The Sacramento Kings are off to a 2-5 start on the court this season but are faring better in court. A federal judge recently denied a motion to dismiss filed by an insurance company that the Kings say wrongfully denied coverage of losses related to the COVID-19 pandemic.
On Oct. 28, Judge Kimberly Mueller wrote that the insurance policy was ambiguous, and “one reasonable interpretation of the policy’s scope and exclusions encompasses [the Kings’] insurance claims.” She stressed that under insurance law, “ambiguity is generally resolved in favor of coverage.” Mueller noted that a motion to dismiss can only be granted if the complaint lacks a “cognizable legal theory.” The Kings’ theory, she found, met that bar.
The lawsuit, which contains claims for breach of contract and bad faith denial of coverage, stems from the loss of millions of dollars in revenue from the cancellation of Kings games and various other events, such as a Bon Jovi concert and a graduation ceremony, at the Golden 1 Center. The center is operated and managed by the Sacramento Downtown Arena LLC, another plaintiff in the suit. Factory Mutual Insurance Company had insured the arena through an “all risks” policy, meaning “all risks of physical loss or damage.”
That seemingly straightforward definition became anything but when it comes to losses incurred from the pandemic.
Factory insists it has no obligation to pay because, as the company sees it, the losses weren’t the result of “physical loss or damage.” Factory notes that other courts have rejected similar claims on grounds that viruses do not alter structures or properties.
Mueller wasn’t convinced. She stressed that the policy lists “additional coverages for insured physical loss or damage,” a term that includes reasonable and necessary costs incurred in response to a “communicable disease,” which in turn is defined as a “disease which is transmissible from human to human by direct or indirect contact with an affected individual or the individual’s discharges.” Mueller determined that a reasonable reading of the policy is the presence of a communicable disease counts as “physical loss or damage.” She added that cases cited by Factory aren’t on point, since none concern the description of a communicable disease provision that arguably falls within the definition of insured physical loss or damage.
Factory also argues the policy contains a contamination exclusion, which relieves the company of the obligation to pay for “the inability to use or occupy property.” However, Mueller reasoned, this exclusion doesn’t apply if one reads the policy as “defining the presence of a ‘communicable disease’ as non-excluded ‘physical damage.’” She also pointed out that such a reading wouldn’t nullify the exclusion completely, since it would remain for “contamination by foreign substances, impurities, pollutants, hazardous materials, poisons, toxins, mold and mildew.”
The Kings aren’t the first NBA team in California to defeat an insurance company at the motion-to-dismiss stage. The Los Angeles Lakers recently had a similar victory, insisting the “persistent presence” of the virus “physically altered” Crypto.com Arena and the UCLA Health Training Center, where the Lakers practice. A judge found a dismissal unwarranted, in part because the policy doesn’t define “direct physical loss or damage,” and ambiguity favors the insured over the insurer.
(This story has been updated in the headline and with the team’s record in the first paragraph.)