517 F.Supp.3d 981
N.D. Cal.2021Background
- Protégé Restaurant Partners (Plaintiff) operates a Palo Alto restaurant and purchased a commercial property/business interruption policy from Sentinel (Defendant) effective Jan 2020–Jan 2021.
- The Policy provides Business Income, Extra Expense, Civil Authority, and Sue & Labor coverages but contains a broad Virus Exclusion and a narrow limited Virus Endorsement.
- In March 2020 state and county COVID-19 "Closure Orders" restricted in‑person dining; Protégé (an "essential" business allowed to offer takeout) voluntarily ceased in‑person operations and claimed coverage for COVID‑related losses and cleanup expenses; Sentinel denied coverage.
- Protégé sued asserting claims for Business Income, Civil Authority, Extra Expense, Sue & Labor, Virus Endorsement coverage, and breach of the implied covenant of good faith and fair dealing; Sentinel moved to dismiss for failure to state a claim and for lack of jurisdiction.
- The court granted Sentinel’s motion to dismiss with leave to amend, holding Plaintiff failed to allege facts establishing coverage under the Policy as a matter of law, though leave to amend was permitted given developing caselaw.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Business Income/Extra Expense coverage was triggered by a "direct physical loss of or physical damage to" property | Closure Orders and the risk/presence of COVID‑19 made premises unusable and thus caused physical loss | Policy unambiguously requires a distinct physical alteration or permanent dispossession; economic impairment or temporary loss of use is insufficient | Court: Policy unambiguous; Plaintiff failed to plead physical loss/damage; economic loss/limited use insufficient to trigger coverage |
| Whether Civil Authority coverage applies where government orders limited customers' access | Closure Orders caused loss of use and thus civil‑authority coverage applies | Orders did not specifically prohibit Plaintiff’s access (essential businesses could remain open); orders were not issued as direct result of a covered physical loss | Court: Access was not "specifically prohibited" and Plaintiff did not plead orders were issued as direct result of physical loss; claim fails |
| Whether the Virus Exclusion/Endorsement bars recovery or provides limited coverage | Exclusion ambiguous; factual dispute whether virus itself (vs. shutdowns) caused losses; endorsement could apply | Exclusion unambiguous: losses caused directly or indirectly by virus are excluded; endorsement covers only where virus results from a "specified cause of loss," which Plaintiff did not allege | Court: Virus Exclusion unambiguous and applies; Plaintiff did not allege virus resulted from a specified cause of loss, so limited endorsement coverage not triggered |
| Whether Sue & Labor expenses or bad faith claim survive absent physical loss | Plaintiff incurred reasonable cleanup/protection costs and insurer unreasonably denied coverage | Sue & Labor and bad faith duties only arise if insured suffered covered physical loss; no benefits due => no bad faith | Court: Sue & Labor requires physical loss/damage and is inapplicable; bad faith fails because no benefits were owing |
Key Cases Cited
- Waller v. Truck Ins. Exch., 11 Cal.4th 1 (Cal. 1995) (policy interpretation is a question of law; ordinary contract rules apply)
- Minkler v. Safeco Ins. Co., 49 Cal.4th 315 (Cal. 2010) (ambiguities in insurance policies construed to protect insureds' reasonable expectations)
- 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 a distinct physical alteration or change in condition)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility pleading standard)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025 (9th Cir. 2008) (on Rule 12(b)(6) courts accept well‑pleaded factual allegations)
- Lopez v. Smith, 203 F.3d 1122 (9th Cir. 2000) (leave to amend should be freely granted when justice requires)
- In re Gilead Scis. Sec. Litig., 536 F.3d 1049 (9th Cir. 2008) (court need not accept allegations contradicting judicially noticed facts)
- Conservation Force v. Salazar, 646 F.3d 1240 (9th Cir. 2011) (Rule 12(b)(6) tests legal sufficiency)
- Harris v. County of Orange, 682 F.3d 1126 (9th Cir. 2012) (courts may take judicial notice of public records)