Vegas Casino Says Insurer Can't Cap Virus Coverage At $200K

By Daphne Zhang
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Law360 (November 17, 2020, 4:02 PM EST) -- Las Vegas casino and resort Treasure Island LLC has fired back at Affiliated FM Insurance Co.'s bid to cap its COVID-19-related claim to the policy's $200,000 communicable disease provision, telling a Nevada federal court that the policy's contamination and loss of use exclusions do not apply.

On Monday, the casino argued that Affiliated FM cannot acknowledge that the novel coronavirus may implicate the policy's "communicable disease" coverage while at the same time asserting that the virus is subject to the "contamination" exclusion.

The contamination exclusion does not apply because it is in direct conflict with the policy's communicable disease coverage, Treasure Island said. And the policy's "loss of market or loss of use" exclusion is not triggered because that "would eviscerate the very purpose of business-interruption coverage and impermissibly make that coverage illusory," the resort said.

Treasure Island is seeking millions in coverage under its "all risk" policy with Affiliated FM for alleged business losses due to COVID-19 shutdown orders. It has argued that the policy covers up to $850 million in property damage and $327 million in business losses.

"The policy cannot both cover property damage and business interruption caused by communicable disease and also exclude coverage for COVID-19, a communicable disease," the resort said. "The policy does not contain a virus exclusion as present in many other cases."

Affiliated FM told the court earlier this month that the policy's contamination exclusion policy bars coverage for the bulk of Treasure Island's claim for coronavirus-related losses, saying the casino and resort should only be able to pursue up to $200,000 under a communicable disease provision. The insurer also argued that a separate exclusion for loss of market or loss of use would also preclude coverage

The policy's communicable disease provision includes a $100,000 coverage limit for cleanup, removal, disposal and "reputation management" costs, plus $100,000 in business interruption coverage, according to court documents.

On Monday, Treasure Island said Affiliated FM has failed to show that its reading of the contamination exclusion is the only reasonable interpretation, so the exclusion is ambiguous and should be analyzed in favor of the policyholder. The policy definition for "contamination" never included "communicable disease," and the policy did not define communicable disease as a contaminant, it said.

"It is not enough for AFM to show any reasonable interpretation of its policy," the resort said. "Nevada law requires that AFM, the drafter, prove that its interpretation is the only reasonable one; otherwise, the policy is ambiguous."

In Monday's response, Treasure Island contended that its loss of use of the property during state closure orders constitutes physical damage. It argued that Affiliated FM has even admitted that "physical loss or damage existed from the mere loss of functionality" of property in Factory Mutual Insurance Co. v. Federal Insurance Co. , a case in which Factory Mutual, Affiliated FM's sister company, was represented by the same counsel while seeking recovery from Chubb unit Federal Insurance Co.

"AFM ignores its own prior argument that loss of functional use alone constitutes physical loss or damage," the resort claimed Monday.

The coverage dispute dates back to mid-March, when Nevada Gov. Steve Sisolak declared a state of emergency due to the pandemic and ordered all gambling establishments to close. Treasure Island temporarily shuttered its 2.1 million-square-foot casino and resort on March 18 in response to the order and later reopened in early June.

The casino operator had filed a claim on March 19, a day before its policy expired, and received a letter from the insurer largely denying coverage in mid-April, according to the court documents.

In the letter, Affiliated FM said the casino operator had not suffered requisite "direct physical loss of or damage to" property. The insurer also cited the contamination exclusion but acknowledged that limited coverage may be available under the communicable disease provision, court documents show.

Counsel for the parties could not be immediately reached for comment Tuesday.

Treasure Island is represented by Renee M. Finch of Messner Reeves LLP and Michael S. Levine, Kevin V. Small, Christopher Cunio and Harry L. Manion of Hunton Andrews Kurth LLP.

Affiliated FM is represented by Joyce C. Wang of Carlson Calladine & Peterson LLP and Mark J. Connot of Fox Rothschild LLP.

The case is Treasure Island LLC v. Affiliated FM Insurance Co., case number 2:20-cv-00965, in the U.S. District Court for the District of Nevada.

--Additional reporting by Jeff Sistrunk. Editing by Daniel King.

For a reprint of this article, please contact reprints@law360.com.

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