & Cas. Co., 93-0911, (La. 1/14/94), 630 So. 2d 759, 763-64. The policy under review in this case is an “all-risk” policy, “where all risks are covered unless clearly and specifically excluded.” Widder, 11-0196, p. 4, 82 So. 3d at 296 (citing Morgan v. Auto Club Family Ins. Co., 04-1562, p. 4 (La. App. 3 Cir. 4/6/05), 899 So. 2d 135, 137; Dawson Farms, L.L.C. v. Millers Mut. Fire Ins. Co., 34,801, p. 3 (La. App. 2 Cir. 8/1/01), 794 So. 2d 949, 950). Additional context is provided in the policy's definition of “suspension”, which includes both a “slowdown” and a “cessation” of business activities.” The words of the policy foresee a situation in which business losses can be covered by less than the complete destruction of the property or less than the complete loss of the property's utility. Construing the policy as a whole does not resolve the ambiguity inherent in “loss” for viral contagions, as the dual definition of suspension allows for both reasonable interpretations of loss.
Reference to external definitions of “loss” accentuate the ambiguity. Loss is defined in one dictionary as “the fact that you no longer have something or have less of something.”1 Another dictionary provides that loss is the “destruction, ruin,” “the act or fact of being unable to keep or maintain something or someone,” and “the partial or complete deterioration or absence of a physical capability or function.”2
The presence of this ambiguity and the existence of two equally reasonable interpretations as to what constitutes a “direct physical loss of or damage to” the insured property requires the Court to liberally construe the provision in favor of coverage for the appellants and against the appellee, who drafted the vague provision. La. C.C. art 2056; Edwards v. Daugherty, 03-2103, p. 22 (La. 10/1/04), 883 So. 2d 932, 947 (finding ambiguity in a provision regarding the burden of defense costs and expenses and barring the insurer from deducting defense costs); Osbon v. Nat'l Union Fire Ins. Co., 93-1975, p. 2 (La. 2/28/94), 632 So. 2d 1158, 1159-60 (finding ambiguity in the phrase “the insured” because it could refer to the named insured, any insured as defined in the policy, or the particular insured seeking coverage); Garcia v. St. Bernard Parish School Bd., 576 So. 2d 975, 976 (La. 1991) (concluding that an exclusionary provision for sports contests was ambiguous because it could reasonably be interpreted as not clearly excluding injuries sustained while cheerleading at a football game).
Even if coverage is found to exist, the appellee argued that the only compensable lost income under the policy is that which falls within the “period of restoration.” The appellee contends that the appellants did not experience a “period of restoration” and, as a result, are unable to recover any alleged lost income. The “period of restoration” is defined as the period of time beginning seventy-two hours after the time of the loss or damage and ending the earlier of either (1) when the property is repaired, rebuilt or replaced with reasonable speed and similar quality, or (2) the date when business is resumed at a new, permanent location.
It is unclear what would constitute “repair” in light of a viral outbreak. Repair is defined as “to restore by replacing a part or putting together what is torn or broken” and “to restore to a sound or healthy state.”3 It could be that the “period of restoration” provision requires the wholesale and permanent repair of physical objects within the property. However, under the plain meaning of “repair”, it is equally plausible that some portion of the cycle of cleaning and decontamination fulfills the definition of restoring the property to a healthy state.
Given the existence of multiple plausible interpretations of these two provisions, the policy is ambiguous as to what constitutes a covered “direct physical loss of or ․ to the property” and coverage should, therefore, be construed in favor of the appellants.
Furthermore, the ambiguity of the provision now renders parole evidence admissible to clarify the ambiguity or show the parties’ intent. Succession of Barreca v. Weiser, 10-0574, p. 16 (La. App. 4 Cir. 11/3/10), 53 So. 3d 481, 491. “Ambiguity will also be resolved by ascertaining how a reasonable insurance policy purchaser would construe the clause at the time the insurance contract was entered.” Breland v. Schilling, 550 So. 2d 609, 610-11 (La. 1989). Examining the evidence introduced by the appellants,4 it is apparent that at the time that the policy was issued, viral exclusions which eliminated the insurer's liability for loss or damage caused by a virus were available on the market. However, the appellee did not include a viral exclusion in the policy it drafted and sold to the appellants. Additionally, the appellants’ general manager testified that he would not have bought a policy that excluded coverage for viruses or bacteria because the business sold raw oysters to customers. His testimony provides insight regarding how the appellants reasonably construed the policy at the time of its purchase. This evidence strengthens the equity of construing coverage in favor of the appellants, pursuant to La. C.C. art. 2053.
Application of the ordinary rules of contract interpretation reveals the ambiguities present in the insurance policy that the appellee drafted and sold to the appellants. The ambiguities are amplified by the presence of two equally reasonable interpretations as to what constitutes a “direct physical loss of or damage to” the insured property and the subsequent “repair” of the insured property. Thus, this Court is compelled to liberally construe the provision in favor of coverage for the appellants and against the appellee, who drafted the vague provision. Accordingly, we conclude that the trial court committed legal error in finding that the insurance policy was not ambiguous and hold that the trial court abused its discretion in denying the declaratory judgment.
For the foregoing reasons, we reverse the judgment of the trial court and hold that coverage exists for loss or damage caused by “direct physical loss of or damage to” the appellants’ insured premises as a result of contamination by COVID-19.
Regrettably, I must dissent from the majority's opinion. Finding no ambiguity in the language of the insurance policy, or manifest error in the refusal to apply coverage, I would affirm the district court's judgment denying Oceana's petition for declaratory judgment.
While the majority argues that the language is open to more than one reasonable meaning and is ambiguous, the jurisprudence and plain language of the Policy do not support that contention. The Policy provision related to Business Interruption coverage reads in pertinent part:
We will pay for the actual loss of Business Income you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration.’ The ‘suspension’ must be caused by direct physical loss of or damage to property at premises․
The contractual language in question here is not defined in the Policy, but has been interpreted by numerous courts applying Louisiana law, in the context of business interruption coverage due to COVID-19, without a finding of ambiguity. Two recent cases, Grand Isle Partners, LLC v. Assurant Insur. Agency, No. CV 21-505, ––– F.Supp.3d ––––, 2022 WL 179467 (E.D. La. Jan. 20, 2022), and Muriel's New Orleans, LLC v. State Farm Fire and Casualty Co., 535 F.Supp.3d 556 (E.D. La. Sept. 21, 2021), involved restaurants seeking insurance coverage for loss of business income due to COVID-19.1 Even though the federal court cases are not binding on this Court, I find the sound reasoning to be persuasive. In the past, although not in a COVID-19 case, this Court has rejected the argument that the term “physical loss of or damage to” was ambiguous when determining coverage in a business interruption dispute. Yount v. Lafayette Ins. Co., 2008-0380 (La.App. 4 Cir. 1/28/09), 4 So.3d 162.
Further, other policy language further supports interpreting the term as unambiguous.2 In particular, the Policy declares that Business Income will be paid for the “suspension” of “operations” during the “period of restoration.”3 As defined in the Policy, the period of restoration contemplates Oceana experienced a tangible alteration to the property that required repair, rebuilding, or replacement. Moreover, the Policy contains a specific exclusion for loss or damage caused by delay or loss of use.4
Given that both the Policy language and jurisprudence are clear, I do not find that the district court erred when it declined to find ambiguity in the Policy language.
Direct Physical Loss of or Damage to Property
Next, I do not find manifest error in the district court's determination that there was no direct physical loss of or damage to Oceana's property due to COVID-19. Several witnesses testified at trial. The witnesses most relevant to the issue before this Court are Moe Bader, Dr. Lamuel Moye, Dr. Allison Stock, and Dr. Brian Flinn.
Oceana's general manager, Moe Bader, testified that he was responsible for the daily operations at Oceana Grill. He explained the heightened safety protocols, which included cleaning the surfaces in the restaurant with disinfectants. Mr. Bader also acknowledged that the premises was never tested for the presence of COVID-19 and there was no tangible loss of property such as chairs, tables, or any other restaurant equipment.
Oceana also presented the testimony of Dr. Lemuel Moye. Dr. Moye was accepted by the district court as an expert in medicine, biostatistics, and epidemiology. Using a Poisson distribution 5 analysis Dr. Moye testified that based on his calculations, using the rate of infection in the City and population, there was a scientific probability that at least one infected person entered the restaurant a day during the restaurants daily operations. Dr. Moye described the damage COVID-19 causes to property as a “physical transformation involving the healthful use of property.” During cross-examination, he did concede that the contamination of the property inside of the restaurant may be cleaned with chemicals. Nevertheless, he also stated that even though efforts are made to disinfect the surfaces they are continuously re-contaminated and damaged by the virus.
Testifying at trial for Underwriters was Dr. Allison Stock a Ph. D. in epidemiology and Dr. Brian Flinn a Ph. D. in materials engineering.6 Dr. Stock served as an epidemic intelligence officer at the Center for Disease Control where she was involved with the investigation of SARS-1. She explained that the virus is transmitted from person to person and as of the date of her testimony there had been no known infections caused by surface-to-human transfer. She also stated that disinfecting the surfaces kills the virus, which allows the inanimate items to be re-used. Dr. Flinn concluded that there was no evidence to support the virus caused a chemical bond to the surfaces of the restaurants property to alter and damage the property. He agreed with Dr. Stock that disinfectants reliably eliminate the virus from surfaces.
In support of its position that it suffered “direct physical loss” when COVID-19 rendered its premises uninhabitable, Oceana cites to this Court's, and this author's, opinion in Widder v. Louisiana Citizens Prop. Ins. Corp., 2011-0196 (La. App. 4 Cir. 8/10/11), 82 So.3d 294, writ denied, 2011-2336 (La. 12/2/11), 76 So.3d 1179, and the Eastern District's decision In re Chinese Manufactured Drywall Prods. Litig., 759 F.Supp.2d 822 (E.D. La. 2010). However, its reliance is misplaced because in those cases the courts found a physical alteration of the insured's property that rendered the property uninhabitable or useless, which did not occur in this case.7
Similar to the instant case, the court in Q Clothier New Orleans LLC v. Twin City Fire Insurance Co., 535 F.Supp.3d 574, 583-84 (E.D. La. 2021), explained “COVID did not condemn plaintiff's property as unusable in the same regard as In re Chinese Drywall because effective health measures such as social distancing, capacity limitations, curbside pickup alternatives, and mask wearing allow for businesses to safely continue operation.” See also Coleman E. Adler & Sons, LLC v. Axis Surplus Ins. Co., No. CV 21-648, 2021 WL 2476867, at *2 (E.D. La. 06/17/21)(closures “mandated by civil authorities due to the COVID-19 pandemic did not cause direct physical loss or damage because their injury is purely economic in nature.”). Additionally, Oceana had employees, vendors, and eventually a limited number of patrons on site, which defeats the contention that the property was uninhabitable and useless as in Widder and In re Chinese Drywall.
Considering the evidence and testimony presented to the district court, it is clear that it found no ambiguity in the Policy language, which I find to be legally correct. Then, applying the Policy language to the facts of this case, the district court rejected the opinions of Oceana's expert, Dr. Lemuel Moye, and found that Oceana did not sustain a physical loss to or damage to its property. Given the great deference afforded to the district court in its factual findings, I do not find its ruling to be manifestly erroneous or clearly wrong. Accordingly, I would affirm the trial court's judgment.
For these reasons, I respectfully dissent.
I respectfully concur. I find that this Court is bound by its holding in Widder v. Louisiana Citizens Prop. Ins. Corp., 11-0196, p. 4 (La. App. 4 Cir. 8/10/11), 82 So.3d 294, 296, writ denied, 11-2336 (La. 12/2/11), 76 So.3d 1179. Thus, I would also reverse the judgment of the district court and hold that coverage exists as a result of COVID-19 contamination.
This matter is before the Court on an application and incorporated brief for rehearing or, alternatively, rehearing en banc filed by the appellee, Certain Underwriters at Lloyd's, London (Lloyd's). Upon review, we grant rehearing for clarification only. We find that the application for rehearing raises no new issues for consideration and that the Court did not err in its reversal of the trial court's judgment. Further, rehearing en banc is denied. The Court's opinion of June 15, 2022 remains intact.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
Cajun Conti LLC, Cajun Cuisine I LLC, and Cajun Cuisine LLC d/b/a Oceana Grill (hereinafter collectively “Oceana”) is the owner and operator of Oceana Grill, a large restaurant in the French Quarter of New Orleans. During the COVID-19 pandemic, Oceana suspended operations to comply with local regulations. Oceana eventually reopened, but with reduced capacity to curtail the spread of COVID-19 particles on the premises. In addition to reducing the restaurant's capacity, Oceana undertook decontamination efforts to clean surfaces of the viral particles.
Seeking guidance on the availability for insurance coverage for its closures and reductions in capacity, Oceana filed a petition in civil district court for declaratory judgment regarding an all-risks insurance policy they purchased from Lloyd's. In the petition, Oceana asked the court to declare that the all-risks policy provided coverage for any loss or damage caused by direct physical loss of or damage to their insured premises as a result of continuous contamination by COVID-19. Lloyd's responded to the petition with arguments that contamination from COVID-19 did not constitute “direct physical loss or damage” and filed a motion for summary judgment.
The trial court denied the motion for summary judgment and proceeded to a bench trial. Following the trial, the trial court denied Oceana's petition for declaratory judgment. Oceana appealed the trial court's denial of the petition for declaratory judgment. We found the insurance policy to be ambiguous and capable of more than one reasonable interpretation in regards to the coverage of lost business income. We held that this ambiguity necessitated an interpretation of the contract in favor of the appellant, Oceana, and reversed the trial court's judgment. Lloyd's has now filed this application and incorporated brief for rehearing of our judgment or, alternatively, rehearing en banc. The appellant filed a reply brief to the appellee's application and the appellee subsequently filed a supplemental brief in support of its application.
Standard of Review
An application for rehearing is considered when a court has “(A) [g]ranted a writ application on the merits; (B) [d]ismissed an appeal; or (C) [r]uled on the merits of an appeal.” Uniform Rules, Courts of Appeal, Rule 2-18.7.
This Court has summarized the standard of review for legal errors to hold that:
Where an error of law taints the record, we are not bound to affirm the judgment of the lower court. Id. at 844. Furthermore, when a trial court makes one or more prejudicial legal errors which interdict the fact-finding process, the manifest error standard is no longer applicable, and the appellate court is obliged to make its own independent, de novo review of the record if such is complete. Evans v. Lungrin, 97-0541, 97-0577, p. 7 (La. 2/6/98), 708 So. 2d 731, 735; McLean v. Hunter, 495 So. 2d 1298, 1303-04 (La. 1986).
In re Succession of Sporl, 04-1373, p. 5 (La. App. 4 Cir. 4/6/05), 900 So. 2d 1054, 1058.
The presence of ambiguity in an insurance contract is a question of law. Cadwallader v. Allstate Ins. Co., 02-1637, p. 4 (La. 6/27/03), 848 So. 2d 577, 580 (citing Louisiana Ins. Guar. Ass'n v. Interstate Fire & Cas. Co., 93-0911, (La. 1/14/94), 630 So. 2d 759, 764). “Words and phrases used in an insurance policy are to be construed using their plain, ordinary and generally prevailing meaning, unless the words have acquired a technical meaning.” Cadwallader, 02-1637, p. 3, 848 So. 2d at 580 (citing La. C.C. art. 2047; Peterson v. Schimek, 98-1712, p. 5 (La. 3/2/99), 729 So. 2d 1024, 1028-29; Carbon v. Allstate Ins. Co., 97-3085, p. 4 (La. 10/20/98), 719 So. 2d 437, 440-41; Reynolds, 634 So. 2d at 1183). If a court finds ambiguity in an insurance contract, the ambiguous provision is “generally construed against the insurer and in favor of coverage. Cadwallader, 02-1637, p. 4, 848 So. 2d at 580 (citing La. C.C. art. 2056; Carrier v. Reliance Ins. Co., 99-2573, p. 12 (La. 4/11/00), 759 So. 2d 37, 43; Louisiana Ins., 93-0911, 630 So. 2d at 764).
Application for Rehearing or, Alternatively, Rehearing En Banc
In its application for rehearing, the appellee presents three main arguments. First, the appellee argues that Widder v. Louisiana Citizens Prop. Ins. Corp., 11-0196, (La. App. 4 Cir. 8/10/11), 82 So. 3d 294, writ denied, 11-2336 (La. 12/2/11), 76 So. 3d 1179, does not support our reversal of the trial court's judgment. Second, the appellee argues that the Court erred in finding the all-risk insurance policy to be ambiguous. Third, the appellee avers that the Court's opinion creates a split between the Louisiana Court of Appeal, Fourth Circuit, and the United States Fifth Circuit.
1. Widder v. Louisiana Citizens Prop. Ins. Corp.
In Widder, this Court held that that physical damage was not necessary to trigger coverage in an insurance policy because the insured property was “rendered unusable or uninhabitable.” Widder, 11-0196, p. 4, 82 So. 3d at 296 (citing In re Chinese Manufactured Drywall Products Liability Litigation, 759 F. Supp. 2d 822 (E.D. La. 2010); Ross v. C. Adams Construction & Design, 10-852 (La. App. 5 Cir. 6/14/11), 70 So. 3d 949). The appellee asserted that Widder's holding does not apply to the factual scenario presented in this matter, as the appellants continued to operate the premises and the property was not uninhabitable or unusable. The appellee has renewed this argument in their application for rehearing.
An examination of the insurance policy at issue in the case sub judice reveals that the policy provides coverage for the insured's “period of restoration” following “direct physical loss of or damage to the property” due to a suspension of business operations. “Suspension” is defined in the policy as a cessation or a slowdown of business activities (emphasis added). In defining “suspension” to include a slowdown of business activities, this policy provision does not require that the property be completely uninhabitable or unusable in order for coverage to prevail.
The contract language defining suspension as a slowdown of business activities, in conjunction with the requirement for “direct physical loss of or damage to the property,” gives rise to ambiguity in the policy because it creates two equally reasonable interpretations of the policy provision. The appellee's position, that the insured must fully lose the use of the property, is one reasonable interpretation. However, another equally reasonable interpretation is proffered by the appellants, who contend that a covered loss is the inability to fully utilize the property.
The appellee charges that the Court jumped over the threshold requirement that, whatever the nature of the suspension, it must always be caused by a “direct physical loss of or damage to property” at the insured premises” (emphasis added). The appellee argues that “physical” has consistently been interpreted to mean tangible, and that the Court did not apply that settled interpretation. This is inaccurate. The Court acknowledged the policy language requiring “physical” loss or damage and noted that COVID-19 particles have a tangible, corporeal form, despite not being immediately visible. The Court also observed that in Widder, the Fourth Circuit joined a line of cases extending coverage to losses sustained from the propagation of harmful agents with a tangible physical form but which, like COVID-19 particles, are not discernible with the naked human eye.
The appellee states that the Court also erred in its interpretation of the “period of restoration.” This provision extends coverage to the period of time commencing seventy-two hours after the loss or damage, until the property is “repaired or replaced,” or business is resumed at a new, permanent location. The appellee argues that “[w]e all know what it is to repair” and that the Court failed to apply the ordinary, prevailing meaning of “repair,” as required by law. In defining repair as “to restore by replacing a part or putting together what is torn or broken” and “to restore to a sound or healthy state,” the Court relied upon an established dictionary publisher and referenced only the primary definitions provided.1
The appellee further argues that the Court had no sound basis to reverse the trial court on grounds that the policy language is ambiguous. The appellee states that the trial addressed whether the suspension of operations was caused by direct physical loss of or damage to the property and implicitly made a factual finding that the suspension was not caused by physical damage. The appellee argues that this procedural posture renders our legal finding of ambiguity improper.
In the initial appeal, the appellants offered two assignments of error. The first assignment of error pertained to the trial court's factual finding that the premises did not sustain a direct physical loss or damage under the terms of the contract as a result of continuous contamination by the COVID-19 coronavirus. The second assignment of error addressed the trial court's legal conclusion that the commercial property policy that the appellee drafted and sold to Oceana was not ambiguous. The assignments of error were offered in the alternative. The Court focused on the legal question of ambiguity because any factual findings by the trial court regarding the existence of “physical loss of or damage to” the property would have been premised on an understanding and interpretation of these relevant contract terms.
3. Conflict within the Circuit and with the United States Fifth Circuit
The appellee's third argument posits that the Court should grant rehearing en banc because there is a conflict within the Circuit regarding the applicability of Widder.
A party may apply for a rehearing en banc in cases of an inter-circuit conflict. See Melerine v. Boba, 95-0197, p. 1 (La. App. 4 Cir. 10/12/95), 664 So. 2d 148, 151. In the present case, two members of the five-judge panel in the Court's underlying opinion dissented on the applicability of Widder to the facts at issue in this matter. The appellee fails to cite to any legal authority requiring en banc review when a minority of judges on a panel dissent about the applicability of a prior case. The appellee emphasizes that one dissenting panel member was the original author of the prior case, yet provides no supporting authority to demonstrate that rehearing en banc is required, or even encouraged, under these circumstances.
Last, the appellee states that rehearing en banc is necessary because the Court's opinion conflicts with a federal case, Muriel's New Orleans, LLC v. State Farm Fire & Cas. Co., 2021 WL 4290724 (E.D. La. Sept. 21, 2021). In Muriel's New Orleans, LLC, the federal district court issued an order finding that the insured “did not sufficiently alleged direct physical loss to the covered property.” Muriel's New Orleans, LLC, 2021 WL 4290724, *8. However, in that case, the restaurant explicitly pled that it “never found any evidence of the COVID-19 virus on its property.” Id. This is distinguishable from the case at bar, where the appellants introduced evidence to show that COVID-19 particles were on its property. Furthermore, federal district court decisions are not binding authority upon the state courts of Louisiana, although they may be reviewed as persuasive authority. State v. King, 19-01332, p. 5 (La. 4/3/20), 340 So.3d 754, 755–56. Therefore, no direct conflict exists sufficient to refer the case to a hearing en banc.
Considering the Motion for Leave to File Reply Brief in Support of Application for Rehearing or, Alternatively, Rehearing En Banc, filed by the appellee, it is hereby ordered that the motion for leave to file the reply brief is granted.
Accordingly, the application for rehearing raises no new issues for consideration and the Court did not err in its reversal of the trial court's judgment. Therefore, rehearing is granted for clarification only and rehearing en banc is denied. The Court's opinion of June 15, 2022 stands unchanged.
REHEARING GRANTED FOR CLARIFICATION ONLY; REHEARING EN BANC DENIED
I respectfully dissent from the majority's position for the reasons stated in my original dissent. I would grant the rehearing.
On rehearing, I respectfully concur, and I maintain my position to reverse the judgment of the district court. As expressed in my original concurrence, I find that coverage exists as a result of COVID-19 contamination. This finding is based on, inter alia, a reasonable interpretation of the word “physical” in keeping with the contamination theory of coverage adopted in Widder v. Louisiana Citizens Prop. Ins. Corp., 11-0196, p. 4 (La. App. 4 Cir. 8/10/11), 82 So.3d 294, 296, writ denied, 11-2336 (La. 12/2/11), 76 So.3d 1179, and the mandated application of the ambiguity principle as construed against insurance companies and in favor of policyholders pursuant to the rules of contractual interpretation in the Louisiana Civil Code.1
I write only to further the discussion of Widder and the application of its expanded interpretation of the term “physical” in contractual insurance settings that pertain to microscopic and molecular level disease-causing contamination and insurance policies that do not include a viral or contamination exclusion. Widder’s holding drastically broadened the interpretation of “physical” in such settings and should have alerted insurance companies that the word “physical” has entered into the realm of ambiguity in our circuit in such settings.2 Widder’s expansion of the term beyond its original meaning under its contamination theory made it susceptible to more than one reasonable interpretation, especially when viewed within the spectrum of property losses from microscopic contamination; thus, courts have found that the totaled, diminished, and/or suspended loss of a property's use, functionality, and/or reliability can constitute “physical loss or damage” under various contamination theories of coverage.3 The arguments raised by the insurance company (“Lloyd's”) in its rehearing application – that “there is nothing ambiguous about a requirement of physical damage” and “[i]ts ordinary, prevailing meaning requires tangible alteration of the property” – fail to recognize Widder’s applicability in the context of contractual interpretation and the ambiguity principle.
In 2011, Widder found coverage in the absence of a distinct, demonstrable, tangible, physical alteration of the property. Widder expanded the word “physical” beyond its ordinary sense and adopted an expansive contamination theory in our circuit finding, inter alia, that “physical damage is not necessary” in allowing coverage when the contamination is at the molecular or microscopic level. Widder, 11-0196, p. 4, 82 So.3d at 296. Contamination theories of coverage are the result of the microscopic nature of the contamination,4 which is “not discernible with the naked human eye.” Cajun Conti LLC v. Certain Underwriters at Lloyd's, London, 21-0343, p. 11 (La. App. 4 Cir. 6/15/22), ––– So.3d ––––, ––––, 2022 WL 2154863, at *5. The Widder court found that the contamination caused the total impairment of the property's intended use, which rendered the property “unusable and uninhabitable.” Widder, 11-0196, p. 4, 82 So.3d at 296. Widder then afforded coverage under a nebulous analysis with respect to the contamination and its nexus to “direct physical loss” or “damage.”5 This left the Widder interpretation of “physical” in a state of ambiguity, prone to judicial expansion, containment, and/or analytical confusion, and susceptible to more than one reasonable interpretation.
Thus, after Widder, the principle that ambiguous provisions in insurance contracts are construed in favor of policyholders is more likely to be judicially invoked in contractual insurance settings involving microscopic level disease-causing contamination insurance policies that do not include a viral or contamination exclusion.
In 2019, Lloyd's entered into an insurance contract with the policyholder (“Oceana”) covering viral contamination without a clear understanding of “physical.” This Court's original opinion noted, “[t]he policy does not define ‘direct physical loss’ or ‘damage.’ ” Cajun Conti LLC, 21-0343, p. 8, ––– So.3d at ––––, 2022 WL 2154863, at *4. I agree with the original opinion that “viral exclusions which eliminated the insurer's liability for loss or damage caused by a virus were available on the market;” however, Lloyd's did not include a viral exclusion in the policy it drafted and sold to Oceana, which reasonably expected full all-risk coverage for viral contaminations. Id., 21-0343, p. 17, ––– So.3d at ––––, 2022 WL 2154863, at *7. This evidence, coupled with a “vague provision,”6 strengthens the equity and policy considerations of construing coverage in favor of Oceana and against Lloyd's pursuant to the rules of contractual interpretation. Id., 21-0343, pp. 15-17, ––– So.3d at ––––, 2022 WL 2154863, at *7
In construing insurance policies, consideration must be given to (1) an insurance company's rights to limit its contractually-assumed liability and to clarify the meaning of terms and provisions in a contract,7 and (2) an insurance company's “extraordinary control over the terms of coverage” by possessing knowledge of “critical industry practice,” “detailed risk determinations,” and developing laws and jurisprudence.8 When a policy does not clearly limit an insurance company's liability, including the failure to clarify the meaning of a word or theory that a court has expanded or adopted, such policy omissions strengthen the equity and policy considerations of construing coverage in favor of the policyholder pursuant to the rules of contractual interpretation set forth in the Louisiana Civil Code.9 I invoke the ambiguity principle in the case sub judice to encourage the placement of such insurance coverage decisions in the business conference room and not the courtroom.
1. Loss Definition, MERRIAM-WEBSTER, https://www.merriam-webster.com/dictionary/loss (last visited June 9, 2022).
2. Loss Definition, CAMBRIDGE DICTIONARY, https://dictionary.cambridge.org/us/dictionary/english/loss (last visited June 9, 2022).
3. Repair Definition, MERRIAM-WEBSTER, https://www.merriam-webster.com/dictionary/repair (last visited March 24, 2022).
4. Although the trial court did not issue reasons for its judgment, the fact that it allowed this otherwise impermissible evidence to be introduced over the objections of the appellee suggests that it also found the provision to be ambiguous, and ultimately admitted it as parole evidence.
1. In Grand Isle, the court found that “ ‘physical loss of or damage to’ property typically requires demonstrable, physical alteration of the property.” Grand Isle, ––– F.Supp.3d at ––––, 2022 WL 179467 at *4. Likewise, in the Muriel's case, the court recognized that case law has consistently interpreted “physical loss or damage” to require a tangible or corporeal loss of property. Muriel's, 535 F.Supp. 3d at 567; see also Q Clothier New Orleans, L.L.C. v. Twin City Fire Ins. Co., 29 F.4th 252 (5th Cir. 2022); Dickie Brennan & Co., LLC v. Zurich American Insurance Co., CV 21-434, 2021 WL 6061917 (E.D. La. December 20, 2021) (COVID-19 caused losses are strictly economical).
2. “An insurance contract is to be construed as a whole and each provision in the contract must be interpreted in light of the other provisions.” Sims v. Mulhearn Funeral Home, Inc., 07-0054, p. 8 (La. 5/22/07), 956 So.2d 583, 589.
3. The Policy defines the “period of restoration as commencing 72 hours after the physical loss or damage occurs and continuing until the date the property is “repaired, rebuilt, or replaced.”
4. It reads, in pertinent part:A. When Special is shown in the Declarations, Covered Causes of Loss means direct physical loss unless the loss is excluded or limited in this policy.B. Exclusions1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of other causes or event that contributes concurrently or in any sequence to the loss.***2. We will not pay for loss or damage caused by or resulting from any of the following:***b. Delay, loss of use or loss of market. (emphasis supplied).
5. Poisson distribution is a statistical tool used to predict the number of times that a given event occurs within a certain interval or physical space.
6. Materials engineering is the study of materials using chemistry and physics.
7. In Widder, Marcia Widder filed a claim with her homeowner's insurer Louisiana Citizens Property Insurance Corporation (“LCPIC”) for damages caused by inorganic lead contamination. Widder, 2011-0196, p. 1, 82 So.3d at 295. Her home was rendered uninhabitable until gutted and remediated. Id. LPIC denied the claim for failure to establish that there was a direct physical loss to trigger coverage under the policy. Id. at p. 2, 82 So.3d at 295. The district court granted a motion for summary judgment in favor of LPIC on that issue. Id.Addressing the correctness of that ruling, this Court reasoned that the type of loss suffered by Ms. Widder was analogous to the loss experienced from Chinese drywall. This Court recognized that like the gaseous fumes released from Chinese drywall, the inorganic lead contamination made the Widder home unusable and uninhabitable even though physically intact. This Court wrote:In In re Chinese Manufactured Drywall Products Liability Litigation, the court found that the presence of Chinese drywall, from which gaseous fumes were released, did in fact constitute a direct physical loss. The court stated that when a home has been rendered unusable or uninhabitable, physical damage is not necessary. See Ross v. C. Adams Construction & Design, 10-852 (La.App. 5 Cir. 6/14/11), 70 So.3d 949 (Although the Chinese drywall is physically intact and functional, its inherent qualities require it to be taken down and replaced. Therefore, there was direct physical loss.).Id. at p. 4, 82 So.3d at 296.
1. Repair Definition, MERRIAM-WEBSTER, https://www.merriam-webster.com/dictionary/repair (last visited July 20, 2022).
1. See, e.g., La. C.C. art. 2053 (“A doubtful provision must be interpreted in light of the nature of the contract, equity, usages, the conduct of the parties before and after the formation of the contract, and of other contracts of a like nature between the same parties.”); La. C.C. art. 2049 (“A provision susceptible of different meanings must be interpreted with a meaning that renders it effective and not with one that renders it ineffective.”); La. C.C. art. 2056 (“In case of doubt that cannot be otherwise resolved, a provision in a contract must be interpreted against the party who furnished its text. A contract executed in a standard form of one party must be interpreted, in case of doubt, in favor of the other party.”).
2. See, e.g., Tred R. Eyerly, Is the Presence of Coronavirus “Direct Physical Loss or Damage” Under A Property Policy?, Haw. B.J., July 2020, at 4-7 (discussing cases in other jurisdictions finding direct physical loss or damage without harm to the structure and contrasting cases rejecting this contamination theory without physical loss; noting Widder’s holding that “intrusion of lead was a direct physical loss even if the building itself was not harmed” and extrapolating by extension that “many cases would seemingly find the presence of coronavirus in a building constitutes ‘direct physical loss or damage’ under a property policy”); Charles S. LiMandri, Milan L. Brandon, and Noel J. Meza, Pandemic of Coverage Litigation for Business Income Losses Due to Coronavirus Plagues Insurance Industry, 32 No. 4 Cal. Ins. L. & Reg. Rep NL 1 (comparing Widder to odor and vapor cases finding coverage in the absence of tangible physical alteration); Peony Fine Clothing, LLC v. State Farm Fire & Cas. Co., No. CV 21-1650-WBV-MBN, 2022 WL 742439, at *4 (E.D. La. Mar. 11, 2022)(declining to apply Widder in the absence of showing “that the presence of COVID-19 rendered its premises uninhabitable or required remediation beyond cleaning”); Q Clothier New Orleans LLC v. Twin City Fire Ins. Co., 535 F.Supp.3d 574, 582 (E.D. La. 2021), aff'd sub nom. Q Clothier New Orleans, L.L.C. v. Twin City Fire Ins. Co., 29 F.4th 252 (5th Cir. 2022)(citing Widder and In re Chinese Manufactured Drywall Products Liability Litigation (“In re Chinese Drywall”), 759 F.Supp.2d 822, 831-32 (E.D. La. 2010) and noting that “[a]lthough such damage cannot be perceived by the senses, we found [contamination] to be a covered physical loss because it ‘rendered the home unusable and inhabitable’ ”); Assocs. in Periodontics, PLC v. Cincinnati Ins. Co., 540 F.Supp.3d 441, 448 (D. Vt. 2021)(citing Widder and Kim-Chee LLC v. Philadelphia Indem. Ins. Co., 535 F. Supp.3d 152, 161 (W.D.N.Y. 2021), aff'd, No. 21-1082-CV, 2022 WL 258569 (2d Cir. Jan. 28, 2022) and criticizing contamination theory applied to “all structures and, indeed, all places in the world” as opposed to a specific covered property); Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-CV-04418-WHW, 2014 WL 6675934, at *8 (D.N.J. Nov. 25, 2014)(finding “physical loss of or damage to” facility when ammonia gas was discharged into facility's air and rendered facility temporarily unfit for occupancy).
3. See Scott G. Johnson, What Constitutes Physical Loss or Damage in A Property Insurance Policy?, 54 Tort Trial & Ins. Prac. L.J. 95 (2019) observing:[S]ome courts have found that “physical loss or damage” does not require that the physical loss or damage be tangible, structural, or even visible. These courts have determined that the presence of bacteria, odors, or noxious gases in a building may constitute physical loss or damage if the property is rendered uninhabitable or unfit for its intended purpose. In doing so, these cases have further broadened the interpretation of the “physical loss or damage” requirement and have decided that it is satisfied where the property's value, usefulness, or functionality has been destroyed or diminished. But coverage for these types of claims may still be excluded by contamination and pollution exclusions.Id. at 117.
4. See generally Widder, supra.
5. Widder relied on In re Chinese Drywall, supra, in holding that the presence of the contaminant rendered the property “unusable or uninhabitable,” which both courts equated with “direct physical loss.” The In re Chinese Drywall court found that the alleged damages that the contaminant caused to plaintiffs’ homes were a covered physical loss, and Widder extended that finding to conclude that the “intrusion” of the contaminant was a “direct physical loss” rendering the property “unusable and uninhabitable.” Widder found that “physical damage is not necessary” in allowing coverage. Widder, 11-0196, p. 4, 82 So.3d at 296 (citing In re Chinese Drywall, 759 F.Supp.2d at 832 (quoting TRAVCO Ins. Co. v. Ward, 715 F.Supp.2d 699, 708 (E.D. Va. 2010))). Widder compared the “type of loss” as “similar to the type of loss experienced from Chinese drywall.” Widder did not define “physical,” 11-0196, pp. 3-4, 82 So.3d at 296, but instead adopted a nebulous, microbial contamination theory of coverage in our circuit that allowed for the further broadening of the interpretation of the “physical loss or damage” requirement. See Johnson, supra n. 3, at 123-24, concluding:Physical loss or damage remains a necessary predicate to property insurance coverage. Using the dictionary definition of “physical” as a guide, many courts require that an insured demonstrate that the insured property suffered a distinct, demonstrable, and physical change or alteration to satisfy the threshold requirement for coverage. Some courts have even found that the insured has this burden even where the claimed physical damage occurs at the molecular or microscopic level. But other courts have adopted a much broader interpretation of the “physical loss or damage” requirement. These courts have found coverage in the absence of a distinct, demonstrable physical alteration of the property where the insured property has become uninhabitable or where a property's function or reliability has been impaired. Thus, in some courts’ view, loss of property's use, functionality, or reliability can constitute physical loss or damage. But in doing so, these courts have largely rendered the word “physical” meaningless and have failed to account for the historical origins of the “physical loss or damage” requirement.
6. “The presence of this ambiguity and the existence of two equally reasonable interpretations as to what constitutes a ‘direct physical loss of or damage to’ the insured property requires the Court to liberally construe the provision in favor of coverage for the [policyholder] and against the [insurance company], who drafted the vague provision.” Id., 21-0343, p. 15, ––– So.3d at ––––, 2022 WL 2154863, at *7 (citations omitted).
7. See Stewart Interior Contractors, L.L.C. v. Metalpro Indus., L.L.C., 07-0251, p. 7 (La. App. 4 Cir. 10/10/07), 969 So.2d 653, 659.
8. David J. Seno, The Doctrine of Reasonable Expectations in Insurance Law: What to Expect in Wisconsin, 85 Marq. L. Rev. 859, 867 (2002)(citing Mark C. Rahdert, Reasonable Expectations Revisited, 5 Conn. Ins. L.J. 107, 127 (1998)). See Aguillard v. Auction Management Corp., 04-2804, p. 10 (La. 6/29/05), 908 So.2d 1, 9 (quoting Saul Litvinoff, Consent Revisited: Offer, Acceptance, Option, Right of First Refusal, and Contracts of Adhesion in the Revision of the Louisiana Law of Obligations, 47 La.L.Rev. 699, 757-59 (1987)) (noting potential adhesionary nature of standard form insurance contracts and stating that “[o]wing to the necessities of modern life a particular kind of contract has been developed where one of the parties is not free to bargain” and “[t]he party in the weaker position is left with no other choice than to adhere to the terms proposed by the other.”). See also n. 1, infra.
9. See notes 1 and 8, infra.
Chief Judge, Terri F. Love
BELSOME, J., DISSENTS WITH REASONS LOBRANO, J., CONCURS AND ASSIGNS REASONS LUKER, J., PRO TEMPORE, DISSENTS FOR THE REASONS ASSIGNED BY J., BELSOME
Response sent, thank you
Docket No: NO. 2021-CA-0343
Decided: June 15, 2022
Court: Court of Appeal of Louisiana, Fourth Circuit.
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