(Article from Insurance Law Alert, October 2024)
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Holding
A California district court granted an insurer’s summary judgment motion, ruling that a contamination exclusion barred coverage for COVID-19-related business losses, notwithstanding a prior ruling in the case holding that the exclusion was ambiguous and should be construed in favor of coverage. Sacramento Downtown Arena LLC v. Factory Mutual Ins. Co., 2024 U.S. Dist. LEXIS 190980 (E.D. Cal. Oct. 21, 2024).
Background
Sacramento Downtown Arena operates a venue that hosts professional basketball games and other events. In March 2020, a game was cancelled after it was determined that the COVID-19 virus was present in the building. Several other events to be held in the arena during this time frame were cancelled as well. Additionally, the government issued numerous orders over the following year that aimed to prevent the spread of COVID-19.
The Arena sought coverage for losses allegedly incurred as a result of the cancellations. The initial proof of loss explained that the claim was for “time element losses that will include, but are not limited to, losses covered by (1) orders issued by a Civil or Military Authority pursuant to the ‘Civil or Military Authority’ and/or (2) the ‘Contingent Time Element Extended’ extensions in the Policy and pursuant to all other applicable provisions.” In response, Factory Mutual stated that the presence of the virus did not constitute “physical damage,” as required by the aforementioned provisions. However, Factory Mutual noted that the losses could be covered by certain Communicable Disease provisions, assuming the conditions of those coverages were met. Factory Mutual ultimately deemed two Communicable Disease provisions applicable and paid $1 million, the annual aggregate sublimit.
The Arena filed suit, alleging breach of contract and bad faith denial of coverage, and seeking declaratory relief. Factory Mutual moved to dismiss, which the court denied. The parties subsequently filed cross-motions for summary judgment and the court ruled in Factory Mutual’s favor.
Decision
A central issue in dispute was whether the court’s prior order denying Factory Mutual’s motion to dismiss constitutes the “law of the case”—a doctrine which holds that when a court decides upon a rule of law, that decision governs the same issues in subsequent stages of that case. Under the “law of the case” doctrine, a court may revisit a prior decision under certain circumstances, including when an “intervening controlling change in the law warrants reexamination of the prior ruling.”
The court held that the doctrine applied here and that its previous interpretation of the policy—including a ruling that a contamination exclusion did not bar coverage—constituted the law of the case. However, the court agreed with Factory Mutual that a recent California appellate decision, San Jose Sharks, LLC v. Superior Court, 98 Cal. App. 5th 158 (2023), warranted reconsideration of the prior decision.
In San Jose Sharks, the court analyzed a contamination exclusion identical to that at issue here and concluded that it unambiguously excluded physical loss and damage in the form of viral contamination. However, as the court noted, San Jose Sharks was decided on appeal from a decision on demurrer and thus did not have a fully developed factual record when it deemed the contamination exclusion unambiguous. Thus, the court in the present case considered extrinsic evidence in determining whether latent ambiguity existed in the contamination exclusion so as to render San Jose Sharks non-controlling.
The court concluded that no such ambiguity existed, that San Jose Sharks was therefore controlling, and that the contamination exclusion unambiguously bars coverage in the present case.
Comments
The decision represents another win for insurers in COVID-19-related coverage disputes. Even after considering fact-specific extrinsic evidence relating to the Communicable Disease coverage provisions in the policy and various communications between the Arena and Factory Mutual, the court ruled that the contamination exclusion squarely applied to bar coverage for the pandemic-related losses.
Simpson Thacher appeared on behalf of Factory Mutual in this suit.