Credit: Steve Young/Adobe Stock
A federal judge in California has ruled that Sacramento Downtown Arena, LLC (Downtown Arena), who runs the home court for the Sacramento Kings basketball team (Kings), may proceed with its suit for wrongful coverage denial against Factory Mutual Insurance Company (Factory Mutual). The case is called Sacramento Downtown Arena LLC v. Factory Mut. Ins. Co., 2022 U.S. Dist. LEXIS 197116 (E.D. Cal. 2022).
Downtown Arena, which also owns a hotel and outdoor mall near the basketball arena, was forced to close all three spaces in 2020 in the face of the COVID-19 pandemic. The Golden 1 Center, the home court of the Kings, was forced to cancel a Bon Jovi concert, the Sacramento State graduation ceremony, and other notable events in addition to all of the basketball games. The hotel and outdoor mall expended funds for extensive cleaning, replacing air filters, and other safety measures all related to the pandemic.
Factory Mutual had sold a commercial property policy (the Policy) to Downtown Arena prior to the pandemic, which "cover[ed] proper, as described in this Policy, against ALL RISKS OF PHYSICAL LOSS OR DAMAGE, except as hereinafter excluded, while located as described in this Policy." Under the "Additional Coverages" section of the policy was a provision specifically and appropriately for "communicable disease response," which provided for "cleanup, removal and disposal of the actual, not suspected, presence of communicable diseases from insured property" (underlines added, bolding original) in addition to expenses paid to public relations personnel or even employees for "reputation management resulting from the actual not suspected presence of communicable diseases on insured property." (Emphasis original). The policy defined a "communicable disease" as one that "is transmissible from human to human by direct or indirect contact with an affected individual or the individual's discharges." However, the Policy also contained two exclusions, for "loss of market or loss of use" and for "contamination," upon which Factory Mutual based its denial of coverage for Downtown Arena's claims.
The court pointed out that Downtown Arena's claim was not an unreasonable interpretation of the Policy because it specifically provided coverage for "risks of physical loss or damage" (internal quotes omitted), then included "the actual presence of of a communicable disease" (internal quotes omitted) in the "Additional Coverages for insured physical loss or damage" section. When Factory Mutual offered a second, also reasonable interpretation of the policy that "a communicable disease can be present without causing any physical change to the property," the judge reminded Factory Mutual that a policy open to more than one reasonable interpretation was, by definition, ambiguous, and ambiguity was resolved in favor of coverage under both California law and well-settled insurance principles.
Continuing in the vein of common insurance principles, once Downtown Arena proved their claim was within the scope of policy coverage, the burden fell to Factory Mutual to prove there was an applicable exclusion. Factory Mutual offered multiple reasonable interpretations of the contamination exclusion: first, that "[l]osses caused by other [non-communicable disease] contaminants listed in the Policy's definitions…would remain within the exclusion's scope; and second, that the "additional coverage for communicable diseases act[ed] as an exception to the more general exclusion of losses caused by contaminants." The judge again reminded Factory Mutual that under both contract law and general insurance principles, they had only shown the exclusion was ambiguous, and "a court must resolve the ambiguity in the insured's favor." Factory Mutual's offering of the "loss-of-use" exclusion was likewise rejected because Factory Mutual did not show how "the policy's exclusions remove[d] the plaintiffs' claims from the scope of coverage."
All of Factory Mutual's motions to dismiss Downtown Arena's claims were dismissed.
Editor's Note: Insurance law is, at its heart, a subset of contract law. It is a cornerstone of contract law that ambiguities in a contract are resolved against the party who wrote the contract, often called the "drafting party"; for insurance situations, the drafting party is almost always the insurer. The theory for interpreting ambiguity against the drafting party is that the drafting party is in a superior position because it wrote the contract; interpreting unclear concepts in favor of the party who wrote them down could mean interpreting the concept against a party who didn't know what it meant, which is highly contradictory to the interests of public policy.