Loss of business income due to government “stay at home” orders issued in response to COVID-19 was not a covered loss | Haight Brown & Bonesteel LLP

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In Mudpie Inc. v. Travelers Casualty Insurance Company of America (No. 20-16858, filed October 1, 2021 ord. Certified for publication October 4, 2021.), Mudpie Inc., a children’s products retailer in San Francisco, filed a claim under “business income and Extra Expense Covers” claiming that state and local “Shelter in Place” orders issued in response to the COVID-19 pandemic prevented him from operating his store.

The policy covered “physical loss or damage to [Mudpie’s] Covered property…caused by or resulting from a covered cause of loss.

The business income coverage of the policy in the relevant part provided”[Travelers] will pay the actual loss of business income [Mudpie] to support[s] because of the necessary “suspension” of [Mudpie’s] “operations” during the “restoration period”. “Suspension” must be caused by direct physical loss or property damage to the premises described. The loss or damage must be caused by or result from a covered cause of loss…”.

Likewise, additional expense coverage provided, “[Travelers] will also pay additional costs (including acceleration costs) to repair or replace the property, but only to the extent that this reduces the amount of loss that would otherwise have been payable under [the ‘Business Income’ provision].”

Travelers denied the claim, concluding that the policy’s additional business income and expense coverage did not apply because limitations on Mudpie’s business operations resulted from state and local government “stay at home” orders. as opposed to “direct physical loss or damage to property.” in the premises described. Travelers also cited the policy’s virus exclusion which excludes coverage for “loss or damage caused by or resulting from any virus”.

Mudpie subsequently sued on behalf of himself and a putative class of all California retailers who purchased comprehensive commercial travelers insurance, which included business interruption coverage, and who had filed a claim for lost business income as a result of California’s “Stay at Home” order. and were subsequently denied coverage.

The Mudpies complaint advanced three causes of action; 1) a declaratory judgment that his business income losses were covered and not excluded by exclusions or other limitations in the policy; 2) breach of contract; and 3) breach of the implied covenant of good faith and fair dealing.

The Travelers filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) asserting that Mudpie was not entitled to business income or additional expense coverage because Mudpie failed to present no facts demonstrating that he had suffered any direct physical loss or damage. to the property insured and because the virus exclusion of the policy excluded coverage. In its objection, Mudpie countered that its failure to operate and occupy its storefront in accordance with government orders constituted a direct physical loss of property covered by the policy.

The district court granted the travellers’ motion finding that Mudpie had not alleged “any physical force intervening beyond government shutdown orders” and therefore was not entitled to coverage for business income or additional expenses under the policy. The district court declined to consider the travellers’ claim that excluding the virus prevented recovery. The district court dismissed the complaint without prejudice and gave Mudpie leave to amend. Mudpie filed a notice advising him that he would not amend his complaint. The Court dismissed the suit with prejudice and Mudpie appealed.

The Ninth Circuit upheld the district court’s decision that the losses claimed by Mudpie were not covered by the traveler’s policy and that the district court did not err in dismissing Mudpie’s suit. Further, the Court of Appeal found that the virus exclusion of the policy precluded coverage of the losses claimed.

The Court of Appeals began its analysis of whether Mudpie was alleging “direct physical loss or damage” of its covered property by examining how other California courts interpreted coverage provisions similar to the wording “loss or direct physical damage to property” of the Travelers policy.

The Ninth Circuit considered the California Court of Appeals’ interpretation of the term “direct physical loss” in a commercial insurance policy in relation to IRM Healthcare Ctr. of Glendale, Inc. c. State Farm Gen. Ins. Co., 115 Cal. Rptr.3d 36, 31-32 which held that “‘direct physical loss’ contemplates an actual change in the insured property…caused by an accident or other fortuitous event directly on the property, rendering it unsatisfactory.” The opinion in Health MRI further, “for the loss to be covered, there must be a distinct and demonstrable physical alteration” to the property.

Citing Hughes v. Potomac Insurance Co. of the District of Columbia, Mudpie argued that under California law, “direct physical loss or damage to property” simply requires that the property is no longer fit for the purpose for which it was intended.

The Ninth Circuit rejected Mudpie’s argument by first distinguishing Hughes noting that he did not interpret a “provision for direct physical loss” such as that at issue in the Travelers policy and instead interpreted the term “lodging” as used in a home insurance policy. The Ninth Circuit further noted that opinion in Hughes did not imply that an insured need not demonstrate a physical change to the property insured to provide a “direct physical loss” and on the contrary, the court of Hughes concluded that the insured’s home suffered “actual and serious damage when the underlying ground slipped and left it overhanging a 30-foot cliff” and ruled the home uninhabitable.

Quote Health MRI, the Ninth Circuit pointed out that Mudpie’s complaint did not identify a “distinct, demonstrable physical alteration of property” nor did it allege that Mudpie was permanently dispossessed of his property. The Ninth Circuit characterized Mudpies’ argument as urging him to interpret “direct physical loss or damage of” as synonymous with “loss of use.” The Court of Appeals rejected Mudpie’s proposed interpretation, finding that California courts had carefully distinguished “intangible”, “intangible” and “economic” losses from “physical” losses, citing Doyle v. Fireman’s Fund Ins. Co. (2018), 229 Cal. Rptr. 3d 840, 843-44 and Ward Gen. Ins. Servs., Inc. vs. Emos. Fire. Co. (2003), 7 Cal. Rptr. 3d 844 851.

In reviewing the Traveler Policy as a whole, the Ninth Circuit determined that its interpretation of the phrase “direct physical loss or damage” as requiring physical alteration of property was consistent with the other provisions of the policy. In support of this analysis, the Ninth Circuit noted that the policy only covers business income and additional expenses during the “restoration period,” suggesting that the police were planning to only provide coverage. in the event of physical changes to the property and that any interpretation that the policy provided cover in the absence of physical damage renders the ‘restoration period’ clause redundant.

The Ninth Circuit then expanded its analysis and chronicled decisions from a multitude of other courts across the country that have interpreted the same or similar language of the business income provisions and their application to losses suffered by businesses following government COVID-19 shutdown orders. . Each of the opinions considered by the court’s analysis held that physical alteration, loss or damage to insured property was necessary for the invocation of a business income provision such as the one at issue.

Finally, the Ninth Circuit found that the losses claimed by Mudpie were also excluded from coverage pursuant to the policy’s virus exclusion policy which provides, “[Travelers] will not pay for loss or damage caused by or resulting from any virus, bacteria or other microorganism that induces or is capable of inducing physical distress, illness or disease. »

On appeal, Mudpie argued that his losses were caused by government orders and not directly by the COVID-19 virus. Travelers countered that the COVID-19 virus prompted state and local authorities to issue the “stay at home” orders and as such the virus exclusion applies.

The Court of Appeals noted California courts’ expansive interpretation of the term “resulting from” in insurance contracts and noted that California had adopted the doctrine of proximate cause effective in Sabella v. Wisler(1963) 377 P.2d 889, 895 which states that “when there are different causes, the efficient cause – that which sets the others in motion – is the cause to which the loss is attributed, although the other causes can follow it and operate more immediately producing the disaster.

The Ninth Circuit held that because Mudpie’s complaint did not allege an attenuated chain of causation between the COVID-19 virus and his losses, and because Mudpie did not contest that government orders to “stay at home had been issued in response to the COVID-19 pandemic, Mudpie could not plausibly claim that the “efficient cause was anything other than the spread of the virus or that it was simply a cause remote from his losses.

This document is intended to provide you with information on developments related to insurance law. The contents of this document are not intended to provide specific legal advice. If you have any questions about the content of this alert, please contact the authors. This communication may be considered advertising in some jurisdictions.

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