Spectrum Retirement Communities, LLC v. Continental Casualty Co.
2025 COA 57. No. 24CA34. Insurance—COVID-19—Direct Physical Loss—Property Rendered Uninhabitable—Judgment on the Pleadings.
June 18, 2025
Spectrum Retirement Communities, LLC (Spectrum) owned, operated, and managed 43 senior living and memory care communities in 10 states, which it kept open during the COVID-19 pandemic in accordance with state and federal orders intended to limit the spread of COVID-19. Spectrum was insured by Continental Casualty Co. (Continental) under an all-risk commercial property policy (the policy) that included a health care endorsement (HCE). Spectrum contended that it had direct physical property loss or damage and additional costs that were created by the governmental orders, so it filed claims with Continental for these losses, which Continental denied. Spectrum then sued against Continental for breach of contract, statutory delay and denial of insurance claims, and common law bad faith. Continental moved to dismiss under CRCP 12(b)(5), arguing that Spectrum failed to state a claim upon which relief could be granted. The court granted in part and denied in part Continental’s motion. Continental later moved for judgment on the pleadings under CRCP 12(c), arguing that Spectrum’s claims failed as a matter of law because Spectrum had not suffered a direct physical loss of property. Because the motion was filed under Rule 12(c) rather than Rule 56, the court was required to premise its ruling solely on the operative pleadings. Based on the facts alleged in the amended complaint, the court concluded that Spectrum could not establish a direct physical loss or damage to covered property resulting from COVID-19 or the associated governmental orders. Accordingly, the court entered judgment on the pleadings in favor of Continental on all of Spectrum’s remaining claims.
On appeal, Spectrum argued that it alleged facts sufficient to support a claim that it suffered a direct physical loss; and even if it suffered no direct physical loss of or damage to property, the HCE covered other aspects of its economic losses. It is undisputed that the policy insured Spectrum against a direct physical loss of property. Spectrum relied on Western Fire Insurance Co. v. First Presbyterian Church, 437 P.2d 52 (Colo. 1968), where the Colorado Supreme Court held that an insurance claim for a direct physical loss does not have to be based on visible, physical damage to a building or its contents but may result from the presence of airborne materials that accumulate to such a degree that they render a property completely uninhabitable. The court of appeals agreed that Western Fire is the proper framework for considering what constitutes a “direct physical loss” in Colorado and that under Western Fire, such a loss does not necessarily have to result from structural or visible damage to insured property. But Western Fire also holds that for coverage to exist under a policy that insures against a direct physical loss, any intangible damage must render the insured property uninhabitable. Here, Spectrum did not allege that there was a COVID-19 buildup to such an extent that it rendered Spectrum’s properties uninhabitable. Nor could it, since it is undisputed that Spectrum’s facilities remained open throughout the pandemic, notwithstanding that some portions of its facilities were rendered unusable for a period and that it could not re-rent some of its patient rooms. The court thus concluded that the district court did not err by concluding that Spectrum failed to plead facts that could establish it suffered a direct physical loss. The court added that its analysis does not mean that COVID-19 can never be found to cause a direct physical loss.
Spectrum also argued that determining whether COVID-19 damaged property depends on expert factual testimony, and that the district court erred by resolving this factual dispute without considering its expert testimony. Assuming, without deciding, that the pleadings established a factual dispute about how COVID-19 physically affects property, as discussed above, it is undisputed that the property was not rendered uninhabitable. And because the property remained habitable, the district court did not err by concluding that the pleadings failed to allege that Spectrum suffered a direct physical loss.
Spectrum further contended that the district court erred by concluding, as a matter of law, that it failed to allege coverage under the HCE. As an initial matter, the court rejected Continental’s argument that Spectrum failed to preserve its claim for covered losses under the HCE because before the complaint and amended complaint were filed, Continental knew that Spectrum was alleging coverage for its losses under the HCE. On the merits, the HCE provides coverage for losses in addition to those caused by a direct physical loss of property. The district court thus erred by not considering Spectrum’s claim for coverage under the policy.
The judgment dismissing Spectrum’s amended complaint was affirmed in part and reversed in part, and the case was remanded for further proceedings.