506 F.Supp.3d 854
N.D. Cal.2020Background
- Franklin EWC (insured) sued Sentinel and HFSG after COVID-19 closure orders caused business interruption losses under a Spectrum Business Owner’s Policy.
- The Policy covers "direct physical loss" but contains a broad Virus Exclusion that disclaims coverage for loss caused directly or indirectly by a virus, and a Limited Virus Coverage endorsement providing up to $50,000 where a virus results from specified covered causes of loss.
- Plaintiffs allege coronavirus physically contaminated their premises, caused direct physical loss, and therefore triggered coverage; they also assert regulatory estoppel (ISO/AAIS misled regulators), a claim that Limited Virus coverage is illusory, and fraud-based claims.
- Defendants moved to dismiss arguing the Virus Exclusion unambiguously bars coverage, the Limited Virus exception does not apply, and plaintiffs’ fraud claims fail Rule 9(b).
- The court concluded the Virus Exclusion plainly applies, rejected regulatory estoppel under California law, found the Limited Virus clause not illusory or ambiguous, and dismissed all claims with prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Virus Exclusion bars coverage for COVID-19-related business losses | Coronavirus physically contaminated premises and directly/indirectly caused loss, so exclusion does not apply | Exclusion unambiguously excludes loss caused directly or indirectly by a virus | Virus Exclusion applies as a matter of law; coverage barred |
| Whether regulatory estoppel prevents enforcement of the Virus Exclusion | ISO/AAIS and HFSG misled regulators in 2006 about the exclusion’s scope, so exclusion should be estopped | Regulatory estoppel is not recognized under California law; extrinsic regulatory history cannot rewrite an unambiguous policy | Regulatory estoppel rejected; exclusion enforced |
| Whether the Policy’s Limited Virus Coverage affords relief or is illusory | Limited Virus coverage should apply or is illusory because viruses cannot be caused by specified "extracellular" perils | Limited Virus clause applies when a specified covered peril causes the virus; it is neither impossible nor totally illusory | Limited Virus exception does not rescue plaintiffs; provision is unambiguous and not illusory |
| Whether fraud and constructive fraud claims meet pleading standards | Defendants made affirmative or implicit misrepresentations about coverage when selling the policy | Plaintiffs have not pled who, what, when, where, and how as required by Rule 9(b) | Fraud-based claims dismissed with prejudice for failure to meet Rule 9(b) |
Key Cases Cited
- State Farm Fire & Cas. Co. v. Martin, 872 F.2d 319 (9th Cir. 1989) (insurer bears burden to prove applicability of an exclusion)
- Davis v. HSBC Bank Nev., N.A., 691 F.3d 1152 (9th Cir. 2012) (pleading inferences must be drawn in plaintiff's favor on motion to dismiss)
- Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1 (Cal. 1995) (plain contractual language controls interpretation)
- AIU Ins. Co. v. Superior Court, 51 Cal.3d 807 (Cal. 1990) (extrinsic evidence requires contractual ambiguity)
- Aydin Corp. v. First State Ins. Co., 18 Cal.4th 1183 (Cal. 1998) (insured bears burden to show coverage provision applies)
- Curtis O. Gries & Sons, Inc. v. Farm Bureau Ins. Co. of Nebraska, 528 N.W.2d 329 (Neb. 1995) (a covered peril can be the proximate cause when it transmits a virus)
- Vess v. Ciba–Geigy Corp. USA, 317 F.3d 1097 (9th Cir. 2003) (fraud claims must plead the who, what, when, where, and how under Rule 9(b))