508 F.Supp.3d 575
N.D. Cal.2020Background
- Mortar and Pestle (Olea Restaurant) ceased operations March 16, 2020 due to COVID-19 and state/local closure orders and submitted a business‑loss/interruptions claim under an Atain commercial property policy.
- The Policy covers losses for "direct physical loss of or damage to" covered property, business income during a "suspension," extra expense, and limited civil‑authority losses tied to "direct physical loss of or damage to" property elsewhere.
- The Policy contains an "Exclusion – Fungi, Spores, Bacteria, or Viruses" that bars coverage for losses resulting from viruses.
- Atain issued a reservation‑of‑rights and indicated it would deny coverage; Mortar and Pestle sued for declaratory relief and amended after an earlier dismissal.
- The court applied California law, found Mortar and Pestle failed to plead a "distinct, demonstrable, physical alteration" to property, held the virus exclusion applicable, and dismissed the First Amended Complaint with prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether "direct physical loss of or damage to" property is triggered by COVID‑19 closures/contamination | COVID‑19 contaminated or intruded on the premises and loss of use/functional impairment suffices as "physical loss" | The phrase requires a distinct, demonstrable physical alteration or change in condition; economic loss or loss of use is insufficient | Dismissed — allegations do not plausibly show direct physical alteration or damage; loss of use/economic injury alone not covered |
| Whether Civil Authority coverage applies to shutdown orders | Orders were issued because of damage from COVID‑19 in and around the restaurant, so civil authority coverage should apply | Civil Authority coverage requires direct physical loss or damage to other property; orders were issued to stop virus spread, not because of physical property damage | Dismissed — plaintiff failed to allege physical loss to other property and orders aimed at public health, not physical damage |
| Whether the Policy's virus exclusion bars coverage | Exclusion ambiguous; should be construed for insured or limited to viruses related to fungi/bacteria | Exclusion unambiguously excludes viruses; COVID‑19 is a virus and thus excluded | Exclusion applies — COVID‑19 losses are excluded; no coverage even if other elements satisfied |
| Whether leave to amend or discovery on exclusion should be allowed | Seek discovery (e.g., ISO statements) and leave to amend to challenge exclusion's meaning | Exclusion text is plain; discovery irrelevant and plaintiff already had chance to amend | Denied — no basis to reopen pleadings or permit discovery; dismissal with prejudice |
Key Cases Cited
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766 (Cal. Ct. App. 2010) ("direct physical loss" requires distinct, demonstrable physical alteration)
- Reserve Ins. Co. v. Pisciotta, 30 Cal. 3d 800 (Cal. 1982) (policy language interpreted according to plain meaning a layperson would attach)
- Waller v. Truck Ins. Exch., 11 Cal. 4th 1 (Cal. 1995) (insurance policy interpretation is a question of law)
- Lockheed Martin Corp. v. Cont’l Ins. Co., 134 Cal. App. 4th 187 (Cal. Ct. App. 2005) (judicially construed policy terms are not ambiguous)
- Stanford Univ. Hosp. v. Fed. Ins. Co., 174 F.3d 1077 (9th Cir. 1999) (choice‑of‑law and insurance interpretation principles)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (plausibility pleading standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (legal conclusions not accepted as true on a motion to dismiss)