Mudpie, Inc. v. Travelers Casualty Insurance
15 F.4th 885
| 9th Cir. | 2021Background
- Mudpie, a San Francisco children’s retailer, purchased commercial property insurance from Travelers that included Business Income and Extra Expense coverage.
- California and San Francisco issued March 2020 Stay-at-Home/Shelter-in-Place orders that forced Mudpie to suspend in-store operations; Mudpie did not allege COVID-19 was present at its premises.
- Mudpie submitted a claim (April 2020); Travelers denied it, citing the Policy’s requirement of “direct physical loss of or damage to” property and a Virus Exclusion.
- Mudpie sued as a putative class action asserting declaratory relief, breach of contract, and breach of the implied covenant of good faith and fair dealing; district court dismissed under Rule 12(b)(6).
- The Ninth Circuit reviewed de novo and affirmed dismissal, holding Mudpie failed to plead physical loss and that the Virus Exclusion independently barred coverage.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether COVID-related business suspension satisfies “direct physical loss of or damage to” property | Government closure causing loss of use equals direct physical loss | “Direct physical loss” requires a distinct, demonstrable physical alteration, contamination, or dispossession | Court: Requires physical alteration; loss of use from orders insufficient |
| Whether the Policy’s Virus Exclusion bars coverage | Losses caused by government orders, not the virus, so exclusion doesn't apply | Virus prompted the orders; virus is the efficient/proximate cause, so exclusion applies | Court: Exclusion applies because the virus was the efficient cause of the orders and losses |
| Viability of breach of implied covenant claim | Travelers unreasonably withheld benefits | No coverage established, so covenant claim fails | Court: Claim fails because insured did not plausibly allege entitlement to benefits |
Key Cases Cited
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 115 Cal. Rptr. 3d 27 (Ct. App. 2010) (interpreting “direct physical loss” to require a distinct, demonstrable physical alteration)
- Garvey v. State Farm Fire & Casualty Co., 770 P.2d 704 (Cal. 1989) (applying efficient proximate cause to resolve mixed-cause coverage disputes)
- Sabella v. Wisler, 377 P.2d 889 (Cal. 1963) (concurrent-cause/efficient-cause principle)
- Aydin Corp. v. First State Ins. Co., 959 P.2d 1213 (Cal. 1998) (insured bears burden to show loss falls within basic scope of coverage)
- AIU Ins. Co. v. Superior Ct., 799 P.2d 1253 (Cal. 1990) (insurance policy terms construed in ordinary and popular sense)
- Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021) (concluding COVID-19 closures without physical property alteration do not trigger similar business-income coverage)