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Ninth Circuit:
State’s ‘Stay-at-Home’ Order Didn’t Cause Property ‘Loss’
Christen’s Opinion Affirms Dismissal of Putative Class Action Against Traveler’s, Says That Under California Law ‘Physical Loss’ of Property Necessarily Entails an Alteration to the Premises
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals on Friday affirmed the scuttling of a putative class action against Travelers Casualty Insurance Company of America alleging that the insurer is wrongfully failing to pay up under comprehensive commercial liability and property insurance policies to businesses that were force to shutter their buildings while a “stay at home order” issued by Gov. Gavin Newsom was in effect.
Those policies covered physical destruction of buildings, Circuit Judge Morgan Christen wrote, and not an inability to make use of the building by virtue of a government decree.
Newsom on March 4, 2020, declared a state of emergency and on March 12 issued an executive order declaring:
“All residents are to heed any orders and guidance of state and local public health officials, including but not limited to the imposition of social distancing measures, to control the spread of COVID-19.” On March 19, the governor promulgated an order requiring “all individuals living in the State of California to stay home or at their place of residence except as needed to maintain continuity of operations of the federal critical infrastructure sectors.”
Coverage Denied
Mudpie, Inc., a San Francisco retailer of toys and other goods, recited in its May 11, 2020 District Court complaint that on or about May 6, 2020, Travelers denied its claim for property loss, advising in a letter that “[b]ecause the limitations or your business operations were the result of the Governmental Order, as opposed to ‘direct physical loss or damage to property at the described premises,” as required under the policy, “this Business Income and Extra Expense coverage does not apply to your loss.”
The class is defined in Mudpie’s May 11, 2020 District Court complaint as “[a]ll retailers in California that purchased comprehensive business insurance coverage from Defendant which includes coverage for business interruption, filed a claim for lost business income following California’s Stay at Home order, and were denied coverage by Defendant.”
District Court Judge Jon S. Tigar of the Northern District of California dismissed the action with prejudice on Sept. 23, 2020, after Mudpie opted not to amend its complaint following a Sept. 14 dismissal with leave to amend.
Christen’s Opinion
In her opinion upholding Tigar’s action, Christen said that “California courts would construe the phrase ‘physical loss of or damage to’ as requiring an insured to allege physical alteration of its property,” and noted that this “is consistent with conclusions reached by other courts.”
Christen also pointed to a policy exclusion saying that Travelers “will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” The judge wrote:
“Though Mudpie argues it was the government orders that most directly caused its injury, Mudpie does not plausibly allege that ‘the efficient cause,’ i.e., the one that set others in motion…, was anything other than the spread of the virus throughout California, or that the virus was merely a remote cause of its losses….Accordingly, the Policy’s Virus Exclusion bars coverage for Mudpie’s claims.”
The case is Mudpie v. Travelers Casualty Insurance Company of America, 20-16858.
In a memorandum opinion on Friday, the Ninth Circuit applied its decision in Mudpie in a like action brought by Selane Products, Inc. against Continental Casualty Company.
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