Sagome v. Cincinnati Insurance Company

Appellate Case: 21-1359 Document: 010110791750 Date Filed: 01/03/2023 Page: 1
FILED
United States Court of Appeals
PUBLISH Tenth Circuit

UNITED STATES COURT OF APPEALS January 3, 2023
Christopher M. Wolpert
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________

SAGOME, INC., d/b/a L’Hostaria,

Plaintiff - Appellant,

v. No. 21-1359

THE CINCINNATI INSURANCE
COMPANY,

Defendant - Appellee.

------------------------------

UNITED POLICYHOLDERS;
AMERICAN PROPERTY CASUALTY
INSURANCE ASSOCIATION,

Amici Curiae.
_________________________________

Appeal from the United States District Court
for the District of Colorado
(D.C. No. 1:21-CV-00097-WJM-GPG)
_________________________________

Bradley A. Levin (Susan S. Minamizono with him on the briefs), Levin Sitcoff Waneka
PC, Denver, Colorado, for Plaintiff-Appellant.

Daniel G. Litchfield (Alan I. Becker and Michael P. Baniak, Litchfield Cavo LLP,
Chicago, Illinois, and Conor P. Boyle, Hall & Evans LLC, Denver, Colorado, with him
on the brief) for Defendant-Appellee.

Timothy M. Garvey, McDermott Law, LLC, Denver, Colorado, filed an Amicus Curiae
Brief for United Policyholders, in support of Appellants.
Appellate Case: 21-1359 Document: 010110791750 Date Filed: 01/03/2023 Page: 2

Laura A. Foggan, Crowell & Moring LLP, Washington, DC, and Wystan Ackerman,
Robinson & Cole LLP, Hartford, Connecticut, filed an Amicus Curiae Brief for
American Property Casualty Insurance Association in support of Appellee.

_________________________________

Before HARTZ, TYMKOVICH, and MATHESON, Circuit Judges.
_________________________________

TYMKOVICH, Circuit Judge.
_________________________________

Like many businesses during the COVID-19 pandemic, Sagome, Inc.’s

restaurant, L’Hostaria, suffered significant financial losses from reduced customer

traffic and government lockdowns and restrictions. And like many businesses, it

sought to recover under its comprehensive general insurance policy. And like many

insurers, The Cincinnati Insurance Company denied coverage because the virus did

not impose physical loss or damage as required by the policy.

Sagome sued, but the district court concluded its financial losses were not

covered. Addressing Sagome’s coverage under Colorado law, we agree and affirm.

COVID-19 did not cause Sagome to suffer a qualifying loss because there was never

any direct physical loss or damage to L’Hostaria.

I. Background

Sagome operated L’Hostaria in Aspen, Colorado. Cincinnati insured

Sagome throughout 2020. The insurance policy provided Cincinnati would “pay

for direct ‘loss’” to Sagome’s covered property “caused by or resulting from any

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Covered Cause of Loss.” 1 Supp. App. 30. In turn, “‘Loss’ mean[t] accidental

physical loss or accidental physical damage.” Supp. App. 65 (emphases added).

The policy did not define “physical loss” or “physical damage.”

Additionally, the policy provided that Cincinnati would pay for lost

business income if Sagome suspended operations during a “period of restoration”

if the suspension was “caused by or result[ed] from a Covered Cause of Loss.” 2

Supp. App. 45 (internal quotation marks omitted). The “period of restoration”

ended when the property “should be repaired, rebuilt or replaced with reasonable

speed and similar quality,” when business “resumed at a new permanent

location,” or on a specified date, whichever occurred first. 3 Supp. App. 68. And

1
The policy provided, “We will pay for direct ‘loss’ to Covered Property at
the ‘premises’ caused by or resulting from any Covered Cause of Loss.” Supp. App.
30.
2
The policy provided,

We will pay for the actual loss of “Business Income” and
“Rental Value” you sustain due to the necessary
“suspension” of your “operations” during the “period of
restoration”. The “suspension” must be caused by direct
“loss” to property at a “premises” caused by or resulting
from any Covered Cause of Loss.

Supp. App. 45.
3
The policy provided the period of restoration

[e]nds on the earlier of: (1) The date when the property at
the “premises” should be repaired, rebuilt or replaced with
reasonable speed and similar quality; (2) The date when
business is resumed at a new permanent location; or (3)

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the policy included civil authority coverage that was triggered when a covered

loss damaged other property, causing the government to prohibit access to

Sagome’s property. 4

COVID-19 struck in March 2020, and the resulting government orders

caused Sagome to temporarily close. It was able to reopen in late April with

The number of consecutive months after the date of direct
physical “loss” indicated in the Schedule of this
endorsement.

Supp. App. 68.
4
The policy provided,

When a Covered Cause of Loss causes damage to property
other than Covered Property at a “premises”, we will pay
for the actual loss of “Business Income” and necessary
Extra Expense you sustain caused by action of civil
authority that prohibits access to the “premises”, provided
that both of the following apply: (a) Access to the area
immediately surrounding the damaged property is
prohibited by civil authority as a result of the damage; and
(b) The action of civil authority is taken in response to
dangerous physical conditions resulting from the damage
or continuation of the Covered Cause of Loss that caused
the damage, or the action is taken to enable a civil
authority to have unimpeded access to the damaged
property. This Civil Authority coverage for “Business
Income” will begin immediately after the time of that
action and will apply for a period of up to 30 days from the
date of that action. This Civil Authority coverage for
Extra Expense will begin immediately after the time of that
action and will end: 1) 30 consecutive days after the time
of that action; or 2) When your “Business Income”
coverage ends; whichever is later.

Supp. App. 46.
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limited curbside pickup and outdoor dining, and it could later operate limited indoor

dining.

Sagome provided timely notice of its losses to Cincinnati, which denied

coverage. Sagome sued, alleging breach of contract, bad faith, and violation of

Colorado insurance law. It also sought a declaratory judgment that its losses were

covered.

Cincinnati successfully moved for Rule 12(b)(6) dismissal. Fed. R. Civ. P.

12(b)(6). The district court concluded COVID-19 did not physically damage

Sagome’s property. And “because no neighboring properties suffered physical loss

triggering coverage,” Sagome was not entitled to civil authority coverage. App. 86.

Deeming any amendment futile, the court dismissed with prejudice.

II. Analysis

Sagome contends the insurance policy covered losses resulting from the

COVID-19 pandemic. According to Sagome, it is entitled to coverage because

physical loss or damage includes loss of use when property is rendered unsafe and

dangerous. As we explain, this reading does not comport with the policy’s plain

language and is not compelled by Colorado law.

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A. The Policy

As an initial matter, whether COVID-19 causes direct physical loss or

damage under a property insurance policy is an open question in Colorado. 5

Relying on relevant precedent from Colorado and other jurisdictions, we answer

that question in the negative and conclude Sagome was not covered.

We review a Rule 12(b)(6) dismissal de novo and apply the same standards

as the district court. Mayfield v. Bethards, 826 F.3d 1252, 1255 (10th Cir. 2016).

To survive, “a complaint must allege facts that, if true, state a claim to relief that

is plausible on its face.” Id. (internal quotation marks omitted). We view the

alleged facts “in the light most favorable to the plaintiff.” Id. Because the policy

covers a Colorado restaurant, we apply Colorado law. See Berry & Murphy, P.C.

v. Carolina Cas. Ins. Co., 586 F.3d 803, 808 (10th Cir. 2009).

Under Colorado law, “[w]e construe an insurance policy according to

principles of contract interpretation,” giving effect to the parties’ intentions and

5
We note that every circuit to have addressed this question has found COVID-
19 does not cause physical loss or damage under similar policy language. See, e.g.,
SAS Int’l, Ltd. v. Gen. Star Indem. Co., 36 F.4th 23 (1st Cir. 2022) (Massachusetts
law); 10012 Holdings, Inc. v. Sentinel Ins. Co., 21 F.4th 216 (2d Cir. 2021) (New
York law); Uncork and Create LLC v. Cincinnati Ins. Co., 27 F.4th 926 (4th Cir.
2022) (West Virginia law); Ferrer & Poirot, GP v. Cincinnati Ins. Co., 36 F.4th 656
(5th Cir. 2022) (per curiam) (Texas law); Santo’s Italian Café, LLC v. Acuity Ins.
Co., 15 F.4th 398 (6th Cir. 2021) (Ohio law); Sandy Point Dental, P.C. v. Cincinnati
Ins. Co., 20 F.4th 327 (7th Cir. 2021) (Illinois law); Oral Surgeons, P.C. v.
Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021) (Iowa law); Mudpie, Inc. v.
Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir. 2021) (California law);
Goodwill Indus. of Cent. Okla., Inc. v. Phila. Indem. Ins. Co., 21 F.4th 704 (10th
Cir. 2021) (Oklahoma law), cert. denied, 142 S. Ct. 2779 (2022); Henry’s La.
Grill, Inc. v. Allied Ins. Co. of Am., 35 F.4th 1318 (11th Cir. 2022) (Georgia law).
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reasonable expectations. Hoang v. Assurance Co. of Am., 149 P.3d 798, 801

(Colo. 2007). We enforce the policy’s plain language unless it is ambiguous,

which occurs when “it is susceptible to more than one reasonable interpretation.”

Id.

In another COVID-19 case, we recently addressed the meaning of “direct

physical loss” under Oklahoma law. Goodwill Indus. of Cent. Okla., Inc. v.

Phila. Indem. Ins. Co., 21 F.4th 704 (10th Cir. 2021), cert. denied, 142 S. Ct.

2779 (2022). There, Goodwill Industries sought to recover under similar policy

language after it closed stores to comply with government orders. Id. at 708.

Relying on dictionary definitions, we concluded “a ‘direct physical loss’ requires

an immediate and perceptible destruction or deprivation of property.” Id. at 710.

But since COVID-19 did not destroy any property, and Goodwill Industries

“never lost physical control of its buildings or merchandise from its stores,” we

found no coverage. Id. A contrary conclusion would have required us to

improperly “ignore the word ‘physical.’” Id. at 711. We noted the policy’s

period of restoration clause bolstered our conclusion because Goodwill Industries

“had nothing to repair, rebuild, or replace before it could resume operations.” Id.

To the contrary, it “simply had to wait until the government lifted the

restrictions.” Id.

Sagome posits a few reasons why Goodwill Industries is inapplicable.

First, it asserts the Goodwill Industries court was not bound by the relevant

Colorado precedent of Western Fire Insurance Co. v. First Presbyterian Church,

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437 P.2d 52 (Colo. 1968). But as we explain below, Western Fire does not compel

a different result. Second, it asserts Goodwill Industries did not allege the virus

was on its premises. The pertinent question, however, is not simply whether

COVID-19 was present, but whether it caused physical loss or damage. Third,

Sagome notes that unlike its policy, Goodwill Industries’ policy contained a virus

exclusion. True, but we only analyzed the exclusion as an alternative basis for

finding no coverage. Goodwill Indus., 21 F.4th at 712. Finally, Sagome asserts

the Colorado Supreme Court takes a more skeptical approach to insurance

contracts than the Oklahoma Supreme Court. But both Colorado and Oklahoma

law require us to give an unambiguous policy term its plain, ordinary meaning.

See Hoang, 149 P.3d at 801; Bituminous Cas. Corp. v. Cowen Constr., Inc., 55

P.3d 1030, 1033 (Okla. 2002). And doing so here establishes COVID-19 did not

cause direct physical loss. It did not destroy Sagome’s property. Goodwill

Indus., 21 F.4th at 710. And Sagome’s “temporary inability to use its property

for its intended purpose”—a fully-functioning restaurant—was not a qualifying

loss. Id. at 711.

For the same reasons, Sagome did not suffer “direct physical damage.”

Webster’s Third New International Dictionary (2002) defines “direct” as “marked by

absence of an intervening agency, instrumentality, or influence: immediate”;

“physical” as “of or relating to natural or material things as opposed to things mental,

moral, spiritual, or imaginary”; and damage as “injury or harm to person, property, or

reputation.”

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For Sagome to be covered, COVID-19 had to injure or harm its property in

some physical manner. 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. See, e.g.,

Dukes Clothing, LLC v. Cincinnati Ins. Co., 35 F.4th 1322, 1328 (11th Cir. 2022)

(Alabama law) (finding the insured “did not state a claim that COVID-19 caused

physical damage to its property because (1) COVID-19 does not physically alter the

property it rests on; and (2) COVID-19 particles can be removed from a surface by

standard cleaning measures”); Ferrer & Poirot, GP v. Cincinnati Ins. Co., 36 F.4th

656, 660 (5th Cir. 2022) (per curiam) (Texas law) (internal quotation marks omitted)

(“While COVID-19 has wrought great physical harm to people, it does not physically

damage property within the plain meaning of physical.”); Verveine Corp. v.

Strathmore Ins. Co., 184 N.E.3d 1266, 1276 (Mass. 2022) (internal quotation

marks omitted) (concluding COVID-19’s “mere presence does not amount to loss

or damage to the property”).

In defining “physical loss” and “physical damage,” Sagome primarily relies

on the fact that the virus is physical in the sense it is tangible, attaches to

property, and causes disease. But that interpretation improperly isolates

“physical” from “loss” and “damage.” See U.S. Fid. & Guar. Co v. Budget Rent-

A-Car Sys., Inc., 842 P.2d 208, 213 (Colo. 1992). For coverage, the loss or

damage itself must be physical, not simply stem from something physical.

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As in Goodwill Industries, the period of restoration clause reinforces that

Sagome did not suffer a covered loss: There was nothing to restore or repair or any

need to move before recommencing business. 21 F.4th at 711. Once the government

allowed Sagome to resume selling food, it did. Sagome pled that when it “was

allowed to partially reopen its business, it undertook some repairs and alterations on

the premises.” App. 21. But it did not connect this standalone allegation to COVID-

19. Even viewing the facts in Sagome’s favor, it would be unreasonable to infer

COVID-19 caused Sagome to repair its premises because the virus did not cause any

physical loss or damage to repair. See Cherokee Nation v. Lexington Ins. Co., __

P.3d __, 2022 WL 4138429, at *5 (Okla. Sept. 13, 2022) (concluding various

COVID-19 modifications “constitute[d] measures to stop the spread of the virus from

one person to another, not repairs to or replacement of damaged or lost property”).

Sagome’s reliance on the civil authority clause is similarly inapplicable. The

provision provided that Cincinnati would pay for lost business income if the

government prohibited access to L’Hostaria because a covered loss damaged other

property. But Sagome only alleged COVID-19 damaged other property, which was

not a covered loss.

B. Western Fire

Sagome primarily relies on a Colorado case, Western Fire, 437 P.2d at 56.

Sagome interprets it to stand for the proposition “that ‘direct physical loss’ in a

property insurance policy does not require visible physical alteration of property.”

Aplt. Br. at 16 n.3. In Western Fire, the fire department ordered a church to close its

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building because gasoline in the soil and the resulting vapors “infiltrated and

contaminated” the building’s “foundation and halls and rooms.” 437 P.2d at 54

(internal quotation marks omitted). The church claimed it suffered a “direct physical

loss” under its insurance policy, and a jury agreed. Id. at 53 (internal quotation

marks omitted).

Upholding the verdict, the Colorado Supreme Court observed the loss of

use could not “be viewed in splendid isolation, but must be viewed in proper

context.” Id. at 55. Doing so showed it was the consequence “of the fact that

because of the accumulation of gasoline around and under the church building[,]

the premises became so infiltrated and saturated as to be uninhabitable, making

further use of the building highly dangerous.” Id. And that “equate[d] to a direct

physical loss.” Id.

No Colorado appellate court has since relied on Western Fire, although the

case has been invoked in other jurisdictions in COVID-19 insurance suits. Courts

have generally distinguished it. See, e.g., Sandy Point Dental, P.C. v. Cincinnati

Ins. Co., 20 F.4th 327, 334 (7th Cir. 2021) (“But the gas infiltration . . . led to

more than a diminished ability to use the property. It was so severe that it led to

complete dispossession—something easily characterized as a ‘direct physical

loss.’”); Santo’s Italian Café, LLC v. Acuity Ins. Co., 15 F.4th 398, 404–05 (6th

Cir. 2021) (“[E]ach case [finding loss of use may be a physical loss] involved

property that became practically useless for anything.”); Hill and Stout, PLLC v.

Mut. of Enumclaw Ins. Co., 515 P.3d 525, 533 (Wash. 2022) (distinguishing

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Western Fire because the property in the instant case was not “rendered unsafe or

uninhabitable because of a dangerous physical condition”).

We relied on Western Fire in an unrelated context. In Adams-Arapahoe

Joint School District No. 28-J v. Continental Insurance Co., we upheld the

finding of a covered loss where a small portion of the insured’s corroded roof

collapsed. 891 F.2d 772 (10th Cir. 1989). We agreed with the district court that

the policy covered “the entire corroded area, because the corrosion made the

school unsafe and unusable.” Id. at 777–78 (citing W. Fire, 437 P.2d at 55).

We find Western Fire distinguishable in this context. 6 The Colorado

Supreme Court emphasized there was no direct physical loss “until the

accumulation of gasoline under and around the church built up to the point that

there was such infiltration and contamination . . . of the church building as to

render it uninhabitable and make the continued use thereof dangerous.” W. Fire,

437 P.2d at 55. Here, Sagome pled that COVID-19—which can cause illness—

was in its restaurant. 7 But it did not plead that COVID-19 built up to the point of

6
A Colorado state trial court has recently relied on Western Fire to deny an
insurer’s motion for partial judgment on the pleadings. Regents of the Univ. of Colo.
v. Factory Mut. Ins. Co., No. 2021CV30206, 2022 WL 245327, at *4 (Colo. 20th Jud.
Dist. Ct. Jan. 26, 2022). In a case involving a university seeking to recover its
COVID-19 losses, the court observed, “[I]t is at least plausible to conclude that a
property could become so saturated [from COVID-19] with contaminated objects,
aerosols, and droplets, that its buildings were uninhabitable.” Id. Given our
understanding of Western Fire, we do not find this assessment persuasive.
7
Sagome did not allege with specificity that COVID-19 was present and
transmitted in L’Hostaria. But even accepting its threadbare pleading, Sagome loses.
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making its property “uninhabitable.” Nor could it. 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.” GPL Enter., LLC v.

Certain Underwriters at Lloyd’s, 276 A.3d 75, 87 (Md. Ct. Spec. App. 2022); see

also Neuro-Commc’n Servs., Inc. v. Cincinnati Ins. Co., __ N.E.3d __, 2022 WL

17573883, at *6 (Ohio Dec. 12, 2022) (noting COVID-19 did not render the

insured’s premises “wholly uninhabitable”). Indeed, Sagome continued to use its

property after the initial shutdown, even though COVID-19 presumably remained

or was transmitted by infected individuals.

And, notably, the church in Western Fire recovered “the cost of remedying

the infiltration and contamination.” 437 P.2d at 54. Although Sagome may have

taken steps to clean surfaces in its restaurant or otherwise remove COVID-19, its

remediation efforts were not like those required in Western Fire. See Verveine

Corp., 184 N.E.3d at 1276 (“While saturation, ingraining, or infiltration of a

substance into the materials of a building or persistent pollution of a premises

requiring active remediation efforts is sufficient to constitute ‘direct physical loss

of or damage to property,’ evanescent presence is not.”).

The gasoline in Western Fire led to a total physical loss of use; the church

could not use the building until the gasoline was cleaned up. Similarly, the

corrosion in Adams-Arapahoe made the school “unsafe and unusable.” 891 F.2d

at 777 (emphasis added). Western Fire establishes that in Colorado there may be

a total physical loss when property is rendered unusable or uninhabitable, a

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conclusion in line with other jurisdictions. See, e.g., Murray v. State Farm Fire

and Cas. Co., 509 S.E.2d 1, 17 (W. Va. 1998) (“Losses covered by the policy,

including those rendering the insured property unusable or uninhabitable, may

exist in the absence of structural damage to the insured property.”); Port Auth. of

N.Y. and N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002) (New

York and New Jersey law) (“When the presence of large quantities of asbestos in

the air of a building is such as to make the structure uninhabitable and unusable,

then there has been a distinct loss to its owner.”). But Sagome’s property was

never rendered uninhabitable or unusable. Sagome did not suffer a total or even

partial physical loss.

In sum, Sagome was not covered under the policy’s plain language, and

Western Fire does not change that conclusion.

C. Certification

Sagome requests we ask the Colorado Supreme Court whether COVID-19’s

presence constitutes physical loss or damage under an insurance policy governed

by Colorado law. Because we could rely on relevant precedent from Colorado

and other jurisdictions to answer the determinative state-law question,

certification is unnecessary.

III. Conclusion

For the foregoing reasons, we affirm the district court and deny Sagome’s

certification motion.

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