512 F.Supp.3d 1019
N.D. Cal.2021Background
- Plaintiff O’Brien Sales and Marketing, a marketing agency, closed or restricted use of its offices during the COVID-19 pandemic and claimed lost business income and extra expenses under a commercial insurance policy issued by Transportation Insurance Company (TIC).
- The Policy’s Business Income and Extra Expense coverages require a "direct physical loss of or damage to" the insured property; the Civil Authority extension requires such loss or damage to other property that caused a civil authority order prohibiting access.
- O’Brien submitted a claim; TIC denied coverage. O’Brien sued seeking declaratory relief for three putative classes (Business Income, Extra Expense, Civil Authority) and an individual breach-of-contract claim.
- The district court had previously dismissed O’Brien’s First Amended Complaint for failure to plausibly allege a covered loss and permitted amendment; O’Brien filed a Second Amended Complaint (SAC).
- The court concluded the SAC still failed to allege a "distinct, demonstrable, physical alteration" or "physical change in condition" of the insured premises or other property and that executive shutdown orders were issued to prevent viral spread, not because of physical damage to property.
- The court granted TIC’s motion to dismiss the SAC with prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether COVID-19 closures and inability to use premises constitute "direct physical loss of or damage to" property under Business Income/Extra Expense provisions | A physical loss occurs when property can no longer be used for its intended purpose; closures therefore qualify | Policy requires a distinct, demonstrable physical alteration or change in condition; mere loss of use or economic loss is not enough | Court held plaintiff failed to plead a physical alteration or change; economic loss/temporary loss of use insufficient, so no coverage |
| Whether presence/spread of the virus on premises (or positive tests of employees) constitutes physical damage | Presence of virus or infected individuals on premises causes physical loss or damage | Presence of virus (and infected persons) does not cause the required physical alteration; surfaces can be cleaned/disinfected | Court held even alleged presence of virus does not plausibly amount to physical damage under California law |
| Whether Civil Authority coverage is triggered by governor’s COVID-19 executive orders | Orders prohibiting access (issued because virus was present in community) trigger Civil Authority coverage | Civil Authority extension requires direct physical loss or damage to other property; orders were issued to prevent spread, not because of property damage | Court held plaintiff did not plead physical loss/damage to other property and orders were preventive, so Civil Authority coverage not triggered |
| Whether dismissal should be with or without leave to amend | Plaintiff sought further amendment to cure defects | Defendant argued prior leave did not fix deficiencies; further amendment futile | Court dismissed with prejudice, finding plaintiff failed to cure previously identified deficiencies |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (pleading must be plausible to survive dismissal)
- Ashcroft v. Iqbal, 556 U.S. 662 (legal conclusions are not entitled to assumption of truth)
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766 ("direct physical loss" requires demonstrable physical alteration)
- Thee Sombrero, Inc. v. Scottsdale Ins. Co., 28 Cal. App. 5th 729 (policy language that expressly covers loss of use differs from policies that do not)
- Hendrickson v. Zurich Am. Ins. Co., 72 Cal. App. 4th 1084 (distinguishing policies that explicitly cover loss of use)
- Lockheed Martin Corp. v. Cont'l Ins. Co., 134 Cal. App. 4th 187 (judicial construction of policy terms negates ambiguity)
- Waller v. Truck Ins. Exch., 11 Cal. 4th 1 (interpretation of insurance policy is question of law)
- Reserve Ins. Co. v. Pisciotta, 30 Cal. 3d 800 (policy words given ordinary lay meaning)
- Stanford Univ. Hosp. v. Fed. Ins. Co., 174 F.3d 1077 (applying California law to interpret policy)