In what could be Rhode Island’s first decision in a dispute over business interruption insurance coverage caused by COVID-19 closures, a Providence adult entertainment venue has had mixed success surviving the motion for dismissal of a defendant insurer.
Superior Court Judge Brian P. Stern recently ruled that plaintiff Atwells Realty, which operates Club Desire, had failed to plead the damages necessary to justify a claim under the income provision of company from its insurance policy.
“In the present case, Atwells has not alleged any physical damage or physical loss of the premises, whether tangible or intangible – such as a modification or transformation of its premises caused by an event, namely COVID-19 – which rendered the premises incapable of performing its essential function, âStern wrote.
However, the judge found that the nightclub could go ahead with a claim under the civil authority clause of the police that it holds with the defendant, Scottsdale Insurance Co.
Stern found that Atwells invoked the two insurance contract requirements for civil authority coverage: damage to any property within a mile of the club and the denial of access to its premises in due to the physical loss of this third party.
“To make a claim, all that is required under the Rhode Island Standard are sufficient facts to provide fair and accurate notice as determined by the four corners of the complaint and as applied to the policy,” wrote Stern. âAtwell’s claims about civil authority coverage meet this standard. “
Further, the judge found that Scottsdale had failed to meet its obligation to show that the virus exclusion from the policy prohibited such coverage.
The 30-page decision is Atwells Realty Corp. vs. Scottsdale Insurance Company.
State advocacy standard
Nicholas J. Hemond, who practices in Providence, is representing Plaintiff Atwells in the litigation. The local attorney for the defendant Scottsdale Insurance is Stephen Adams, also of Providence. Neither lawyer responded to requests for comment on the decision.
But Stacey P. Nakasian, who is not involved in the case, said she found it interesting that Stern repeatedly acknowledged that the standard of pleading is different depending on whether one is in federal court or State, and in Rhode Island, the standard is not as stringent as the federal plausibility standard.
“[The judge] took care to dive deep, probably aware that he is leading the pack with these types of claims.
– Stacey P. Nakasian, Providence
This may be one of the reasons – as shown by statistics reported by the University of Pennsylvania Law School in its âCovid Coverage Litigation Trackerâ – that the lawsuits filed at this point are about twice as many. likely to be dismissed by a federal court, she added.
âThe judge is very clear in pointing out that Rhode Island is a state of ‘pleadings’ and that some of these issues will have to be decided on a fully developed case. All he has at the dismissal stage is the complaint, âsaid the lawyer for Providence.
Nakasian said insurance coverage disputes require “getting into the weeds” of specific provisions of a policy, as contracts are interpreted against carriers and complex questions often arise as to the meaning. terms – for example, the exclusion of the virus in this case.
“After carefully reviewing the wording of the policy, Judge Stern came out and said the insured had argued enough to keep the door open as to civil authority coverage and the carrier had failed to demonstrate that the exclusion would apply under the circumstances, “Nakasian continued.” He took care to dive deep, probably aware that he is leading the pack with these types of claims. “
On that front, Nakasian said that while she was unaware of the volume of COVID-19 business interruption claims in the court pipeline at this point, she surmised that some had likely been resolved without litigation.
âWe are not seeing a tsunami yet and we are certainly discussing with our customers how to purchase insurance in the future. Everyone is aware of these problems now, âshe said.
Claim for business interruption
Plaintiff Atwells Realty has operated Desire nightclub since 2003. In the course of its business, the company holds licenses for alcohol, food sales and adult entertainment.
In 2019, Atwells purchased an insurance policy with defendant Scottsdale Insurance. It includes coverage for business income caused by “direct physical loss or damage to insured property” and for actions taken by a civil authority prohibiting access to property.
The contract also contains a “virus exclusion,” specifying that Scottsdale “will not pay for any loss or damage caused by or resulting from any virus, bacteria or other microorganism which induces or is capable of inducing physical distress, disease or illness â.
As the coronavirus pandemic began to set in in March 2020, Providence Mayor Jorge O. Elorza issued an order suspending all entertainment and adult entertainment licenses in the city. A few days later, Governor Gina M. Raimondo suspended all food services at restaurants, lounges and nightclubs in the state.
As a result of these decrees, Atwells was barred from having clients in Desire and business operations were therefore suspended, although the company said there was no evidence to suggest anyone associated with the club had contracted COVID-19 or that the premises were contaminated.
In April 2020, Atwells filed a claim with Scottsdale under the business income and civil authority clauses of its policy, alleging that it had “suffered direct physical loss of its premises for use for its intended purposes. “Causing” an extreme and total loss “of income.
The insurer rejected the claim.
As to the contract’s business income provision, Scottsdale held that Atwells’ losses did not involve “direct physical damage” to his property. He also objected to the civil authority’s cover, noting that the conditions require a ban on access to the property made in response to “unsafe physical conditions” within a one-mile radius of the premises of the insured. Scottsdale also relied on the police virus exclusion clause.
Atwells brought this breach of contract action and Scottsdale sought dismissal for failure to bring a claim.
Prima facie case
Atwells having the burden of proving a prima facie case that coverage for his losses exists under the policy, and in light of the terms of the contract and the alleged facts, the motion was allowed in part and dismissed in part.
Stern first concluded that Atwells did not make sufficient claims of “direct physical loss or property damage” as required by the business income coverage.
He declined to adopt the Applicant’s interpretation of the sentence as ambiguous, which could have supported a broader interpretation to include more than tangible structural injuries.
“Although the policy does not define ‘direct physical loss or property damage’, when this coverage is considered in its entirety, the loss of income must be (1) due to the necessary suspension of operations, and (2) incurred. during [a] âPeriod of restoration,â Stern wrote. “[I]It is clear that the loss of business income must have occurred during this “restoration period”, that is, while the premises are being repaired, constructed or replaced. “
In the judge’s opinion, because Atwells did not allege that its operations were suspended to allow it to somehow repair its property, such as a restoration effort to rid the premises of COVID -19, he did not plead sufficient facts for business income coverage.
But the outcome was different when it came to coverage from civil authorities, with Stern concluding that the complainant had made adequate arguments in arguing that COVID-19 was a physical substance that survived on surfaces and caused damage to people. other properties within a mile of his nightclub, and further claiming that executive orders shut down his nightclub operations due to the spread of the virus statewide, including within a radius of a mile.
“[T]The court is not ready to rule out, at the pleading stage, that COVID-19 in the air and on surfaces could be considered as a physical alteration of a room which only causes damage to people on the premises. places without altering their physical structure, âStern explained. “This is a factual question best left to uncover.”
Finally, Stern said Scottsdale had not fulfilled its onus of showing that the exclusion of the virus prohibited coverage by civil authorities.
Although the exclusion excludes coverage if the loss or damage is caused by or results from a virus, the judge was “not convinced by Scottsdale’s argument that the virus exclusion excludes coverage from. civil authority where Atwells has not alleged that his “loss or damage [was] caused by or resulting[ed] of a virus, ‘as envisioned by the exclusion, but was instead caused by executive orders that suspended operations due to a pandemic and the presence of COVID-19 in the state. “