Colectivo Coffee Roasters, Inc. v. Society Insurance
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The Supreme Court reversed the judgment of the district court denying the motion to dismiss this complaint brought by Colectivo Coffee Roasters against Society Insurance, holding that the district court erred.
Collective, which experienced substantial monetary losses as a result of the COVID-10 pandemic and related government restrictions on in-person dining, brought this class action complaint against Society seeking declaratory and injunctive relief and damages for breach of contract, alleging that Society was required to compensate it for the business income it lost during the pandemic. Society filed a motion to dismiss, arguing that none of the policy's coverage provisions applied. The circuit court denied the motion. The Supreme Court reversed, holding that Colectivo failed to state a claim for coverage under the Society policy's business income, extra expense, civil authority, or contamination provisions.
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2022 WI 36 SUPREME COURT OF WISCONSIN CASE NO.: 2021AP463 COMPLETE TITLE: Colectivo Coffee Roasters, Inc., Tandem Restaurant, LLC d/b/a The Tandem, Wrecking Crew, Inc., Iron Grate BBQ Company, Inc., East Troy Brewery Company, Logan & Potter, Inc., Buckley's Kiskeam Inn, LLC, Other Ones MKE, LLC, BCT 5, LLC, Company Brewing, LLC, Bryhopper's Bar & Grill, LLC, The River's Bar, LLC, Etcetera by BLH, LLC, REMBS, LLC, KRO Bar, Inc., Rivermill, Inc. and Pork's Place of Kaukana, LLC, Plaintiffs-Respondents, v. Society Insurance, a Mutual Company, Defendant-Appellant. ON BYPASS FROM THE COURT OF APPEALS OPINION FILED: SUBMITTED ON BRIEFS: ORAL ARGUMENT: SOURCE OF APPEAL: COURT: COUNTY: JUDGE: June 1, 2022 April 12, 2022 Circuit Milwaukee Laura Gramling Perez JUSTICES: DALLET, J., delivered the majority opinion for a unanimous Court. NOT PARTICIPATING: ATTORNEYS: For the defendant-appellant there were briefs filed in the court of appeals by Janet E. Cain, Heidi L. Vogt, Beth J. Kushner, Christopher E. Avallone and von Briesen & Roper, S.C., Milwaukee. There was a brief filed in response to amicus briefs for United Policyholders and the Tavern League of Wisconsin by Janet E. Cain, Heidi L. Vogt, Beth J. Kushner, Christopher E. Avallone, Laura A. Foggan and von Briesen & Roper, S.C., Milwaukee and Crowell & Moring LLP, Washington D.C. There was an oral argument by Laura A. Foggan. For the plaintiffs-respondents there was a brief filed in the court Richard of W. appeals Schulte by and Jay Urban Wright & Schulte, Vandalia. A. Urban, Nicole & Taylor, S.C., A. Flemming, Milwaukee and There was an oral argument by Jay A. Urban. An amicus curiae brief was filed in the court of appeals by Jeffrey D. Colman, Gabriel K. Gillett and Jenner & Block LLP, Chicago for The Restaurant Law Center. An amicus curiae brief was filed by Andrew B. Hebl and Boardman & Clark LLP, Madison for the Wisconsin Insurance Alliance, American Property Casualty Insurance Association, and the National Association of Mutual Insurance Companies. An amicus curiae brief was filed by Patrick Murphy, John S. Vishneski III and Quarles & Brady LLP, Milwaukee and Reed Smith LLP, Chicago for United Policyholders. An amicus curiae brief was filed by Patricia L. Jenness, Marshall Gilinsky, Esq., Nicholas M. Insua, Esq., Rhonda Orin, Esq. and Michael Best & Friederich LLP, Milwaukee and Anderson Kill, New York City for the Tavern League of Wisconsin. 2 2022 WI 36 NOTICE This opinion is subject to further editing and modification. The final version will appear in the bound volume of the official reports. No. 2021AP463 (L.C. No. 2020CV2597) STATE OF WISCONSIN : IN SUPREME COURT Colectivo Coffee Roasters, Inc.; Tandem Restaurant, LLC d/b/a The Tandem; Wrecking Crew, Inc.; Iron Grate BBQ Company, Inc.; East Troy Brewery Company; Logan & Potter, Inc.; Buckley's Kiskeam Inn, LLC; Other Ones MKE, LLC; BCT 5, LLC; Company Brewing, LLC; Bryhopper's Bar & Grill, LLC; The River's Bar, LLC; Etcetera by BLH, LLC; REMBS, LLC, KRO Bar, Inc.; Rivermill, Inc.; and Pork's Place of Kaukauna, LLC, FILED JUN 1, 2022 Sheila T. Reiff Clerk of Supreme Court Plaintiffs-Respondents, v. Society Insurance, a Mutual Company, Defendant-Appellant. DALLET, Court. J., delivered the majority opinion for a unanimous APPEAL from an order of the Circuit Court for Milwaukee County, Laura Gramling Perez, Judge. ¶1 Reversed and remanded. REBECCA FRANK DALLET, J. Colectivo Coffee Roasters and other bars and restaurants experienced substantial losses as a result of the COVID-19 pandemic and related government No. restrictions on in-person dining. 2021AP463 This case is about whether those losses are covered by a property-insurance policy issued by Society are: Insurance. Specifically, the questions here (1) whether a bar or restaurant's inability to use its dining space for in-person dining because of the pandemic and related government restrictions constitutes a direct physical loss of or damage to its property under Society's policy; and (2) whether the presence of COVID-19 on a bar or restaurant's property caused the bar or restaurant to suspend its operations, thereby entitling it contamination provision. to coverage under the policy's We conclude that the answer to both questions is "No," and therefore reverse. I ¶2 This case began in the early days of the COVID-19 pandemic. In early February insurance policy from Society.1 2020, Colectivo purchased an The policy provides that Society "will pay for direct physical loss of or damage to" Colectivo's buildings, permanently installed equipment, and other "business personal property." policy covers not resulting from it. When such direct physical harm occurs, the only that harm but certain other losses Two types of losses are relevant here, each Although several bars and restaurants are plaintiffs here, only Colectivo's policy is in the record. Throughout this litigation the parties have treated Colectivo's policy as representative of the other plaintiffs' policies. We do the same. We also refer to all plaintiffs collectively as "Colectivo." 1 2 No. covered by its own provision. The first is the 2021AP463 "business- income" provision, under which Society is required to pay for "the actual loss of business income [Colectivo] sustain[s] due to the necessary suspension of [its] 'operations' during the 'period of restoration.'"2 The second is the "extra-expenses" provision, which covers expenses incurred "during the period of restoration," that Colectivo would not have incurred but for the direct physical harm, and that are "necessary" to "avoid or minimize the suspension of business and to continue operations". ¶3 business The policy also contains provisions that cover lost income and extra expenses incurred as a result of contamination on the property or an order by a civil authority preventing Colectivo from accessing its property.3 The policy's "Operations" and "period of restoration" are defined in the policy. "Operations" means "[the insured's] business activities occurring at the described premises." "Period of restoration" means "the period of time that begins with the date of direct physical loss or damage caused by or resulting from a covered cause of loss . . . and ends on the date when the property . . . should be repaired, rebuilt or replaced with reasonable speed and similar quality." 2 The policy uses "business income" and "extra expenses" both as titles for coverage provisions and as types of losses. When the contamination provision refers to business income and extra expenses, it does so only to identify types of losses: "The definitions of Business Income and Extra Expense, contained in the Business Income and Extra Expense Additional Coverages section shall also apply to the additional coverages under this section." The policy defines lost "business income" as the "net income . . . that would have been earned or incurred if no physical loss or damage had occurred." An "extra expense" is defined, in relevant part, as an "expense incurred to avoid or minimize the suspension of business and to continue operations." 3 3 No. "contamination" provision covers the costs to 2021AP463 "clean and sanitize [Colectivo's] premises, machinery and equipment" when Colectivo's "operations are suspended due to 'contamination,'" defined as a "defect, deficiency, inadequacy or dangerous condition in [Colectivo's] products, merchandise, or premises." When the contamination "results in an action by a public health or other governmental authority that prohibits access" to the property and causes Colectivo to suspend its business operations, the policy covers lost business income and extra expenses Colectivo incurs during that suspension period. "civil-authority" provision provides coverage when a The "civil authority . . . prohibits access" to Colectivo's property due to direct physical harm to a surrounding property, even if Colectivo's property itself suffered no such harm. ¶4 Not long after Colectivo purchased its policy from Society, Department of Health Services Secretary-Designee Andrea Palm issued several emergency spread of COVID-19. prohibited although aimed at stopping the Orders Nos. 5 and 12, issued in March 2020, in-person take-out orders dining and at delivery all bars services and restaurants, were allowed to continue. Colectivo lost business income as a result of its compliance with those restrictions, and some of the other plaintiffs that served only alcohol closed altogether, as local laws prohibited them from offering take-out service. Colectivo filed a claim with Society to recover its lost income, which Society denied on the grounds that Colectivo had not suffered a "direct physical loss." Rather, in Society's view, Colectivo's 4 No. 2021AP463 use of its property was restricted, but the property was not lost or damaged. ¶5 Colectivo then filed a class-action complaint against Society seeking declaratory and injunctive relief, as well as damages for breach of contract. "forced . . . to cease [its] It alleged that it had been operations" because of Palm's orders and the potential presence of COVID-19 on its property. Colectivo asserted that the "presence of any COVID-19 particles renders items of "direct physical physical harm, property direct physical loss to property." unsafe," physical thereby damage, and causing direct Accordingly, Colectivo argued that Society was required to compensate it for that harm as well as the business income it lost because of that harm. Likewise, it alleged that Palm's orders "prohibited the public from accessing [its] restaurants, thereby causing the necessary suspension of [its] operations," which triggered the business-income, extraexpense, and civil-authority provisions of the policy. ¶6 Society filed a motion to dismiss the complaint, arguing that Colectivo had failed to allege any direct physical loss of or damage to its property, so none of the policy's coverage motion, provisions concluding applied. that The Colectivo circuit had court denied sufficiently that alleged a physical loss of its dining area due to both the likely presence of COVID-19 on Colectivo's prohibiting in-person dining. property and Palm's orders The court of appeals permitted Society to appeal the circuit court's non-final order. 5 Society No. 2021AP463 then filed a petition to bypass the court of appeals, which we granted. II ¶7 We review de novo the Society's motion to dismiss. circuit court's denial of See Data Key Partners v. Permira Advisers LLC, 2014 WI 86, ¶17, 356 Wis. 2d 665, 849 N.W.2d 693. We accept as true all well-pleaded facts in Colectivo's complaint, as well as reasonable inferences from those facts, but we draw our own legal conclusions regarding how they apply to the Society insurance policy. ¶8 The interpretation See id., ¶¶18–19. of an insurance question of law that we review de novo. v. Am. Girl, N.W.2d 65. Inc., 2004 WI 2, policy is a Am. Fam. Mut. Ins. Co. ¶23, 268 Wis. 2d 16, 673 Our goal is to give effect to the parties' intent, construing the policy as it would be understood by a reasonable person in the same position as the insured. Id. If, based on the facts in the complaint, "it is clear that the policy was not intended to cover the claim asserted, the analysis ends there." See id., ¶24. Only if the complaint establishes an initial grant of coverage do we analyze whether any exclusion provisions apply. See id. III ¶9 alleged Colectivo asserts that Society must cover Colectivo's damages under the policy's 6 business-income, extra- No. expense, civil-authority, and contamination 2021AP463 provisions.4 We analyze the former three provisions together because they share a similar prerequisite for coverage: they apply only if there has been a physical loss of or damage to either Colectivo's property or contamination a surrounding provision, property. which We applies then if address a the "dangerous condition" on Colectivo's property caused Colectivo to suspend its operations or a governmental authority to "prohibit access" to the property. A ¶10 The provisions of Society's policy on which Colectivo relies, with the exception of the contamination provision, all require Colectivo to allege a direct physical loss of or damage to either its property or a surrounding property. Although Society's policy does not define "direct physical loss of or damage language to" property, establish our that prior cases physical losses interpreting similar and damages refer to different degrees of tangible harm. a physical "loss" of its property when physical An insured suffers the property is Colectivo also argues that it is entitled to coverage under the policy's "sue and labor" clause, which requires Colectivo to keep a record of its expenses related to a covered loss or damage and to take reasonable steps to prevent further damage. By its plain text, however, this provision does not provide coverage; it merely lays out certain obligations Colectivo has "in the event of loss or damage to covered property." See also In re Soc'y Ins. Co. COVID-19 Bus. Interruption Prot. Ins. Litig., 521 F. Supp. 3d 729, 745 (N.D. Ill. 2021) (reaching the same conclusion). 4 7 No. 2021AP463 "destroyed" or affected to such an extent that it cannot be repaired. See RTE Corp. v. Md. Cas. Co., 74 Wis. 2d 614, 624, 247 N.W.2d 171 (1976). building burns down Such a loss occurs, for example, when a and must be rebuilt. See, e.g., Park Terrace, LLC v. Transp. Ins. Co., No. 2010AP2432, unpublished op., ¶4 (Wis. Ct. App. Dec. 1, 2011). Physical "damage" is harm to the tangible characteristics of the insured property that does not rise to the level of a physical loss. See Wis. Label Corp. v. Northbrook Prop. & Cas. Ins. Co., 2000 WI 26, ¶¶29–31, 233 Wis. 2d 314, 607 N.W.2d 276; see also Sandy Point Dental, PC v. Cincinnati Ins. Co., 20 F.4th 327, 332 (7th Cir. 2021). So a roof that is dented by hail but remains functional has incurred physical damage because "[t]his denting changes [its] physical characteristics." Advance Cable Co., LLC v. Cincinnati Ins. Co., 788 F.3d 743, 747 (7th Cir. 2015). that is merely mislabeled has By contrast, a product suffered no physical because its tangible characteristics are unchanged. damage See Wis. Label Corp., 233 Wis. 2d 314, ¶¶31–33. ¶11 to" That definition of "direct physical loss of or damage property is consistent Society's policy. with how the phrase is used in See Day v. Allstate Indem. Co., 2011 WI 24, ¶28, 332 Wis. 2d 571, 798 N.W.2d 199 (insurance policy terms are interpreted "in the context of the policy as a whole"). The policy provides that business-income and extra-expense coverages are limited to losses resulting from a physical loss of or damage to the property that are incurred during the "period of restoration." The "period of restoration" is the time during 8 No. which the property is "repaired, rebuilt reasonable speed and similar quality." or 2021AP463 replaced with Thus, for a harm to constitute a physical loss of or damage to the property, it must be one that requires the property to be repaired, rebuilt, or replaced——that is, characteristics. it See, must alter e.g., the Sandy property's Point Dental, tangible 20 F.4th at 333. 1 ¶12 or Colectivo argues that it suffered a physical loss of damage to its property in two ways: (1) because of the "presence of COVID-19 particles" on its premises; and (2) it lost the use of at least some of its property because of Palm's orders closing restaurants. We reject both arguments because neither alleges a tangible harm to Colectivo's physical property necessary to trigger coverage. ¶13 As the overwhelming majority of the other courts that have addressed the same issue have concluded, the presence of COVID-19 does not constitute a physical loss of or damage to property because it does not "alter the appearance, shape, color, structure, or other material dimension of the property." See, e.g., Sandy Point Dental PC v. Cincinnati Ins. Co., 488 F. Supp. 3d aff'd, 20 necessitate 690, F.4th 693–94 327 structural (N.D. (7th Ill. Cir. "repairs 2020) 2021). or (collecting The virus remediation"; removed from a surface with a disinfectant. it cases), does can not be See Uncork & Create LLC v. Cincinnati Ins. Co., 498 F. Supp. 3d 878, 883–84 (S.D. W. 9 No. Va. 2020), COVID-19 aff'd, does not "uninhabitable" 27 F.4th render in the 926 (4th property same way Cir. 2022). "inherently as "ongoing 2021AP463 Likewise, dangerous" or rockfalls" or wildfire smoke might, because COVID-19 is not a "physical peril that ma[kes merely] entering a structure hazardous." See Biltrite Furniture, Inc. v. Ohio Sec. Ins. Co., No. 20-CV-656JPS-JPS, 2021 WL 3056191, at *4 n.4 (E.D. Wis. July 20, 2021). Rather, the danger of the virus is to "people in close proximity to one another," not to the real property itself. Id.; see also Uncork & Create, 498 F. Supp. 3d at 884. ¶14 As for Palm's orders, although they restricted Colectivo's use of its property, Society's policy makes clear that a loss of use is distinct from physical loss of or damage to property. For instance, in a provision regarding personal property, the policy expressly covers damages for both the loss of or damage to that property as well as the loss of the use of that property: direct physical "We [Society] will pay . . . damages because of loss or damage, including loss of use, to [invitees' personal property] caused by accident and arising out of any covered provisions on cause which of loss." Colectivo By relies contrast, the omit loss-of-use any policy language, instead covering only a "direct physical loss of or damage to" the property. One may think of the business-income provision as indirect loss-of-use coverage, but that does not change the fact that a prerequisite for that provision is still a direct distinct physical loss from "direct a or damage. "Loss physical loss 10 of or use" is thus damage," and No. 2021AP463 Colectivo's argument fails because it conflates the two. See, e.g., Co., Green Beginnings, LLC v. W. Bend Ins. No. 20-CV-1661, 2021 WL 2210116, at *5 (E.D. Wis. May 28, 2021) ("'Direct physical loss' does not include the temporary loss of use of the insured's property."), appeal filed, No. 21-2186 (7th Cir. June 25, 2021); Real Hosp., LLC v. Travelers Ins. Co. of Am., 499 F. Supp. 3d 288, 295–96 (S.D. Miss. 2020). ¶15 The primarily federal relies district makes court that case same COVID-19 Bus. Interruption while Ins. and bars who could also Litig., 521 That case involved similar plaintiffs who raised similar claims as in this case: restaurants Colectivo See In re Soc'y Ins. Prot. F. Supp. 3d 729 (N.D. Ill. 2021). which mistake, misinterpreting "period of restoration." Co. on not offer they were in-person dining because of COVID-19-related government orders and who had filed insurance claims under the same Society policy. court concluded plaintiffs had that a reasonable suffered a jury "physical could loss" The district find under that the the policy because they were "limited from using much of their physical space." See id. at 742. It also rejected Society's argument that the definition of "period of restoration" precluded the plaintiffs' claims, explaining that the period of restoration defined only the timeframe for which business-income expenses would be covered. Additionally, the court noted that because a restaurant could "repair" its dining room by installing certain safety features expanding its or "replace" dining room, its the 11 "lost" dining definition of space by "period of No. 2021AP463 restoration" was "consistent with interpreting direct physical loss of property to include the loss of physical use" of that property. ¶16 See id. at 742–43. We disagree with that reasoning for two reasons. First, the district court's interpretation ignores the language in Society's policy distinguishing a loss of use from a direct physical loss and is inconsistent interpreting "physical loss." with our previous cases And second, to restore property is to "bring [it] back to . . . [its] former or original state,"5 not to alter its condition, as the district court's proposed measures would. So although Colectivo could not use its dining room for in-person dining for a period of time, the dining room was still damaged. such a there, unharmed——it was not physically lost See Sandy Point Dental, 20 F.4th at 332–34. harm, the policy's provisions do not apply. business-income and or Without extra-expense See 10E, LLC v. Travelers Indem. Co. of Conn., 483 F. Supp. 3d 828, 836 (C.D. Cal. 2020) ("Plaintiff only plausibly alleges that in-person dining restrictions interfered with the use or value of its property——not that the restrictions caused direct physical loss or damage."). 2 ¶17 The civil-authority provision likewise does not apply. Unlike the business-income and extra-expense provisions, which require a physical loss of or damage to Colectivo's property, 5 https://www.merriam-webster.com/dictionary/restore. 12 No. 2021AP463 the civil-authority provision requires a physical loss of or damage to someone else's. It also requires an "action of civil authority that prohibits access" to Colectivo's property because of the physical damage to the other property. Palm's orders operations," Colectivo, "caus[ed] thus the necessary "triggering" however, has the identified Colectivo argues suspension civil-authority no other of [its] provision. property in the "immediately surrounding" area that suffered a physical harm. See In re Soc'y Ins. Co., 521 F. Supp. 3d at 743–44. Plus, Palm's orders did not prohibit access to Colectivo's property. In fact, the orders explicitly allowed customers to access the property to order, pick up, and pay for Colectivo's food or drinks, provided that they stay six feet apart from others and did not use Colectivo's property for in-person dining. ¶18 Because Colectivo has identified no physical loss of or damage to its property or a surrounding property, the losses it alleges are not covered by the business-income, extra- expense, or civil-authority provisions. B ¶19 We now turn to Colectivo's claim that it has coverage under the policy's contamination provision. The policy defines "contamination," in relevant part, as a "dangerous condition in your products, merchandise or premises." If the contamination causes Colectivo to suspend its operations and "results in an action by prohibits a public access to health the or governmental [property] 13 or authority production that of No. 2021AP463 [Colectivo's] product," Society will pay for related businessincome and extra-expense losses. Colectivo argues that it is entitled to coverage under this provision because the possible presence on its property dangerous condition. that condition of COVID-19 particles created a It asserts that Palm's orders responded to by barring access to its property, which prohibited the production of its product. ¶20 The contamination provision does not apply here for three reasons. it did not First, as Colectivo concedes in its complaint, suspend its operations due to the COVID-19; it did so because of Palm's orders. the continuing presence of the virus, presence of Indeed, despite in-person dining operations were no longer prohibited after the court invalidated Palm's orders.6 particles Thus, constitutes assuming the "contamination," presence that of COVID-19 contamination did not cause Colectivo to suspend its operations, as the policy requires. Second, and as discussed above, Palm's orders did not prohibit access to Colectivo's property; they restricted how the property could be used. And third, Palm's orders did not prohibit Colectivo from producing its products; they prevented See Wis. Legis. v. Palm, 2020 WI 42, 391 Wis. 2d 497, 942 N.W.2d 900. 6 14 it only from Accordingly, initial serving Colectivo grant of its products has coverage failed under to the for No. 2021AP463 in-person dining.7 sufficiently contamination allege an provision. See In re Soc'y Ins. Co., 521 F. Supp. 3d at 744–45. IV ¶21 coverage We conclude that Colectivo fails to state a claim for under expense, the Society civil-authority, Accordingly, we do not or address exclusion provisions apply. Wis. 2d 16, ¶24. policy's business-income, contamination whether any of extra- provisions. the policy's See Am. Fam. Mut. Ins. Co., 268 We therefore reverse the circuit court's order and remand the cause with instructions to grant Society's motion to dismiss. By the Court.—The circuit court's order is reversed, and the cause remanded. This third reason applies equally to the plaintiffs here that serve only alcohol and, at least at the beginning of the pandemic, did not have the option of serving their products via take-out or delivery. As Emergency Order No. 12 stated, so long as they were "permitted by state law and municipal ordinance," carryout sales of alcohol beverages could continue. And where such sales were prohibited by state law and municipal ordinance, it is those laws and ordinances that prohibited the plaintiffs from serving their product, not Palm's orders or COVID-19. 7 15 No. 1 2021AP463
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