Sacramento arena sues insurer for COVID business losses

The owner of the Sacramento Downtown Arena, also known as Golden 1 Center, sued Factory Mutual Insurance Co. after being denied coverage for business losses because of the pandemic, despite a provision in its $850 million policy the plaintiffs say does not exclude damages arising out of communicable diseases.

The lawsuit, filed in federal court in Sacramento on Thursday, was joined by nearby hotels and retailers that lost business during the pandemic. The complaint seeks damages for declaratory relief, contract breach, and breach of implied covenant of good faith. Sacramento Downtown Arena LLC; Sacramento Kings LTD Partnership, et al v. Factory Mutual Insurance Co., 2:21-AT-215 (E.D. Cal., filed March 11, 2021).

"For the live entertainment industry, these orders resulted in a complete interruption and cessation of business. Unable to host sporting events, concerts and other live entertainment events, venues and their operators (like plaintiffs) have lost huge sums as they heeded governmental orders meant to protect the public from the pandemic," wrote Howard A. Slavitt, a partner at Coblentz Patch Duffy & Bass LLP.

"Subsequent to submitting its claim to Factory Mutual, plaintiffs learned that Factory Mutual had already adopted a companywide position on coverage for COVID-19 claims, and issued guidelines to all of its claims handlers across the company to ensure that Factory Mutual's adjusters reached the same conclusion for all COVID-19 claims."

Slavitt argued the claims personnel were told to follow the company's talking points without regard to any individual probe into each claim, and denied coverage regardless of what a probe could reveal.

Steve Zenofsky, spokesman for Factory Mutual, said in a statement Friday: "FM Global values the long term relationships we have with our policyholders, and we are proud to be leading the industry for claims service. It is unfortunate when legal matters arise because we strongly believe our insurance policies are clear on the coverage provided."

The venue had to cancel many events in 2020, including NBA basketball games, an NCAA tournament, pop concerts and an event featuring Michelle Obama, the plaintiffs said. The policy it purchased limits maximum coverage to $850 million per occurrence. Slavitt argued the virus' presence did cause physical loss and damage, as droplets are known to land on surfaces or remain in the air for several days. Substantial money was spent to clean, disinfect, repair and replace air filtration systems and remodel physical spaces, he said.

Slavitt focused on the clause in the provision that states: "This policy excludes the following unless directly resulting from other physical damage not excluded by this policy" which goes on to include contamination and any cost due to contamination such as the inability to use the property. Contamination, as defined by the policy, refers to pathogens, virus, or disease causing agent, but doesn't include 'communicable disease,' the lawsuit states.

"If contamination due only to the actual not suspected presence of contaminant(s) directly results from other physical damage not excluded by this policy, then only physical damage caused by such contamination may be insured," the policy reads. That clause, Slavitt argued, creates a broad exception to the contamination exclusion and does not exclude coverage or communicable diseases like COVID-19. The generic contamination exclusion, if applicable, excludes coverage for costs, "but makes no mention of losses or damages," Slavitt argued.

The Sacramento Kings' lawsuit is one of several filed against insurers by live entertainment and sports franchises that lost business amid the pandemic. Last winter, Major League Baseball and its 30 teams sued over lost ticketing revenue. Insurers across the board refused to pay claims, maintaining that financial loss caused by COVID doesn't constitute physical loss or property damages, whereas policyholders say the pandemic led to both.

LiveNation and Ticketmaster sued Factory Mutual for similar reasons. LiveNation argued its premium policy specifically designated communicable disease as a covered cause of loss, just like the Sacramento Kings.

"I think the Sacramento Kings have a good argument here," said William Shernoff, partner at Shernoff Bidart Echeverria LLP, who is not involved in the action. "Most average policies don't have that contamination exclusion clause. Bigger companies like hotels and entertainment companies have similar provisions, while smaller businesses like restaurants don't, but it depends on how the courts interpret these clauses."

Shernoff, who represents policyholders, said the most common problems he sees are that insurers deny claims without investigation or negotiation, which has fueled a rush to the courthouse.

"All policies have some type of business interruption coverage, but it's just the way insurers are interpreting that you must have physical damage, which I don't agree with. Loss means loss of use of the premises," Shernoff said.

Andrea Warren, special counsel with Sheppard Mullin who represents insurers, said as with any other similarly situated insured, insureds in the live entertainment industry will face insurmountable hurdles to triggering coverage under standard commercial property policies.

"The policy language clearly negates coverage and courts have consistently rejected very similar arguments," Warren said.

Some insurers have paid on pandemic claims, though. The Wimbledon tennis tournament, which is governed by the All-England Lawn Tennis Club, bought millions of dollars worth of pandemic-related coverage after the SARS outbreak in 2003, Shernoff said. The insurance company agreed to pay $141 million after Wimbledon canceled the tournament, Shernoff said.

"It's not altogether consistent, some courts go one way and some go other ways, but I think the most recent trend has been in favor of policyholders," said Shernoff, who has kept track of nearly every insurance dispute across the nation.

On March 4, U.S. District Judge Jesus G. Bernal of the Central District of California allowed a beauty salon owner's complaint to proceed against Farmers Insurance, finding that "it is plausible that 'direct physical loss of' property includes physical dispossession because of dangerous conditions (a virus in the air)" or a government order requiring businesses to cease. Kingray Inc. v. Farmers Group, 5:20-CV-963 (C.D. Cal., filed May 4, 2020)

Bernal pointed to the clause in the salon's policy that did not exclude viruses, and that viruses could result in direct physical loss of or damage to property. Dispossession is a form of loss whether by government order or presence of a virus even if there was no direct physical damage, the judge found. Shernoff said Bernal's decision was one of the best analyses of the phrase "physical loss or damage" that he's seen arise out of insurance disputes filed so far in federal courts.

"The next question is whether that loss -- dispossession -- constitutes a 'direct physical loss,'" Bernal wrote. "Plaintiff compellingly contends that under both California and New York law, physical alteration to property is not necessary to constitute a physical loss."