Tao Group Holdings, LLC v. Employers Insurance Company of Wausau

NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
TAO GROUP HOLDINGS, LLC,
Plaintiff-Appellant,
v.
EMPLOYERS INSURANCE COMPANY
OF WAUSAU,
Defendant-Appellee.
No. 22-15506
D.C. No.
2:21-cv-00382-GMN-NJK
MEMORANDUM*
Appeal from the United States District Court
for the District of Nevada
Gloria M. Navarro, District Judge, Presiding
Submitted November 18, 2022**
San Jose, California
Before: SCHROEDER, GRABER, and FRIEDLAND, Circuit Judges.
Employers Insurance Company of Wausau (“Wausau”) issued Tao Group
Holdings, LLC (“Tao”) a property insurance policy (“the Policy”), insuring Tao’s
restaurant and entertainment venues “against all risks of direct physical loss or
* This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
** The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
FILED
NOV 22 2022
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS

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damage” except those expressly excluded. In March 2020, local governments in
several states where Tao’s insured properties are located attempted to contain the
spread of COVID-19 by issuing orders that prohibited in-person dining. As a
result, Tao had to close its venues partially or completely. It incurred significant
losses.
Tao submitted a claim to Wausau seeking coverage for its COVID-19-
related losses, and Wausau denied coverage because “there was no physical
damage[,] and contamination is an excluded peril.” Tao then sued Wausau,
alleging that the Policy covered its losses because the COVID-19 virus was
physically present at Tao’s properties, caused physical damage, and impaired the
use of the property. The Complaint detailed how the virus spreads and cited
various studies and reports. Tao successfully moved for judicial notice of further
studies and reports on how the virus spreads. Tao argued that in denying coverage
for Tao’s losses, Wausau breached its duties under the insurance contract; violated
the Nevada Unfair Claims Practices Act, Nev. Rev. Stat. § 686A.310; and breached
the implied covenant of good faith and fair dealing. Tao sought damages and a
declaratory judgment that the Policy insured its losses. The district court dismissed
Tao’s Complaint without leave to amend under Federal Rule of Civil Procedure
12(b)(6), holding that Tao did not allege “direct physical loss or damage” sufficient
to trigger coverage under New York, Illinois, or California law. Reviewing de

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novo, Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885, 889 (9th Cir.
2021), we affirm.
1. Under New York law, an insured’s allegations that its property was
unusable for its intended purpose or physically altered by the presence of COVID-
19 are insufficient to state a basis for coverage where the insurance policy requires
direct physical loss or damage to property. Consol. Rest. Operations, Inc. v.
Westport Ins. Corp., 205 A.D.3d 76, 82–83 (N.Y. App. Div. 2022). Although a
policyholder might be able to state a claim if it identified anything “it had to
replace, anything that changed, or that was actually damaged . . . [or] stopped
working,” id. at 86, Tao did not do so and thus failed to allege facts sufficient to
trigger coverage under New York law. Tao has not argued that it could add such
allegations if given leave to amend.
2. The presence of COVID-19 on an insured’s premises and associated loss
of use of the property are likewise insufficient to trigger property insurance
coverage under Illinois law. Sweet Berry Café, Inc. v. Soc’y Ins., Inc., 193 N.E.3d
962, 974 (Ill. App. Ct. 2022); Lee v. State Farm Fire & Cas. Co., --- N.E.3d ---,
2022 WL 829651, at *3–4 (Ill. App. Ct. 2022). Although a plaintiff might be able
to state a claim by alleging that “property needed to be repaired or replaced,” Sweet
Berry Café, 193 N.E.3d at 974, Tao did not do so and thus failed to state a basis for
coverage under Illinois law. Again, Tao has not argued that it could make such

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allegations if given leave to amend.
3. Under California law, loss of use of property does not constitute “direct
physical loss of or damage to” property. Mudpie, 15 F.4th at 892. The California
Court of Appeal held in United Talent Agency v. Vigilant Insurance Co., 293 Cal.
Rptr. 3d 65 (Ct. App. 2022), that “the presence . . . of the [COVID-19] virus does
not constitute direct physical damage or loss” to property. Id. at 79. Tao argues
that Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Insurance Co., 296
Cal. Rptr. 3d 777 (Ct. App. 2022), disagreed with United Talent Agency, but the
court in Marina focused on the allegation that the insured had disposed of property
to get rid of COVID-19 contamination and that the insurance policy at issue
expressly covered loss or damage resulting from communicable diseases. Id. at
788–90. Tao has not alleged that it had to dispose of property damaged by
COVID-19, nor did its policy contain an express provision covering loss or
damage resulting from communicable diseases, so Tao did not allege facts
sufficient to trigger coverage under California law. Nor has Tao argued that, if
given leave to amend, it could add allegations like those in Marina.
4. Tao’s claims for breach of contract, breach of the implied covenant of
good faith and fair dealing, violation of the Nevada Unfair Claims Practices Act,1
1 Even if a bad faith denial of insurance coverage could support a violation
of the Nevada Unfair Claims Practices Act in the absence of a breach of the
insurance contract, Tao has not alleged a bad faith denial here. Wausau’s swiftness

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and for a declaratory judgment all rest on the premise that its properties suffered
direct physical loss or damage. Because Tao did not allege such loss or damage
under New York, Illinois, or California law, these claims all fail as a matter of law.
The district court did not err in denying Tao leave to amend its complaint because
Tao did not offer to allege that it had to repair, replace, or dispose of any property,
which might distinguish the otherwise controlling precedents. Amendment
therefore would have been futile. See Kroessler v. CVS Health Corp., 977 F.3d
803, 814–15 (9th Cir. 2020).
AFFIRMED.
in resolving the claim, without more, cannot create an inference bad faith when the
denial was consistent with the Policy’s terms.

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