out W. Rest. Grp., Inc. v. Affiliated FM Ins. Co.

out W. Rest. Grp., Inc. v. Affiliated FM Ins. Co.

Opinion

MEMORANDUM³

Out West Restaurant Group, Inc. and three related entities ("Out West") held a commercial property insurance policy issued by Affiliated FM Insurance Company ("Affiliated"). Several policy provisions, including the "Civil or Military Authority" provision, cover business losses that are the "direct result of physical loss or damage" to property but exclude losses due to "contamination." Two provisions cover costs and losses from the "presence of communicable disease." Out West sought coverage from Affiliated for costs and losses arising from business interruptions caused by the presence of the COVID-19 virus at its restaurants and COVID-related government closure orders. Affiliated denied the coverage under the "direct physical loss or damage" provisions, deferred a coverage determination under the two "communicable disease" provisions, and sought [*3]  additional information from Out West to investigate coverage under those two provisions.

Out West sued Affiliated, alleging that the policy covered its costs and losses. The district court dismissed the suit with prejudice under Rule 12(b)(6), holding that Out West did not suffer "direct physical loss or damage" within the meaning of the policy, and that its claim for "communicable disease" coverage remained under consideration by Affiliated. ] We review de novo the district court's judgment. See L.A. Lakers, Inc. v. Fed. Ins. Co., 869 F.3d 795, 800 (9th Cir. 2017). We may affirm the judgment on any ground supported by the record. See Franklin v. Terr, 201 F.3d 1098, 1100 n.2 (9th Cir. 2000).

As to the direct physical loss or damage policy provisions, Affiliated argues (1) that Out West's losses were not a "direct result of physical loss or damage" to property, and, in the alternative, (2) that the contamination exclusion bars coverage. Insofar as Out West submits that its costs and losses were caused by government closure orders, its claim is foreclosed by Mudpie, Inc. v. Travelers Casualty Insurance Co. of America, 15 F.4th 885 (9th Cir. 2021), which holds that such ] orders, standing alone, do not inflict direct physical loss or damage to property. Id. at 889-93.

To the extent that Out West argues that coverage is nonetheless available under the Civil or Military Authority provision, we reject that contention. That provision [*4]  covers certain losses caused by an "order of civil or military authority [that] prohibits access to a location[,] provided such order is the direct result of physical damage ... at a[n] [insured] location or within five (5) statute miles of it" (emphasis added). Out West alleges that the closure orders that "deprived [it] of the use and function" of its restaurants, were imposed due to "the presence of COVID-19 ... at and/or within five miles of Out West insured locations."

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