U.S. Court of Appeals for the Tenth Circuit in Denver, Colorado. (Photo: Google) The U.S. Court of Appeals for the Tenth Circuit joined many other courts in concluding that a restaurant's financial losses during the COVID-19 pandemic were not covered under its insurance policy because the presence of the virus on its property did not constitute "direct physical loss or damage."
Sagome is a company that owns the L'Hostaria restaurant in Aspen, Colorado. According to the opinion, Sagome sued its insurer, The Cincinnati Insurance Co., over denial of coverage under a comprehensive insurance policy. That policy provided that Cincinnati would "pay" for a direct "loss" to Sagome's covered property "caused by or resulting from any covered cause of loss." The policy additionally provided coverage for lost business income if Sagome's operations were suspended during a "period of restoration."
When COVID-19 struck in March 2020, Sagome temporarily closed the restaurant, in accordance with government orders. In late April, the restaurant was able to reopen and offer limited curbside pickup and outdoor dining, according to the opinion.
After Cincinnati denied coverage, Sagome sued and alleged breach of contract, bad faith, and violation of coverage in the U.S. District Court for the District of Colorado. Cincinnati moved for Rule 12(b)(6) dismissal, which was granted, according to the opinion. The district court concluded that COVID-19 did not physically damage the property.
Judge Timothy M. Tymkovich, in his written opinion for the court, stated that Sagome's contention that it is entitled to coverage because physical loss or damage includes loss of use of property does not comport with the policy's plain language and is not compelled by Colorado law.
"As an initial matter, whether COVID-19 causes direct physical loss or damage under a property insurance policy is an open question in Colorado," Tymkovich said. "Relying on relevant precedent from Colorado and other jurisdictions, we answer that question in the negative and conclude Sagome was not covered."
Tymkovich's opinion stated that in 11 circuit courts, the question of whether COVID-19 causes direct physical loss or damage under a property insurance policy has been addressed and answered the same way—it does not cause physical loss or damage under similar policy language.
"For Sagome to be covered, COVID-19 had to injure or harm its property in some physical manner," Tymkovich said. "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," Tymkovich said.
According to the opinion, Sagome primarily relies on the fact that the virus attaches to the property and causes disease. However, Tymkovich stated that that interpretation improperly isolates "physical" from "loss" and "damage."
"For coverage, the loss or damage itself must be physical, not simply stem from something physical," Tymkovich said.
The opinion discussed another COVID-19 case recently addressed by the court under Oklahoma law. In Goodwill Indus. of Cent. Okla. v. Phila. Indem. Ins., the Tenth Circuit held that "direct physical loss requires an immediate and perceptible destruction or deprivation of property." There, the court held that the period-of-restoration clause bolstered its conclusion because Goodwill "had nothing to repair, rebuild, or replace before it could resume operations."
"As in Goodwill Industries, the period of restoration clause reinforces that Sagome did not suffer a covered loss," Tymkovich said. "There was nothing to restore or repair or any need to move before recommencing business. Once the government allowed Sagome to resume selling food, it did."
According to the opinion, Sagome primarily relied on a Colorado case—Western Fire Insurance v. First Presbyterian Church. Tymkovich held that Western Fire does not compel a different result. In that case, the fire department ordered a church to close its doors due to gasoline in the soil, which had contaminated the building's "foundation and halls and rooms." A jury found that the church suffered a direct physical loss under its insurance policy and the Colorado Supreme Court upheld that verdict.
"No Colorado appellate court has since relied on Western Fire, although the case has been invoked in other jurisdictions in COVID-19 insurance suits," Tymkovich said. "Courts have generally distinguished it."
"We find Western Fire distinguishable in this context," Tymkovich said. "Here, Sagome pled that COVID-19—which can cause illness—was in its restaurant."
Tymkovich stated that Sagome did not plead that COVID-19 had built up to the point of making its property "uninhabitable."
"Nor could it," Tymkovich said. "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."
The opinion concluded that Sagome was not covered under the plain language of the policy and that Western Fire does not change the court's conclusion. As to Sagome's request that the Tenth Circuit ask the Colorado Supreme Court whether the presence of COVID-19 constitutes physical loss or damage under a policy governed by Colorado law, the court found that unnecessary based on precedent from Colorado and other jurisdictions.
Judges Harris Hartz and Scott Matheson joined Tymkovich in affirming the district court ruling and denying Sagome's motion for certification.
Counsel to Sagome, Bradley A. Levin of Levin Sitkoff Waneka, and counsel to Cincinnati, Daniel G. Litchfield of Litchfield Cavo, did not immediately respond to requests for comment.
