21-2609 Abbey Hotel Acquisition, LLC, et al. v. Nat’l Sur. Corp.

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION ASUMMARY ORDER@). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 27th day of May, two thousand twenty-two.

PRESENT: JON O. NEWMAN, JOHN M. WALKER, JR., RICHARD J. SULLIVAN, Circuit Judges. _____________________________________ ABBEY HOTEL ACQUISITION, LLC, SETAI HOTEL ACQUISITION, LLC, SETAI RESORT AND RESIDENCE CONDOMINIUM ASSOCIATION, INC., SETAI VALET SERVICES, LLC, Plaintiffs-Appellants, v. No. 21-2609 NATIONAL SURETY CORPORATION, Defendant-Appellee. _____________________________________ FOR APPELLANTS: JOSHUA L. MALLIN (Dennis T. D’Antonio, on the brief), Weg & Myers, P.C., Rye Brook, NY.

FOR APPELLEE: BRETT SOLBERG (Michael D. Hynes, Anna K. Finger, DLA Piper LLP (US), New York, NY, on the brief), DLA Piper LLP (US), Houston, TX.

Appeal from a judgment of the United States District Court for the Southern

District of New York (Valerie E. Caproni, Judge).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,

ADJUDGED, AND DECREED that the judgment of the district court is

AFFIRMED.

Plaintiffs-Appellants Abbey Hotel Acquisition, LLC, Setai Hotel

Acquisition, LLC, Setai Resort and Residence Condominium Association, Inc., and

Setai Valet Services, LLC (collectively, “Abbey Hotel”) appeal from a judgment

granting the motion of Defendant-Appellee National Surety Corporation

(“National Surety”) to dismiss Abbey Hotel’s breach of contract action for failure

to state a claim. We review de novo the dismissal of a complaint under Federal

Rule of Civil Procedure 12(b)(6). Bacon v. Phelps,

(2d Cir. 2020).

We assume the parties’ familiarity with the underlying facts, procedural history,

and issues on appeal.

2 This case is one of many in which a business seeks insurance coverage for

the loss of income caused by the COVID-19 pandemic. Abbey Hotel, which owns

and operates the Setai Hotel in Miami Beach, Florida, purchased an all-risk

commercial property insurance contract from National Surety (the “Policy”). The

Policy provisions at issue here include insurance coverage for “direct physical loss

or damage” to the property. App’x at 123. Abbey Hotel also purchased an

extension of coverage for the loss of business income “due to direct physical loss

or damage to property at a location caused by or resulting from a covered

communicable disease event” (“Communicable Disease Coverage”). App’x at

141.

In March 2020, the spread of COVID-19 prompted the governor of Florida

to declare a state of emergency, and the mayor of Miami-Dade County issued an

emergency order directing hotels to stop accepting most new reservations and

extending existing ones (the “Emergency Order”). Naturally, this caused a

precipitous decline in Abbey Hotel’s business. Abbey Hotel sought

reimbursement for its loss of revenue under the Policy, but National Surety

refused to cover the claims; Abbey Hotel then sued for breach of contract. The

district court dismissed the complaint, concluding that (1) the complaint failed to

3 allege “direct physical loss or damage” to trigger coverage under any of the

relevant Policy provisions; and (2) the COVID-19 pandemic did not constitute a

“communicable disease event” under the Policy. Sp. App’x at 4–6.

The first issue on appeal is whether the Policy – an all-risk commercial

insurance policy providing coverage for “direct physical loss or damage” – insures

against lost income resulting from the COVID-19 pandemic and related closure

orders. The law of Florida, where the insured property is located, governs this

dispute. 1 Abbey Hotel argues that it sufficiently alleged physical loss because

“the virus physically contaminated the surfaces and air supplies in [its] premises.”

Abbey Hotel’s Br. at 8. This argument, however, has been rejected by Florida’s

Third District Court of Appeal (and virtually every other federal and state court to

consider it). Although the Florida Supreme Court has not yet directly ruled on

this issue, Florida’s intermediate appellate court recently concluded that “‘direct

physical loss of or damage to property’ requires actual, tangible alteration to the

insured property,” and therefore does not extend to economic losses caused by

1 The Policy does not contain a choice-of-law provision, but the parties agree that Florida law applies (and that there is no significant difference between New York and Florida law on the issue). The district court also concluded that New York’s “center of gravity” choice-of-law test favored applying Florida law, Sp. App’x at 3 n.2, and the parties do not challenge that conclusion on appeal.

4 COVID-19 closure orders. Commodore, Inc. v. Certain Underwriters at Lloyd's

London, — So.3d —, No. 3D21-0671,

, at *6 (Fla. Dist. Ct. App.

May 11, 2022). It also rejected the contention, similar to Abbey Hotel’s, that

COVID-19 particles on surfaces or in the air caused physical damage, observing

that a structure that “merely needs to be cleaned” has not suffered direct physical

loss.

(quoting Mama Jo's Inc. v. Sparta Ins. Co.,

, 879 (11th Cir.

2020), cert. denied,

(2021)).

When construing state substantive law, “[t]his Court is bound

to apply the law as interpreted by a state’s intermediate appellate courts unless

there is persuasive evidence that the state’s highest court would reach a different

conclusion.” Chufen Chen v. Dunkin' Brands, Inc.,

(2d Cir. 2020)

(citation omitted). There is no such evidence here. Even before Commodore, the

Eleventh Circuit concluded that Florida’s high court would reach the same result,

noting that “every federal and state appellate court that has decided the meaning

of ‘physical loss of or damage to’ property (or similar language) in the context of

the COVID-19 pandemic has come to the same conclusion.” SA Palm Beach, LLC

v. Certain Underwriters at Lloyd's London, 32 F.4th —, No. 20-14812,

, at *8 (11th Cir. May 5, 2022) (collecting cases applying the law of more

5 than a dozen different states). This Court reached the same conclusion when

applying New York law, see 10012 Holdings, Inc. v. Sentinel Ins. Co., Ltd.,

(2d Cir. 2021) (holding that, under New York law, the terms “direct

physical loss” and “physical damage” require an “actual” physical loss, and do

not cover business losses caused by COVID-19), and Abbey Hotel concedes that

New York law has “no significant differences” from Florida law on the issues

raised here, Abbey Hotel’s Br. at 12. We therefore agree with the district court

that Abbey Hotel failed to allege the requisite “direct physical loss or damage” to

trigger coverage under the relevant Policy provisions.

Abbey Hotel also argues that the district court erred in determining that the

COVID-19 pandemic and related closure orders did not constitute a

“communicable disease event” under the Policy. The Policy’s Communicable

Disease Coverage provision explains that:

(1) We will pay for direct physical loss or damage to Property Insured caused by or resulting from a covered communicable disease event at a location including the following necessary costs incurred to:

(a) Tear out and replace any part of Property Insured in order to gain access to the communicable disease;

(b) Repair or rebuild Property Insured which has been damaged or destroyed by the communicable disease; and

6 (c) Mitigate, contain, remediate, treat, clean, detoxify, disinfect, neutralize, cleanup, remove, dispose of, test for, monitor, and assess the effects the communicable disease.

(2) . . . [W]e will pay for the actual loss of business income and necessary extra expense you sustain due to [t]he necessary suspension of operations during the period of restoration. The suspension must be due to direct physical loss or damage to property at a location caused by or resulting from a covered communicable disease event.

App’x at 141 (emphasis added). The Policy defines a “communicable

disease event” as “an event in which a public health authority has ordered

that a location be evacuated, decontaminated, or disinfected due to the

outbreak of a communicable disease at such location.” App’x at 175.

Abbey Hotel contends that the county mayor’s Emergency Order

qualified as a “communicable disease event,” triggering coverage under this

provision. But even if it were true that a communicable disease event

happened here, Abbey Hotel would still be entitled to reimbursement only

for “direct physical loss or damage” “caused by or resulting from” such an

event. App’x at 141. As noted above, “physical loss or damage” does not

extend to the mere presence of COVID-19 particles in the air or on surfaces.

This conclusion is reinforced by the fact that the Communicable Disease

Coverage provision covers lost business income only “during the period of

restoration,” App’x at 141, which means either the date when the “property

7 at the location [is] repaired, rebuilt, or replaced” or “when business is

resumed at a new permanent location,” App’x at 182. The provision clearly

contemplates that coverage for lost business income is appropriate only

where there has been “physical, tangible alterations to the property that

need to be corrected.” Commodore,

, at *6; see SA Palm

Beach,

, at *11 (“The need to repair, rebuild, replace, or

expend time securing a new, permanent property is a pre-condition for

coverage of lost business income and other expenses. Any alternative

meaning of the terms ‘physical loss’ or ‘physical damage’ that does not

require a material alteration to the property would render meaningless this

pre-condition to coverage for business income loss.” (quoting Uncork &

Create LLC v. Cincinnati Ins. Co.,

, 932–33 (4th Cir. 2022))).

Abbey Hotel nonetheless argues that the Communicable Disease

Coverage provision must be interpreted to provide coverage in these

circumstances, because any other reading would render the provision

“illusory.” Abbey Hotel’s Br. at 19–20. “When limitations or exclusions

completely contradict the insuring provisions, insurance coverage becomes

illusory.” Purrelli v. State Farm Fire & Cas. Co.,

(Fla. Dist.

8 Ct. App. 1997). But under Florida law, “[i]n order for an exclusion to

render a policy’s coverage illusory it must eliminate all – or at least virtually

all – coverage in a policy.” Zucker for BankUnited Fin. Corp. v. U.S. Specialty

Ins. Co.,

(11th Cir. 2017) (applying Florida law). Abbey

Hotel fails to explain how denying coverage here necessarily eliminates any

possibility for coverage under the Communicable Disease Coverage

provision; the mere fact that the COVID-19 virus happens to be unable to

survive on surfaces for very long does not automatically mean that an

insured could never incur physical damage to a property arising out of

efforts to mitigate the spread of a communicable disease. For example, at

oral argument, counsel for both sides agreed that treating an outbreak of

legionella – which infects a building’s water supply, including centralized

air-cooling systems – may be covered under the provision.

We have considered Abbey Hotel’s remaining arguments and find them to

be meritless. Accordingly, we AFFIRM the judgment of the district court.

FOR THE COURT: Catherine O’Hagan Wolfe, Clerk of Court

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