Out West Restaurant Group, Inc v. Affiliated Fm Insurance Co

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS SEP 2 2022
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT

OUT WEST RESTAURANT GROUP, INC.; No. 21-15585
CERCA TROVA RESTAURANT GROUP,
INC.; CERCA TROVA STEAKHOUSE, D.C. No. 3:20-cv-06786-TSH
L.P.; CERCA TROVA SOUTHWEST
RESTAURANT GROUP, LLC,
MEMORANDUM*
Plaintiffs-Appellants,

v.

AFFILIATED FM INSURANCE
COMPANY,

Defendant-Appellee.

Appeal from the United States District Court
for the Northern District of California
Thomas S. Hixson, Magistrate Judge, Presiding

Submitted August 31, 2022**
San Francisco, California

*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
Before: W. FLETCHER and COLLINS, Circuit Judges, and FEINERMAN,***
District Judge.

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 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

***
The Honorable Gary Feinerman, United States District Judge for the
Northern District of Illinois, sitting by designation.
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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 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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 Confronting materially identical allegations, the California Court of Appeal

held that a similar Civil Authority provision “d[id] not apply” to business losses

caused by COVID-related shutdown orders because “the plain language of the

Orders shows that they were not based on ‘direct physical loss of or damage to

property’ to [] premises,” but rather were issued “in an attempt to prevent the spread

of the COVID-19 virus.” Inns by the Sea v. Cal. Mut. Ins. Co., 286 Cal. Rptr. 3d

576, 595–96 (Cal. Ct. App. 2021); see also id. at 581, 595–96 (holding that shutdown

orders designed “to slow the spread of COVID-19 to the maximum extent possible

… did not give rise to Civil Authority coverage,” despite the plaintiff’s allegations

that the orders “were made in direct response to the continued and increasing

presence of the coronavirus on [the plaintiff’s] property and/or around its premises”).

So too here: the stated purpose of the Solano County order—the only order discussed

in Out West’s complaint and briefs—was to “protect and preserve the public health

from, and prevent, the increasing transmission of COVID-19 in California.” Order

of the Health Officer No. 2020-04, issued on March 30, 2020, available at

https://solano.courts.ca.gov/wp-

content/uploads/2020/08/Solano_County_Health_Officer_Order_No_2020-04.pdf.

The same holds for the orders cited in an appendix to the complaint, one of which—

the Monterey County order—was among those examined by Inns by the Sea. D.C.

No. 3:20-cv-06786-TSH, Doc. 18-4; Inns, 286 Cal. Rptr. 3d at 595–97.

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Accordingly, because the closure orders that allegedly caused Out West’s losses

were issued in an effort to halt the spread of COVID-19, Out West is not entitled to

coverage under the Civil or Military Authority provision for losses it suffered due to

those orders.1

Nor is Out West entitled to coverage, under the direct physical loss or damage

policy provisions, due to the presence of COVID-19 virus on its property. To the

extent that Out West’s theory of physical loss is based upon the presence of infected

employees or patrons on its property, standing alone, that does not entail a “physical

alteration of property” and therefore does not qualify as direct physical damage or

loss. Mudpie, 15 F.4th at 892. And to the extent that Out West argues that infected

persons contaminated the property or that virus was otherwise present, the

contamination exclusion would bar coverage under the direct physical loss or

damage policy provisions. The exclusion precludes coverage under those provisions

for “[c]ontamination, and any cost due to contamination including the inability to

use or occupy property or any cost of making property safe or suitable for use or

occupancy.” “Contamination” is defined as “any condition of property due to the

actual or suspected presence of any foreign substance … pathogen or pathogenic

organism, bacteria, virus, disease causing or illness causing agent, fungus, mold or

1
Because coverage is thus not available under the Civil or Military Authority
provision, we need not resolve the parties’ dispute as to whether the contamination
exclusion applies to that coverage.
5
mildew.” It follows that the policy excludes under those provisions losses caused

by the presence of COVID-19 virus on Out West’s property.

Out West contends that, given the policy’s inclusion of the communicable

disease provisions, the contamination exclusion must refer only to “viruses that are

not communicable diseases.” The policy imposes no such limitation. “An insurance

policy may exclude coverage for particular injuries or damages in certain specified

circumstances while providing coverage in other circumstances.” Julian v. Hartford

Underwriters Ins. Co., 110 P.3d 903, 910 (Cal. 2005). That is precisely the case

here. The communicable disease provisions cover damage caused by the presence

of a virus if “access to [the insured property] is limited, restricted or prohibited by:

a) An order of an authorized governmental agency regulating or as [a] result of such

presence of communicable disease; or b) A decision of an Officer of the Insured as

a result of such presence of communicable disease.” The contamination exclusion

bars coverage under the direct physical loss or damage provisions for damage caused

by the presence of a virus. There is thus no conflict between the contamination

exclusion, on the one hand, and the communicable disease provisions, on the other,

such that the contamination exclusion must be read to refer only to viruses that are

not communicable diseases.

Out West next argues that the contamination exclusion bars coverage only for

“costs” from contamination, not for “losses.” The exclusion’s plain terms, which

6
cover both “[c]ontamination, and any cost due to contamination” (emphasis added),

preclude that interpretation, which would read the words “contamination, and” out

of the exclusion. See Magna Enters., Inc. v. Fid. Nat’l Title Ins. Co., 127 Cal. Rptr.

2d 681, 683 (Cal. Ct. App. 2002) (rejecting a “construction [that] implicitly deletes

… words … from the policy’s language”). Moreover, the contamination exclusion

specifically precludes coverage for “the inability to use or occupy property,” which

makes clear that coverage for losses caused by the closure of Out West’s restaurants

is precluded.

Out West’s remaining arguments fail as well. First, nothing in the policy

suggests that the contamination exclusion “excludes only traditional industrial

contaminants”; to the contrary, the exclusion specifically excludes viruses. Second,

the California Court of Appeal has rejected the argument, advanced by Out West

here, that a policy’s failure to include standardized virus or pandemic exclusion

provisions suggests that it does not exclude losses caused by viruses or pandemics.

See Inns by the Sea, 286 Cal. Rptr. 3d at 593–94 (holding that the absence of a

standardized virus exclusion does not “create an ambiguity in an otherwise

unambiguous” policy).

As to the two communicable disease provisions, Out West argues that the

district court erred in dismissing its claims for declaratory relief. Because Affiliated

has not yet denied coverage under those provisions, Out West’s request for

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declaratory relief as to those provisions is unripe, and the district court was correct

to dismiss it. See Bova v. City of Medford, 564 F.3d 1093, 1096 (9th Cir. 2009)

(where the plaintiffs had not yet been denied coverage, reversing and remanding

with instructions to dismiss as unripe the plaintiffs’ request for declaratory relief that

they were entitled to coverage). However, the dismissal should have been entered

without prejudice to Out West’s renewing its request for declaratory relief in the

event Affiliated denies coverage under those provisions.2

AFFIRMED AND REMANDED, with instructions to convert the

dismissal of Plaintiffs’ communicable disease provision claims to a dismissal

without prejudice.

2
Out West’s requests that we allow supplemental briefing on certain aspects of
Inns by the Sea—those that, according to Out West, “recognize[] that noxious
substances like COVID-19 can cause direct physical loss or damage” and
incorrectly hold that “[government] orders caused the claimed loss”—are denied as
moot. Those aspects of Inns by the Sea are immaterial to the grounds we articulate
for affirming the district court’s judgment.
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