Motion to Dismiss Superspreader Case Due to SIR Denied

The United States District Court for the Central District of California, applying California law, denied an insurer’s motion to dismiss a coverage action related to the insurer’s failure to provide business interruption coverage under a “Site Environmental Impairment Liability Coverage” policy (the “Policy”).  The court found that “covered under the Policy” was at best ambiguous.  It then adopted the insured’s interpretation that “covered under the Policy” meant fitting within the Policy’s definition of “Cleanup Costs.’”  

Sunstone Hotel Investors, Inc. (“Sunstone”) sued Endurance American Specialty Insurance Company (“Endurance”) alleging that it wrongfully withheld insurance coverage under the Policy related to a coronavirus “superspreader” event that took place at a February 2020 hotel conference, which resulted in more than 20,000 coronavirus cases around the world.  Sunstone then closed the hotel for months.   Endurance moved to dismiss for failure to state a claim. 

Sunstone sought coverage under Coverage D of the policy, which covered “Business Interruption” (BI) losses “that directly result from … Biological Agent Condition(s) … on … a Scheduled Location” that “result in Cleanup Costs covered under this Policy.”  Endurance denied coverage stating the claim was subject to a $100,000 self-insured retention (“SIR”) articulated in Coverage C that had not been satisfied.  

The parties disputed the meaning of “covered under this Policy.”  According to Endurance, the “Cleanup Costs covered under this Policy” include only those Cleanup Costs that exceed the $100,000 SIR for Coverage C “Biological Agent Condition(s)”.  Sunstone, on the other hand, argued that the phrase “covered under this Policy” means only “fitting within the Policy’s definition of Cleanup Costs.’”  

The court found that the meaning and function of the “covered under this Policy” language was at best ambiguous, and therefore, must be interrupted to protect the reasonable expectations of the insured.  “[T]he Policy gave [Sunstone] reasonable expectations that BI losses would be covered even if, as in the usual case, they did not result in significant Cleanup Costs.”  Thus, the court denied Endurance’s motion.  Sunstone Hotel Investors, Inc. v Endurance Am. Specialty Ins. Co., No. SACV 20-02185-CJC (KESx) (C.D. Cal. Feb. 26, 2021).