538 F.Supp.3d 457
E.D. Pa.2021Background
- Plaintiff Kern & Co., a California retail/interior-design business, bought an "all‑risk" Businessowners Policy from ACE and closed its two San Diego locations from March 20 to May 22, 2020 pursuant to California and San Diego COVID‑19 closure orders.
- Kern submitted a claim for Business Income, Extra Expense, Action of Civil Authority, and Dependent Property losses; ACE denied coverage citing no "direct physical loss or damage" and invoking a Virus Exclusion.
- The Policy is a lengthy Businessowners Coverage Form (BCF) plus a Businessowners Property Enhancements Form (BPEF) with multiple endorsements; its language differentiates between "Covered Property" (buildings/business personal property) and "property at the described premises" used in Business Income provisions.
- Plaintiff alleges the government closure orders themselves caused suspension of operations (or alternatively that SARS‑CoV‑2 caused physical loss); ACE argues the Virus Exclusion and a requirement of demonstrable physical alteration bar coverage.
- The district court found the Business Income/Extra Expense language ambiguous as to whether suspension of operations can be a "direct physical loss of or damage to property," and concluded ACE had not shown the Virus Exclusion unambiguously applies; ACE’s motion to dismiss was denied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Complaint pleads "direct physical loss of or damage to property" under the Business Income/Extra Expense provisions | The closure orders deprived Kern of the use/operation of its premises — a loss of property rights — so Business Income loss qualifies | "Direct physical loss" requires a distinct, demonstrable physical alteration; mere inability to use property is not enough | Court: ambiguous in this Policy context; allegations plausibly state a covered loss for Rule 12(b)(6) purposes |
| Whether the Policy's Virus Exclusion bars coverage for Kern’s alleged losses | The exclusion does not necessarily apply because Kern alleges the government orders (not the virus presence) caused the losses; causation is a factual issue | Losses were caused directly or indirectly by the virus, and the Virus Exclusion excludes such losses regardless of concurrent causes | Court: Virus Exclusion not shown to unambiguously bar coverage at pleading stage; factual causation unresolved |
| Whether anti‑concurrent/anti‑sequencing exclusionary language is enforceable under California law (efficient proximate cause) | Even if a virus was involved, if a covered peril (e.g., government order) is the predominant cause, coverage exists | Policy language excludes loss caused directly or indirectly by virus regardless of other contributing causes | Court: California’s efficient proximate cause doctrine limits enforcement of overly broad anti‑concurrent clauses; cannot resolve at dismissal |
| Whether the Anti‑Concurrent (including Virus) Exclusions apply to Business Income/Extra Expense coverages given Policy structure | Policy structure and differing terminology ("Covered Property" vs "property at the described premises") make it unclear that paragraph 1 exclusions apply to paragraph 5 Additional Coverages | Exclusions in Part B generally apply across Section I—Property, so Virus Exclusion applies to Business Income losses | Court: ambiguity in the Policy’s organization permits a reasonable inference that virus exclusion may not apply to Business Income; cannot resolve on motion to dismiss |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard: factual allegations must state a plausible claim)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for pleadings)
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766 (2010) (treated "physical loss" as generally requiring a distinct physical alteration)
- Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747 (2005) (efficient proximate cause doctrine may limit exclusions)
- Pappy's Barber Shops, Inc. v. Farmers Group, Inc., 487 F. Supp. 3d 937 (S.D. Cal. 2020) (application of California contract/insurance interpretation rules)
- My Choice Software, LLC v. Travelers Cas. Ins. Co., [citation="823 F. App'x 510"] (9th Cir. 2020) (insurance coverage interpreted broadly; exclusions construed narrowly)