Muriel's New Orleans, LLC v. State Farm Fire and Casualty Company

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF LOUISIANA

MURIEL’S NEW ORLEANS, LLC CIVIL ACTION

VERSUS NO. 20-2295

STATE FARM FIRE AND SECTION: “G”(5)

CASUALTY COMPANY

ORDER AND REASONS

This litigation arises from a denial of insurance coverage for damages allegedly arising

from the COVID-19 pandemic. Pending before the Court is Defendant State Farm Fire and

Casualty Company’s (“State Farm”) “Rule 12(b)(6) Motion to Dismiss Plaintiff’s Petition for

Failure to State a Claim.”1 Plaintiff Muriel’s New Orleans, LLC (“Muriel’s”) opposes the

motion.2 Considering the motion, the memoranda in support and in opposition, the record, and

the applicable law, the Court denies the motion and grants Plaintiff leave to amend the

deficiencies identified in this Order.

I. Background

A. Factual Background

In this litigation, Muriel’s alleges that it entered into an “all-risk” insurance contract with

State Farm to cover losses at its restaurant, Muriel’s Jackson Square, in New Orleans, Louisiana

(the “Policy”).3 According to Muriel’s, the Policy was in “full effect, providing property, business

1 Rec. Doc. 12.

2 Rec. Doc. 27.

3 Rec. Doc. 1-1 at 2–3.

personal property, business income, and extra expense, and additional coverages for the insured

premises between the period of June 19, 2019 through June 19, 2020.”4 During this time, Muriel’s

allegedly “faithfully paid policy premiums” to State Farm.5 Muriel’s alleges that under the Policy,

insurance coverage extends to “the actual loss of business income sustained and necessary extra

expenses incurred when access to the insured premises is specifically prohibited by order of civil

authority” (the “Civil Authority” provision).6

In March and April 2020, in response to the COVID-19 pandemic, Louisiana Governor

John Bel Edwards and New Orleans Mayor LaToya Cantrell issued a series of orders and

emergency proclamations restricting public gatherings and limiting restaurant operations (the

“Closure Orders”).7 Muriel’s alleges that it sustained a “massive and detrimental hit to its business

income” and lost the “functionality and use of its physical property” as a result of the Closure

Orders.8 Muriel’s avers that “this loss of use is damage as required to trigger insurance coverage

for ‘physical damage’ under the Policy.”9 Muriel’s also claims that its alleged losses are covered

under the Policy's Civil Authority provision.10

Muriel’s alleges that State Farm nevertheless denied coverage, claiming that Muriel’s: (1)

had not suffered physical loss or damage, and (2) was precluded from coverage due to the “virus

4 Id. at 3.

5 Id.

6 Id.

7 Id. at 10–20.

8 Id. at 4–5.

9 Id. at 5.

10 Id. at 5, 8.

exclusion” in the Policy.11 Muriel’s asserts that State Farm’s denial of coverage represents a

breach of contract resulting in “significant damages.”12 In addition to damages, Muriel’s seeks a

judicial declaration as to its rights and State Farm’s obligations under the Policy.13

B. Procedural Background

On June 22, 2020, Muriel’s filed a petition in the Civil District Court for the Parish of

Orleans, State of Louisiana.14 State Farm removed the case to this Court on August 19, 2020,

asserting diversity jurisdiction pursuant to Title 28, United States Code, Section 1332.15 On

September 11, 2020, Muriel’s filed a motion to remand the case to state court.16 The Court denied

the motion to remand on November 18, 2020.17

On September 16, 2020, State Farm filed the instant motion to dismiss.18 Muriel’s filed

an opposition to the instant motion on November 10, 2020.19 On November 20, 2020, with leave

of Court, State Farm filed a reply brief in further support of the motion to dismiss.20 On December

18, 2020, with leave of Court, both parties filed notices of supplemental authority regarding the

11 Id. at 5 (internal quotations omitted).

12 Id. at 7.

13 Id. at 8.

14 Rec. Doc. 1-1.

15 Rec. Doc. 1.

16 Rec. Doc. 9.

17 Rec. Doc. 30.

18 Rec. Doc. 12.

19 Rec. Doc. 27.

20 Rec. Doc. 32.

instant motion to dismiss.21 On January 12, 2021, with leave of Court, State Farm filed a response

to Muriel’s notice of supplemental authority in opposition to the motion to dismiss.22 On January

26, 2021, with leave of Court, Muriel’s filed a second notice of supplemental authority in

opposition to the instant motion.23 With leave of Court, State Farm filed a response to Muriel’s

second notice of supplemental authority in opposition to the instant motion on February 3, 2021.24

II. Parties’ Arguments

A. State Farm’s Arguments in Support of the Motion to Dismiss

State Farm moves the Court to dismiss Muriel’s breach of contract and declaratory

judgment claims pursuant to Federal Rule of Civil Procedure 12(b)(6). The Court summarizes

State Farm’s arguments with respect to each claim.

1. State Farm asserts that Muriel’s breach of contract claim should be dismissed

State Farm argues that Muriel’s breach of contract claim should be dismissed because

“there is no coverage for [Muriel’s] alleged losses”.25 First, State Farm argues that the Policy’s

“Virus Exclusion” provision bars Muriel’s breach of contract claim.26 State Farm asserts that the

“unambiguous” Virus Exclusion provision serves to bar Muriel’s claim because the Policy

provides coverage for “accidental direct physical loss[es]” that are “not excluded” by the Policy’s

exclusions, including the specified Virus Exclusion provision.27

21 Rec. Doc. 38; Rec. Doc. 40.

22 Rec. Doc. 44.

23 Rec. Doc. 52.

24 Rec. Doc. 58.

25 Rec. Doc. 12-2 at 11.

26 Id. at 11–18.

27 Id. at 12.

State Farm contends that “Louisiana courts have repeatedly given effect to comparable

policy exclusions barring coverage for bacteria and microorganisms.”28 State Farm points to the

Petition in this case to support its assertion that a virus is in the “chain of causation” for Muriel’s

alleged losses.29 State Farm argues that “the COVID-19 virus is plainly at the root of the

government orders at issue.”30 State Farm asserts that under the terms of the Policy, the alleged

losses sustained by Muriel’s are not covered regardless of other perils that may have contributed

“concurrently or in any sequence” to the loss.31 State Farm also argues that there is no basis for

“carving out an exception to the Virus Exclusion for losses resulting from a virus because the

virus has reached pandemic status.”32 State Farm notes that the Virus Exclusion does not require

the “actual presence of the virus at the insured premises for the exclusion to apply.”33

Second, State Farm argues that even in the absence of the Virus Exclusion provision,

Muriel’s does not allege losses covered by the Policy.34 Specifically, State Farm contends that

Muriel’s allegations are “insufficient to establish the required ‘accidental direct physical loss to’

Covered Property” as required by the Policy.35 In support, State Farm points to Fifth Circuit

caselaw interpreting the meaning of “physical loss or damage” to “exclude alleged losses that are

28 Id. at 12–13.

29 Id. at 13.

30 Id. State Farm also contends that the virus is a but-for cause of Muriel’s alleged losses. Id. at 14.

31 Id.

32 Id. at 16.

33 Id.

34 Id. at 18–24.

35 Id. at 18.

intangible or incorporeal.”36 State Farm contends that Muriel’s fails to allege direct physical

losses because Muriel’s does not claim that “the COVID-19 virus has ever been present on its

property” and Muriel’s seeks recovery only for “financial damage due to the lost functionality

and use of the restaurant.”37 State Farm further contends that Muriel’s alleged loss of use of its

property due to the Closure Orders does not constitute a covered loss under the Policy because

the Policy covers direct physical loss “to” property, not direct physical loss “of” property.38

Third, State Farm argues that the Civil Authority provision in the Policy’s Endorsement

is inapplicable to this case.39 According to State Farm, the Civil Authority provision “provides

coverage for loss of income caused where damage to other property caused by a covered risk

causes a civil authority to prohibit access to the insured property, causing loss of income to the

insured.”40 State Farm contends that Muriel’s does not allege facts to support the applicability of

the Civil Authority provision.41 Specifically, State Farm avers that Muriel’s “does not allege

damage to a nearby property” and fails to “plead a prohibition on access to its property” as

required by the Civil Authority provision.42 In addition, State Farm claims that Muriel’s “fails to

plead the requisite causal link between actual damage to nearby premises and the prohibition on

access.”43 State Farm further contends that the Civil Authority coverage is circumscribed by the

36 Id. at 19 (citing Hartford Ins. Co. v. Miss. Valley Gas Co., 181 F. App’x 465, 470 (5th Cir. 2006)).

37 Id. at 20 (internal quotation omitted).

38 Id. at 23–24.

39 Id. at 24.

40 Id.

41 Id.

42 Id. at 25.

43 Id. at 26.

Policy’s Virus Exclusion provision.44

Fourth, State Farm argues that the “Loss of Income” and “Extra Expense” provisions set

forth in the Endorsement to the Policy do not provide coverage in this case.45 State Farm contends

that like the Civil Authority provision, the Loss of Income and Extra Expense provisions are

limited by the Virus Exclusion provision.46 Additionally, State Farm asserts that Loss of Income

and Extra Expense coverage applies only to losses sustained due to the necessary suspension of

operations during a “period of restoration.”47 State Farm argues that such coverage is inapplicable

here because “[t]here are no allegations that the coronavirus necessitated repairs, replacement, or

rebuilding, or that new permanent locations are being sought.”48

Fifth, State Farm argues that three additional policy exclusions bar Muriel’s claims: (1)

the “Ordinance or Law” provision bars coverage for any losses due to the “enforcement of any

ordinance or law;” (2) the “Acts or Decisions” provision bars coverage for any losses caused by

“conduct, acts or decisions . . . of any person, group, organization, or governmental authority;”

and (3) the “Consequential Loss” provision bars coverage for any losses caused by “delay, loss

of use or loss of market.”49

2. State Farm argues that Muriel’s declaratory judgment claim should be

dismissed

State Farm argues that Muriel’s claim for a judicial declaration as to its rights and State

44 Id. at 25.

45 Id. at 27–28.

46 Id. at 27.

47 Id. at 28.

48 Id.

49 Id. at 28–30 (internal quotations omitted).

Farm’s obligations under the Policy should be dismissed.50 State Farm contends that the

declaratory judgment claim should be dismissed for the same reasons as the breach of contract

claim, namely that “there is no coverage for the claimed losses.”51 State Farm asserts that the

declaratory judgment action claim in this case is redundant and should be dismissed on the same

grounds as the breach of contract claim.52

B. Muriel’s Arguments in Opposition to the Motion to Dismiss

Muriel’s offers several overlapping arguments in opposition to the motion to dismiss.53

First, Muriel’s notes that the Twombly pleading standard “requires plausibility, not success on the

merits before discovery.”54

Second, Muriel’s contends that its claims are not barred by the “Ordinance or Law”

provision of the Policy.55 Muriel’s argues that the COVID-19 emergency order issued by Mayor

Cantrell represents “an action or decision by a governmental authority that results in direct

physical loss,” not an “ordinance” or “law” of the City of New Orleans.56 Muriel’s argues that

the Proclamation of Governor Edwards similarly is not an “ordinance” or “law.”57

Third, Muriel’s contends that the Policy issued by State Farm covers “losses” rather than

50 Id. at 30.

51 Id.

52 Id. at 31.

53 Rec. Doc. 27.

54 Id. at 9.

55 Id. at 10.

56 Id.

57 Id.

“damages,” and that this distinction is significant.58 Specifically, Muriel’s asserts that the

Louisiana Supreme Court “has not spoken” on the definition of “direct physical loss” as compared

to “physical damage.”59 Muriel’s argues that pursuant to the McCarran-Ferguson Act, 15 U.S.C.

§ 1012, the Louisiana Supreme Court “should be charged with the interpretation of critical

insurance terms regulated by the Louisiana Department of Insurance.”60 In support of its assertion

that “loss” is meaningfully distinct from “damage,” Muriel’s points to decisions issued by the

Louisiana First Circuit Court of Appeal and a federal district court in the Western District of

Missouri.61 Muriel’s asserts that it suffered “loss of use” because “[t]he insured property was

uninhabitable by Muriel’s customers because the City and State decided it was unsafe.”62

Fourth, Muriel’s argues that the Virus Exclusion is a “pollution/contamination” exclusion

and the COVID-19 pandemic does not satisfy the applicable “pollutant test” under Louisiana

law.63 Muriel’s asserts that “[a] virus is a thing. It is a contaminant, a pollutant with both a

physical form and physical mass.”64 Muriel’s contends that a pandemic, by contrast, is an event

“like civil unrest, terrorism, or war.”65 Muriel’s avers that “State Farm clearly excludes damages

from civil unrest, terrorism, and war” but does not exclude damages resulting from “pandemic,

58 Id. at 11–15.

59 Id. at 12.

60 Id. at 12–13.

61 Id. at 13–15 (citing Mangerchine v. Reaves, 63 So. 3d 1049, 1056 (La. App. 1 Cir. 3/25/11); Studio 417,

Inc. v. Cincinnati Ins. Co., No. 20-CV-03127-SRB, 2020 WL 4692385, at *8 (W.D. Mo. Aug. 12, 2020)).

62 Id. at 16.

63 Id. at 17–18; 25–26.

64 Id. at 21.

65 Id.

epidemics, or other societal transmission of communicable disease despite having ready access

to boilerplate language used throughout the insurance industry.”66

Fifth, Muriel’s argues that State Farm inappropriately relies on “parol evidence and policy

arguments” to clarify the contracting parties’ intent because the contract at issue here is “clear

and unambiguous.”67 Muriel’s asserts that the contract clearly “excludes viral contamination,

which State Farm admits is not alleged in this case, and does not exclude Pandemic Events or

Communicable Disease events.”68 Muriel’s contends that “[i]f parol evidence is to be considered,

discovery is necessary to provide balance to State Farm’s unilateral view,” and that “if parol

evidence is to be considered then the contract is ambiguous and should be interpreted against

State Farm and in favor of coverage.”69

Sixth, Muriel’s contends that State Farm should be “equitably estopped from obtaining a

policy ‘clarification’ [] regarding contamination events at the property and then applying that

small change as if a Pandemic Event or Communicable Disease Exclusion had been approved

and amended to the policy.”70 In making this argument, Muriel’s suggests that State Farm’s

decision not to include “Pandemic Events” and “Communicable Disease” exclusions was “bad

faith contracting” in order to avoid implementing a premium reduction across State Farm’s

policies.71 Muriel’s appears to argue that State Farm should therefore be estopped from arguing

66 Id. at 20–25.

67 Id. at 19.

68 Id. at 19–20 (internal citation omitted).

69 Id. at 20. Muriel’s also claims that State Farm hid its “true intent” from Muriel’s by adding the word

“virus” to the list of policy exclusions instead of including a “Pandemic Event Exclusion” in the wake of

the 2002 – 2003 SARS outbreak. Id. at 21.

70 Id. at 27.

71 Id. at 28.

that the Virus Exclusion extends to pandemics.72

C. State Farm’s Arguments in Further Support of the Motion to Dismiss

In reply, State Farm first reiterates that coverage for Muriel’s alleged losses is barred by

the Virus Exclusion provision in the Policy.73 State Farm responds to Muriel’s argument that the

absence of a pandemic exclusion renders the Policy applicable by arguing that “[t]here is no basis

in the Policy language or the law for carving an exception to the Virus Exclusion for losses

resulting from a virus because the virus has reached pandemic status.”74 State Farm also asserts

that the Pollution Exclusion is distinct from, and does not limit the application of, the Virus

Exclusion.75 Moreover, State Farm contends that the Virus Exclusion provision “does not say

anything about contamination” and does not require the actual presence of the virus on the insured

property to exclude coverage.76

Second, State Farm reasserts that even absent the Virus Exclusion provision, Muriel’s

does not allege covered losses.77 State Farm submits that Muriel’s “erroneously contends that no

tangible damage to property is necessary to establish direct physical loss.”78 State Farm also

reiterates that physical loss “to” property and physical loss “of” property carry distinct

meanings.79

72 Id. at 26–28. Muriel’s also filed two notices of supplemental authority. Rec. Docs. 40, 52.

73 Rec. Doc. 32 at 7–11.

74 Id. at 9.

75 Id. at 10.

76 Id. at 10–11.

77 Id. at 11–15.

78 Id. at 12.

79 Id.

In addition, State Farm points out that the Closure Orders required Muriel’s to limit its

operations and did not require Muriel’s to close or forbid access to its restaurant.80 State Farm

also notes that Muriel’s admits that at the time it filed the Petition it was permitted to operate at

50% capacity.81 Therefore, State Farm argues that the Closure Orders did not render Muriel’s

property “uninhabitable.”82

Finally, State Farm argues that the Policy identifies “loss of use” as a “consequential loss,”

and excludes it under all coverages.83 For the foregoing reasons, State Farm contends that

Muriel’s claims should be dismissed.84

III. Legal Standards

A. Legal Standard for Rule 12(b)(6) Motion to Dismiss

Federal Rule of Civil Procedure 12(b)(6) provides that an action may be dismissed “for

failure to state a claim upon which relief can be granted.”85 A motion to dismiss for failure to

state a claim is “viewed with disfavor and is rarely granted.”86 “To survive a motion to dismiss,

a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim for relief that

is plausible on its face.’”87 “Factual allegations must be enough to raise a right to relief above the

80 Id. at 13.

81 Id. at 14.

82 Id. at 13.

83 Id. at 15.

84 Id. State Farm also filed two notices of supplemental authority. Rec. Docs. 38, 62.

85 Fed. R. Civ. P. 12(b)(6).

86 Kaiser Aluminum & Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1050 (5th Cir. 1982).

87 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570

(2008)).

speculative level.”88 A claim is facially plausible when the plaintiff has pleaded facts that allow

the court to “draw a reasonable inference that the defendant is liable for the misconduct

alleged.”89

On a motion to dismiss, asserted claims are liberally construed in favor of the claimant,

and all facts pleaded are taken as true.90 However, although required to accept all “well-pleaded

facts” as true, a court is not required to accept legal conclusions as true.91 “While legal

conclusions can provide the framework of a complaint, they must be supported by factual

allegations.”92 Similarly, “[t]hreadbare recitals of the elements of a cause of action, supported by

mere conclusory statements” will not suffice.93

The complaint need not contain detailed factual allegations, but it must offer more than

mere labels, legal conclusions, or formulaic recitations of the elements of a cause of action.94 That

is, the complaint must offer more than an “unadorned, the defendant-unlawfully-harmed-me

accusation.”95 From the face of the complaint, there must be enough factual matter to raise a

reasonable expectation that discovery will reveal evidence as to each element of the asserted

88 Twombly, 550 U.S. at 556.

89 Id. at 570.

90 Leatherman v. Tarrant Cnty. Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 164 (1993); see

also Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322–23 (2007).

91 Iqbal, 556 U.S. at 677–78.

92 Id. at 679.

93 Id. at 678.

94 Id.

95 Id.

claims.96 If factual allegations are insufficient to raise a right to relief above the speculative level,

or if it is apparent from the face of the complaint that there is an “insuperable” bar to relief, the

claim must be dismissed.97

B. Legal Standard for Interpreting Insurance Contracts Under Louisiana Law

Under Louisiana law, “an insurance policy is a contract between the parties and should be

construed by using the general rules of interpretation of contracts set forth in the Louisiana Civil

Code.”98 “The Louisiana Civil Code provides that ‘[t]he judiciary’s role in interpreting insurance

contracts is to ascertain the common intent of the parties to the contract’ by construing words and

phrases ‘using their plain, ordinary and generally prevailing meaning.’”99 “Interpretation of an

insurance contract generally involves a question of law.”100

If the contract is clear and unambiguous and does not have absurd consequences, the court

applies the ordinary meaning of the contractual language.101 If the insurance policy contains

ambiguous provisions, the “[a]mbiguity . . . must be resolved by construing the policy as a whole;

one policy provision is not to be construed separately at the expense of disregarding other policy

96 Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 257 (5th Cir. 2009).

97 Moore v. Metro. Human Serv. Dep’t, No. 09-6470, 2010 WL 1462224, at * 2 (E.D. La. Apr. 8, 2010)

(Vance, C.J.) (citing Jones v. Bock, 549 U.S. 199, 215 (2007)); Carbe v. Lappin, 492 F.3d 325, 328 n. 9

(5th Cir. 2007).

98 In re Katrina Canal Breaches Litig., 495 F.3d 191, 206 (5th Cir. 2007) (quoting Cadwallader v. Allstate

Ins. Co., 848 So.2d 577, 580 (La. 2003)); Mark v. Sunshine Plaza, Inc., No. 16-455, 2016 WL 6876645, at

*2 (E.D. La. Nov. 22, 2016) (Morgan, J.) (quoting Wisznia Co. v. Gen. Star Indem. Co., 759 F.3d 446, 448

(5th Cir. 2014) (quoting Mayo v. State farm Mut. Auto. Ins. Co., 2003-1801, at 3 (La. 2/25/04); 869 So.2d

96, 99)) (quotation marks omitted) (alterations omitted).

99 Wisznia Co., 759 F.3d at 448–49 (quoting Mayo, 2003–1801, at 3 (La.2/25/04); 869 So.2d at 99 (citing

La. Civ. Code arts. 2045, 2047)).

100 In re Katrina Canal Breaches Litig., 495 F.3d at 206 (citing Bonin v. Westport Ins. Corp., 930 So.2d

906, 910 (La. 2006)).

101 Prejean v. Guillory, 2010-0740, at 6 (La. 7/2/10), 38 So. 3d 274, 279; see also Sapp v. Wood Grp. PSN,

Inc., No. 15-3, 2016 WL 6995897, at *4 (E.D. La. Nov. 30, 2016) (Brown, J.).

provisions.”102 “An insurance contract, however, should not be interpreted in an unreasonable or

strained manner under the guise of contractual interpretation to enlarge or restrict its provisions

beyond what is reasonably contemplated by unambiguous terms or achieve an absurd

conclusion.”103 “Courts lack the authority to alter the terms of insurance contracts under the guise

of contractual interpretation when the policy's provisions are couched in unambiguous terms.”104

IV. Analysis

In the Petition, Muriel’s asserts breach of contract and declaratory judgment claims

against State Farm.105 Specifically, Muriel’s alleges that State Farm breached its insurance

contract with Muriel’s by denying coverage for losses Muriel’s sustained as a result of the

COVID-19 Closure Orders.106 In the instant motion, State Farm argues that Muriel’s breach of

contract and declaratory judgment claims should be dismissed for three reasons: (1) Muriel’s does

not allege direct physical loss to the covered property as required by the Policy; (2) the Policy’s

Virus Exclusion bars coverage for the alleged losses; and (3) the Civil Authority provision of the

Endorsement to the Policy does not apply to Muriel’s alleged losses.107 The Court addresses each

issue in turn. In its analysis, the Court applies Louisiana law as required by Erie/Klaxon

doctrine.108

102 In re Katrina Canal Breaches Litig., 495 F.3d at 207 (quoting La. Ins. Guar. Assoc. v. Interstate Fire &

Cas. Co., 630 So.2d 759, 763 (La. 1994)).

103 Id. at 208 (quoting Cadwallader v. Allstate Ins. Co., 848 So.2d 577, 580 (La. 2003)).

104 Id.

105 Rec. Doc. 1-1.

106 Id.

107 See generally Rec. Doc. 12-2.

108 See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941); Sorrels Steel Co. v. Great Sw. Corp.,

906 F.2d 158, 167 (5th Cir 1990) (“A federal court sitting in diversity follows the choice of law rules of the

state in which it sits.”). “Under the Louisiana choice-of-law regime, the law of the state where the

A. Whether Muriel’s has Alleged Direct Physical Loss to the Covered Property

Muriel’s alleges that the Closure Orders and their effects on Muriel’s business, property,

and operations constitute a “direct physical loss” under the terms of the Policy.109 In the instant

motion to dismiss, State Farm argues that Muriel’s allegations are “insufficient to establish the

required ‘accidental direct physical loss to’ Covered Property.”110 In opposition, Muriel’s argues

that the alleged losses are covered by the Policy because the Policy covers “losses” as opposed to

“damages.”111

The Policy states, in pertinent part:

We insure for accidental direct physical loss to Covered Property unless the loss

is:

1. Excluded in SECTION I — EXCLUSIONS; or

2. Limited in the Property Subject To Limitations provision.112

The Policy does not define “direct physical loss.” State Farm argues that direct physical

loss requires tangible damage.113 In opposition, Muriel’s urges a broader interpretation of

physical loss that encompasses loss of use or access to the covered property.114

In Trinity Industries, Inc. v. Insurance Co. of North America, the Fifth Circuit, applying

Louisiana law, found that “the language ‘physical loss or damage’ strongly implies that there was

insurance contract was issued and executed generally governs the interpretation of that contract.” Woodfield

v. Bowman, 193 F.3d 354, 360 (5th Cir.1999). Here, the Policy was issued and executed in Louisiana. Rec.

Doc. 12-3 at 93. In addition, the parties agree that Louisiana law governs the instant dispute. Rec. Doc. 12-

2 at 4; Rec. Doc. 27 at 11.

109 Rec. Doc. 1-1 at 4.

110 Rec. Doc. 12-2 at 18.

111 Rec. Doc. 27 at 11–15.

112 Rec. Doc. 12-3 at 6 (emphasis added).

113 Rec. Doc. 12-2 at 18–24.

114 Rec. Doc. 27 at 12–15.

an initial satisfactory state that was changed by some external event into an unsatisfactory state—

for example, the car was undamaged before the collision dented the bumper.”115 Similarly, in

Hartford Insurance Co. of Midwest v. Mississippi Valley Gas Co., the Fifth Circuit found that

“[t]he requirement that the loss be ‘physical,’ given the ordinary definition of that term, is widely

held to exclude alleged losses that are intangible or incorporeal and, thereby, to preclude any

claim against the property insurer when the insured merely suffers a detrimental economic impact

unaccompanied by a distinct, demonstrable, physical alteration of the property.”116

In this case, Muriel’s does not allege any physical loss that manifested as a demonstrable

physical alteration of the premises.117 Instead, Muriel’s relies on Studio 417, Inc. v. The

Cincinnati Insurance Co. to argue that “direct physical loss” does not require physical tangible

alteration.118 In Studio 417, a district judge in the Western District of Missouri found that the

plaintiffs adequately alleged a “direct physical loss” under their insurance policy due to “the

presence of COVID-19 on premises.”119

Of course, the Studio 417 decision is not binding upon this Court. Nevertheless, Studio

417 is easily distinguished from this case for two reasons. First, in Studio 417, the insurance

policy at issue provided coverage for “accidental physical loss or accidental physical damage.”120

115 916 F.2d 267, 270–71 (5th Cir. 1990).

116 181 F. App’x 465, 470 (5th Cir. 2006) (quoting 10A Couch on Ins. § 148:46) (applying Mississippi law);

see also Diesel Barbershop, LLC v. State Farm Lloyds, No. 5:20-CV-461-DAE, 2020 WL 4724305, at *5

(W.D. Tex. Aug. 13, 2020) (“It appears that within our Circuit, the loss needs to have been a distinct,

demonstrable physical alteration of the property.”) (internal quotation omitted).

117 See Rec. Doc. 1-1.

118 Rec. Doc. 27 at 13–14.

119 No. 20-CV-03127-SRB, 2020 WL 4692385, at *4 (W.D. Mo. Aug. 12, 2020).

120 Id. at *5 (emphasis in original).

The Studio 417 court applied the statutory interpretation canon against superfluity to give distinct

meanings to “physical loss” and “physical damage.”121 Here, the Policy provides coverage only

for “physical loss,” thereby rendering the statutory canon against superfluity inapplicable.122

Second, in Studio 417, the plaintiffs alleged that “COVID-19 is a physical substance” that

“attached to and deprived Plaintiffs of their property.”123 The court relied on this allegation to

find that the plaintiffs alleged “a causal relationship between COVID-19 and their alleged

losses.”124 By contrast, Muriel’s does not allege that COVID-19 physically infiltrated the

premises; rather, Muriel’s alleges that “[t]he shutdown orders issued by the City of New Orleans

and State of Louisiana, and their effects on [Muriel’s] business, property, and operations

constitute a direct physical loss to covered property.”125 For these reasons, the Court finds the

reasoning in Studio 417 inapplicable here.

Alternatively, Muriel’s argues that it sufficiently alleges direct physical loss because

“[t]he insured property was uninhabitable” as a result of the Closure Orders.126 Muriel’s relies on

In re Chinese Manufactured Drywall Products Liability Litigation to argue that loss of use of the

121 Id.

122 Rec. Doc. 12-3 at 6. The Court finds that Henderson Road Restaurant Systems, Inc. v. Zurich American

Insurance Co. is similarly distinguishable on this ground. Rec. Doc. 52. In Henderson, a district judge in

the Northern District of Ohio found that Policy language covering “direct physical loss of or damage to

property” covered alleged losses resulting from COVID-19-related shutdown orders. age to” property. 2021

WL 168422 at *11 (N.D. Ohio Jan. 19, 2021). The Henderson court relied on this language to distinguish

the scope of coverage from other policies that provided coverage only for “physical loss to property.” Id. at

*10.

123 Studio 417, 2020 WL 4692385, at *4.

124 Id.

125 Rec. Doc. 1-1 at 4; see also Rec. Doc. 27 at 21 (“Do Muriel’s losses result from the existence of a virus

on the property? No.”).

126 Rec. Doc. 27 at 12.

insured property constitutes a covered physical loss.127 In Chinese Drywall, a federal district

judge in the Eastern District of Louisiana found that the plaintiffs had suffered “direct physical

loss” when Chinese-manufactured drywall rendered their homes “unusable and uninhabitable”

due to “damage to the electrical wiring, appliances, and devices, as well as the ever-present sulfur

gases.”128

Muriel’s also relies on Elegant Massage, LLC v. State Farm Mutual Automobile Insurance

Co., in which a federal district judge in the Eastern District of Virginia denied in part a motion to

dismiss filed by State Farm and allowed claims that were allegedly “identical to those stated here

by Muriel’s” to proceed.129 In Elegant Massage, the plaintiff operated a business providing

therapeutic massages.130 In response to the COVID-19 outbreak, the governor of Virginia issued

an Executive Order mandating “the closure of ‘recreational and entertainment businesses,’

including ‘spas’ and ‘massage parlors.’”131 State Farm denied the plaintiff’s claim for loss of

business income and extra expense coverage.132 The district court found that the plaintiff had

“submitted a good faith claim to the Defendants for a ‘direct physical loss’ covered by the policy”

because it was “plausible that Plaintiff’s [sic] experienced a direct physical loss when the property

was deemed uninhabitable, inaccessible, and dangerous to use by the Executive Orders . . . .”133

127 Id. at 17 (citing In re Chinese Manufactured Drywall Products Liability Litig., 759 F. Supp. 2d 822, 832

(E.D. La. 2010) (Fallon, J.)).

128 759 F. Supp. 2d at 832–34.

129 Rec. Doc. 40; see also Elegant Massage, LLC v. State Farm Mut. Auto. Ins. Co., No. 2:20-CV-265, 2020

WL 7249624 (E.D. Va. Dec. 9, 2020).

130 Id. at *1.

131 Id.

132 Id. at *2.

133 Id. at *10.

The instant case is distinguishable from the non-binding decisions in both Chinese

Drywall and Elegant Massage. In this case, the Closure Orders did not render Muriel’s “unusable

and uninhabitable.” Rather, the Closure Orders suspended restaurant dining operations but

allowed restaurants—including Muriel’s—to continue offering takeout and delivery services.134

The Petition does not allege that Muriel’s was “uninhabitable” by restaurant employees, delivery

personnel, or even customers who could enter the restaurant to pick up takeout orders.135

Moreover, when Muriel’s filed the Petition, it was permitted to operate at 50% capacity pursuant

to the City of New Orleans reopening plan.136 Additionally, Muriel’s does not allege that COVID-

19 was physically present on the insured premises,137 in contrast to the plaintiffs in Chinese

Drywall who alleged that the drywall was physically present in their homes and was “releasing

elemental sulfur gases throughout the homes.”138 Therefore, the Court finds Chinese Drywall and

Elegant Massage inapposite here.

For these reasons, the Court finds that Muriel’s does not sufficiently allege direct physical

loss to the covered property.

B. Whether the Virus Exclusion Provision of the Policy Bars Coverage for Muriel’s

Alleged Losses

134 Rec. Doc. 1-1 at 16.

135 See generally id; see also, e.g. Michael Cetta, Inc. v. Admiral Indem. Co., No. 20 CIV. 4612 (JPC), 2020

WL 7321405, at *12 (S.D.N.Y. Dec. 11, 2020) (“The fact that Sparks could have continued to operate its

restaurant in some capacity is fatal to Sparks's claims for civil authority coverage.”); Malaube, LLC v.

Greenwich Ins. Co., No. 20-22615-CIV, 2020 WL 5051581, at *9 (S.D. Fla. Aug. 26, 2020) (“The

government permitted Plaintiff to continue its takeout and delivery services. While Plaintiff never makes

clear whether it undertook either of these options, the government never made the restaurant uninhabitable

or substantially unusable.”).

136 Rec. Doc. 1-1 at 4.

137 Rec. Doc. 27 at 21.

138 Chinese Drywall, 759 F. Supp. 2d at 832.

In the instant motion, State Farm argues that the Virus Exclusion provision of the Policy

bars insurance coverage for Muriel’s alleged losses.139 In opposition, Muriel’s contends that the

Virus Exclusion does not bar coverage because it only covers “viral contamination,” which is

distinct from the COVID-19 pandemic. 140 Muriel’s also argues that COVID-19 is a pandemic

and the Policy does not exclude coverage for “Pandemic Events.”141

Because the Court finds that Muriel’s does not adequately allege direct physical loss to

the covered property, it need not determine whether the Virus Exclusion precludes coverage in

this case. However, even if Muriel’s had alleged direct physical loss to the covered premises, the

Court finds that the plain language of the Virus Exclusion precludes Muriel’s claim for coverage.

The Virus Exclusion provision appears in the section of the Policy titled “Section I –

Exclusions.”142 The section begins with an introductory anti-concurrent causation clause (“ACC

Clause”) that reads:

1. We do not insure under any coverage for any loss which would not have

occurred in the absence of one or more of the following excluded events. We do

not insure for such loss regardless of: (a) the cause of the excluded event; or (b)

other causes of the loss; or (c) whether other causes acted concurrently or in any

sequence with the excluded event to produce the loss; or (d) whether the event

occurs suddenly or gradually, involves isolated or widespread damage, arises from

natural or external forces, or occurs as a result of any combination of these:143

The Policy then enumerates various exclusions, including the following Virus Exclusion:

j. Fungi, Virus or Bacteria

. . .

(2) Virus, bacteria or other microorganism that induces or is capable of inducing

139 Rec. Doc. 12-2 at 12–14.

140 Rec. Doc. 27 at 19–20.

141 Id. at 20–25.

142 Rec. Doc. 12-3 at 7.

143 Id.

physical distress, illness or disease; . . . .144

With regard to insurance policy coverage and exclusions, the Louisiana Supreme Court

has stated, “[a]lthough the insured bears the burden of proving a policy of insurance affords

coverage for an incident, the insurer bears the burden of proving the applicability of an

exclusionary clause within a policy.”145 “Policy exclusions must be clearly stated. Any ambiguity

in an insurance policy’s exclusions is construed to afford coverage.”146

Here, the Court finds that the Virus Exclusion unambiguously excludes coverage for

losses resulting from COVID-19. The Centers for Disease Control and Prevention (“CDC”)

defines COVID-19 as “a new virus . . . ‘CO’ stands for corona, ‘VI’ for virus, and ‘D’ for

disease.”147 Therefore, COVID-19 falls squarely within the language of the Virus Exclusion.

Notably, despite Muriel’s assertion that the Virus Exclusion requires “viral contamination,”148

the text of the Virus Exclusion includes nothing about a contamination requirement.149

The Court finds Muriel’s multiple attempts to obfuscate the plain language of the Virus

Exclusion unpersuasive. First, Muriel’s contention that the cause of the alleged losses is the

144 Id. at 8.

145 Jones v. Estate of Santiago, 2003-1424, p. 12 (La. 4/14/04); 870 So. 2d 1002, 1010 (citing Doerr v. Mobil

Oil Corp., 2000-0947, p. 5 (La. 12/19/00); 774 So. 2d 119, 124, modified on other grounds on reh’g, 00-

0947 (La. 3/16/01); 782 So. 2d 573)); see also Blackburn v. Nat. Union Fire Ins. Co. of Pittsburgh, 2000-

2668, p. 6 (La. 4/3/01); 784 So. 2d 637, 641 (“The insurer bears the burden of proving the applicability of

an exclusionary clause within a policy”); La. Maint. Servs., Inc. v. Certain Underwriters at Lloyd’s of

London, 616 So. 2d 1250, 1252 (La. 1993) (“The insurer has the burden of proving that a loss comes within

a policy exclusion”); Russ, 10A Couch on Ins. § 148:52 (3d ed. 2010).

146 La. Maint. Servs., 616 So. 2d at 1252; see also Yount v. Maisano, 627 So. 2d 148, 151 (La. 1993) (“Any

ambiguity in an exclusion should be narrowly construed in favor of coverage”).

147 Centers for Disease Control and Prevention, Frequently Asked Questions,

https://www.cdc.gov/coronavirus/2019-ncov/faq.html#Basics (last visited Mar. 5, 2021).

148 Rec. Doc. 27 at 20.

149 Rec. Doc. 12-3 at 8.

Closure Orders, rather than the virus itself, flies in the face of the ACC Clause. In Tuepker v.

State Farm Fire & Casualty Co., the Fifth Circuit found an identical ACC Clause in an insurance

policy issued by State Farm “unambiguous and enforceable.”150 The Fifth Circuit explained the

meaning of the ACC Clause: “[E]xcluded losses—here, any loss which would not have occurred

in the absence of one or more of the excluded events—will not be covered even if a nonexcluded

event or peril acts ‘concurrently or in any sequence’ with the excluded event to cause the loss in

question.”151 Similarly, in Spector v. USAA Casualty Insurance Co., this Court addressed a

nearly-identical ACC Clause in an insurance contract excluding coverage for flood damage.152

There, the plaintiffs argued that damage caused by moisture and evaporation of floodwaters fell

outside of the scope of the flood damage exclusion.153 This Court disagreed, finding that damage

caused by the moisture and evaporation of floodwaters was derivate of the flooding on the

plaintiffs’ property. As a result, this Court found that the flood damage exclusion precluded

coverage under the insurance contract.154

Like in Spector, the Closure Orders issued by Mayor Cantrell and Governor Edwards are

derivative of the COVID-19 outbreak.155 Stated differently, the Closure Orders were issued either

concurrently, or in sequence with, the spread of COVID-19 across the State of Louisiana.

150 507 F.3d 346, 355 (5th Cir. 2007) (applying Mississippi law).

151 Id. at 354.

152 No. CV 18-8806, 2019 WL 1493467, at *6 (E.D. La. Apr. 3, 2019) (Brown, C.J.).

153 Id. at 3.

154 Id. Notably, in Elegant Massage, the district court judge found that anti-concurrent causation clauses

were “not a recognized or settled doctrine in the Court’s jurisdiction.” Elegant Massage, 2020 WL 7249624,

at *11. By contrast, anti-concurrent causation clauses are clearly recognized by Louisiana law.

155 Rec. Doc. 1-1 at 10 (“WHEREAS, the worldwide outbreak of COVID-1 9 and the effects of its extreme

risk . . . .”); Id. at 13 (“WHEREAS, the United States has confirmed cases of individuals who have a severe

acute respiratory disease (‘COVID-19’) caused by a novel coronavirus (‘the virus’) . . . .”).

Therefore, the excluded event—COVID-19—remains part of the causal chain that resulted in

Muriel’s alleged losses and coverage is barred by the Virus Exclusion.

Second, the Court disagrees with Muriel’s argument that because the Policy does not

explicitly exclude “pandemics” or “communicable diseases,” the Policy provides coverage for

Muriel’s alleged losses.156 Although the exclusionary language could have been more clear, “[t]he

fact that an exclusion could have been worded more explicitly does not necessarily make it

ambiguous.”157

Third, the Court declines to rewrite the unambiguous Virus Exclusion as a

“Pollution/Contamination Exclusion,” as urged by Muriel’s.158 In a somewhat convoluted

argument, Muriel’s contends that State Farm should be “equitably estopped” from arguing that

the Virus Exclusion is not a “Pollution/Contamination Exclusion” because of representations

made by “the industry” to the Louisiana Department of Insurance.159 The Court will not examine

extrinsic evidence of the Policy at issue here because the Virus Exclusion is unambiguous and

Louisiana law does not permit the introduction of parol evidence under these circumstances.160

C. Whether Muriel’s has Alleged that the Civil Authority Provision of the Policy Provides

Coverage for Muriel’s Alleged Losses

Muriel’s alleges that it is entitled to coverage under the “Civil Authority” coverage

156 Rec. Doc. 27 at 4.

157 In re Katrina Canal Breaches Litig., 495 F.3d at 210. In addition, the Court is unpersuaded by Muriel’s

claim that a pandemic is “an event, like civil unrest, terrorism, or war.” Rec. Doc. 27 at 21.

158 Id. at 18.

159 Id. at 26–27.

160 La. Civ. Code Ann. art. 2046; see also Condrey v. SunTrust Bank of Georgia, 429 F.3d 556, 563 (5th

Cir. 2005) (“Louisiana law bars parol evidence to evaluate contractual intent ‘[w]hen the words of

a contract are clear and explicit and lead to no absurd consequences.’”).

provision that appears in the Endorsement to the Policy.161 In the instant motion, State Farm

argues that the Civil Authority provision is inapplicable to this case.162 In opposition, Muriel’s

does not respond to State Farm’s argument but states that Muriel’s purchased extended coverage

via the Endorsement “includ[ing] coverage for Civil Authority actions that deprive it of access to

its business facility.”163

The Civil Authority provision provides, in pertinent part:

When a Covered Cause of Loss causes damage to property other than property at

the described premises, we will pay for the actual “Loss of Income” you sustain

and necessary “Extra Expense” caused by action of civil authority that prohibits

access to the described premises, provided that both of the following apply:

1. Access to the area immediately surrounding the damaged property is prohibited

by civil authority as a result of the damage, and the described premises are within

that area but are not more than one mile from the damaged property; and

2. 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.164

Under Louisiana law, to prove coverage under the Civil Authority provision,

the insured must establish a loss of business income:

(1) caused by an action of civil authority;

(2) the action of civil authority must prohibit access to the described premises of

the insured;

(3) the action of civil authority prohibiting access to the described premises must

be caused by direct physical loss of or damage to property other than at the

described premises; and

(4) the loss or damage to property other than the described premises must be

caused by or result from a covered cause of loss as set forth in the policy.165

161 Rec. Doc. 1-1 at 3.

162 Rec. Doc. 12-2 at 24.

163 Rec. Doc. 27 at 8.

164 Rec. Doc. 12-3 at 57.

165 Dickie Brennan & Co. v. Lexington Ins. Co., 636 F.3d 683, 685 (5th Cir. 2011) (citing Kean, Miller,

Importantly, coverage under the Civil Authority provision is circumscribed by the terms

of the Endorsement, which provides: “The coverage provided by this endorsement is subject to

the provisions of Section I – Property, except as provided below.”166 Therefore, the Court’s

previous findings—namely that Muriel’s does not allege a direct physical loss and that the Virus

Exclusion bars coverage for the alleged losses—also preclude coverage under the Civil Authority

provision. Nevertheless, the Court alternatively finds that the Civil Authority coverage is

inapplicable here.

In Dickie Brennan & Co. v. Lexington Insurance Co., the Fifth Circuit, applying Louisiana

law, explained that “[t]he general rule is that civil authority coverage is intended to apply

to situations where access to an insured’s property is prevented or prohibited by an order of civil

authority issued as a direct result of physical damage to other premises in the proximity of the

insured’s property.”167 There, operators of New Orleans restaurant Brennan’s brought suit against

their insurer when the insurer denied coverage for losses incurred during a mandatory evacuation

of New Orleans in anticipation of Hurricane Gustav.168 The plaintiffs argued on appeal that the

damage Hurricane Gustav caused in the Caribbean qualified as “damage to property, other than

at the described premises” and was therefore sufficient to trigger coverage under the civil

authority provision of the insurance policy.169 The Fifth Circuit disagreed, holding that there was

Hawthorne, D’Armond McCowan & Jarman, LLP v. Nat’l Fire Ins. Co., 2007 WL 2489711, at *3 (M.D.

La. Aug. 29, 2007)).

166 Rec. Doc. 12-3 at 56.

167 636 F.3d at 686–87 (internal quotation marks omitted).

168 Id. at 684.

169 Id.

no coverage under the civil authority provision of the policy because the plaintiffs “fail[ed] to

demonstrate the required nexus between the evacuation order and damage to property ‘other than

at the described premises.’”170

Here, Muriel’s allegations establish that the Closure Orders were intended to prevent the

spread of COVID-19.171 Like in Dickie Brennan, the Closure Orders were preventative and lack

the requisite nexus with prior property damage. Moreover, Muriel’s does not allege physical

damage to other property in the proximity of the insured premises as is required to invoke

coverage under the Civil Authority provision.

For these reasons, the Court finds that Muriel’s fails to allege that it is entitled to coverage

under the Civil Authority provision of the Endorsement to the Policy.

D. Whether Muriel’s Declaratory Judgment Claim Should be Dismissed

State Farm argues that Muriel’s claim for a judicial declaration as to its rights and State

Farm’s obligations under the Policy should be dismissed for the same reasons as the breach of

contract claim, namely that “there is no coverage for the claimed losses.”172 Muriel’s does not

address this argument.173

If Muriel’s breach of contract claim is dismissed, dismissal of the declaratory judgment

claim is appropriate in this case. In the Petition, Muriel’s seeks a judicial declaration as to its

rights and State Farm’s obligations under the Policy “stating the actions and orders of the State

of Louisiana and/or City of New Orleans, Parish of Orleans have rendered the Covered Property

170 Id. at 684–87.

171 Rec. Doc. 1-1 at 4.

172 Rec. Doc. 12-2 at 30.

173 See Rec. Doc. 27.

unfunctional and therefore constitute and/or have caused a direct physical loss that triggers and

affords civil authority coverage under the policy.”174 For the reasons explained above, the Court

finds that Muriel’s fails to adequately state a claim for coverage under the Civil Authority

provision of the Policy.

V. Conclusion

Considering the foregoing reasons, the Court finds that Muriel’s has not set forth sufficient

allegations to state a claim for insurance coverage under the Policy for losses resulting from the

COVID-19 Closure Orders. Nevertheless, cognizant of the economic hardships resulting from the

COVID-19 virus and its ongoing effects, the Court grants Plaintiff leave to amend the Complaint

to address the deficiencies identified in this Order. State Farm is granted leave to file responsive

motions to Plaintiff’s amended complaint if necessary. Accordingly,

IT IS HEREBY ORDERED that Defendant State Farm Fire and Casualty Company’s

“Rule 12(b)(6) Motion to Dismiss Plaintiff’s Petition for Failure to State a Claim”175 is DENIED

WITHOUT PREJUDICE.

IT IS FURTHER ORDERED that Muriel’s is granted leave to amend the Complaint to

address the deficiencies identified in this Order by May 10, 2021.

174 Id. at 8.

175 Rec. Doc. 12.

IT IS FURTHER ORDERED that State Farm is granted leave to file responsive motions

to Muriel’s amended complaint if necessary.

NEW ORLEANS, LOUISIANA, this 26th day of April, 2021.

NANNETTE J we TE BROWN

CHIEF JUDGE

UNITED STATES DISTRICT COURT

29