532 F.Supp.3d 948
S.D. Cal.2021Background
- Plaintiffs Islands Restaurants, LP and CFBC, LLC own/operate restaurant and bakery chains and bought an "all-risks of physical loss or damage" commercial property and business-interruption policy for Aug. 1, 2019–Aug. 1, 2020.
- COVID-19 closure orders in 2020 restricted or suspended dine-in services; Plaintiffs allege resulting lost business income and submitted a business-interruption claim on March 27, 2020.
- Defendant Affiliated FM denied the claim, asserting Plaintiffs’ losses did not result from "physical loss or damage" and pointing to policy exclusions (loss of use, contamination).
- Plaintiffs sued for breach of contract and breach of the implied covenant of good faith and fair dealing; the case was removed to federal court.
- Defendant moved for judgment on the pleadings under Rule 12(c); the court accepted the motion and entered judgment for Defendant, dismissing both claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs alleged "physical loss or damage" sufficient to trigger business-interruption coverage | "Physical loss or damage" is ambiguous and can include temporary loss of use from COVID-19 restrictions | Policy requires a "distinct, demonstrable, physical alteration" to property; temporary loss of use is insufficient | The clause is unambiguous under California law and requires a demonstrable physical alteration; contract claim dismissed |
| Whether plaintiffs stated a bad-faith claim for breach of the implied covenant of good faith and fair dealing | Denial of claim was wrongful and breached covenant | No benefits were due under the policy, so there can be no bad-faith claim | Bad-faith claim fails because there is no potential for coverage or benefits owed |
Key Cases Cited
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 115 Cal. Rptr. 3d 27 (Cal. Ct. App. 2010) (construed "physical loss or damage" to require a distinct, demonstrable physical alteration)
- Doyle v. Fireman's Fund Ins. Co., 229 Cal. Rptr. 3d 840 (Cal. Ct. App. 2018) (financial loss or diminished value does not alone constitute physical loss)
- Waller v. Truck Ins. Exch., Inc., 900 P.2d 619 (Cal. 1995) (insurance contract interpretation and implied covenant principles)
- McMillin Homes Constr., Inc. v. Natl. Fire & Marine Ins. Co., 247 Cal. Rptr. 3d 825 (Cal. Ct. App. 2019) (judicial construction of policy terms defeats ambiguity)
- Minkler v. Safeco Ins. Co. of Am., 232 P.3d 612 (Cal. 2010) (clear and explicit policy language governs)
- Major v. W. Home Ins. Co., 87 Cal. Rptr. 3d 556 (Cal. Ct. App. 2009) (elements required to establish insurer bad faith)