487 F.Supp.3d 937
S.D. Cal.2020Background:
- Plaintiffs Pappy’s Barber Shops, Inc. and Pappy’s Barber Shop Poway, Inc. each operated barbershop businesses and held a commercial property policy issued by Truck Insurance Exchange for Feb. 1, 2020–Feb. 1, 2021.
- In March 2020 California and San Diego COVID-19 orders restricted nonessential businesses; Plaintiffs closed and filed an insurance claim for business income, extra expense, and civil authority losses on April 1, 2020.
- Insurer denied the claim; Plaintiffs sued for declaratory relief and breach of contract as to Business Income, Extra Expense, and Civil Authority coverages, and asserted a California UCL claim.
- The Policy covers loss from "direct physical loss of or damage to property" and defines Covered Causes of Loss as risks of direct physical loss unless excluded; Plaintiffs expressly allege COVID-19 did not physically damage their properties and instead rely on government orders as the cause of loss.
- Defendants moved to dismiss for failure to allege direct physical loss or damage and lack of civil-authority-triggering facts; the court granted dismissal in full but permitted Plaintiffs to move for leave to amend with a proposed redlined complaint.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether government-ordered COVID closures constitute "direct physical loss of or damage to property" for Business Income and Extra Expense coverage | Loss of use/uninhabitability qualifies as "direct physical loss"; physical alteration not required | Policy requires a tangible or demonstrable physical alteration or equivalent physical loss; mere loss of use/economic harm insufficient | Dismissed — complaint fails to allege direct physical loss or damage |
| Whether Civil Authority coverage is triggered by COVID-19 orders | Orders prohibiting business operations trigger civil authority coverage | Civil Authority requires prohibited access to premises due to physical loss/damage to property elsewhere; orders here barred operation, not access, and no physical loss elsewhere alleged | Dismissed — no alleged prohibition on access and no physical loss elsewhere |
| Whether virus/microorganism exclusions preclude coverage | Plaintiffs: proximate cause was government orders, not virus contamination, so exclusions don't apply | Defendants: exclusions would bar virus-related claims (alternative argument) | Court did not reach exclusions because coverage was not plausibly alleged |
| Whether Plaintiffs may amend the complaint | Plaintiffs sought leave to amend in opposition | Defendants opposed (implicitly) or contested futility | Conditional leave: must file formal motion with proposed amended complaint and redline; failure to move by set deadline leads to dismissal with prejudice |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard: plausibility)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility pleading standard)
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766 (physical loss requires demonstrable physical alteration)
- Waller v. Truck Ins. Exch., 11 Cal.4th 1 (contract interpretation: insurance policy is a question of law)
- Minkler v. Safeco Ins. Co., 49 Cal.4th 315 (ambiguity construed to protect insured's reasonable expectations)
- AIU Ins. Co. v. Superior Court, 51 Cal.3d 807 (coverage clauses interpreted broadly)
- MacKinnon v. Truck Ins. Exch., 31 Cal.4th 635 (burden shifts to insurer to prove exclusions)
- Universal Cable Prods., LLC v. Atl. Specialty Ins. Co., 929 F.3d 1143 (coverage/exclusion burden discussion)
- Intri-Plex Techs., Inc. v. Crest Group, Inc., 499 F.3d 1048 (choice of law forum-state rules)