499 F.Supp.3d 670
N.D. Cal.2020Background
- Plaintiff Water Sports Kauai, Inc. ("Sand People") operates retail stores in Hawai‘i and sought coverage for lost business income under an insurance policy issued by Fireman’s Fund, National Surety, and Allianz.
- Policy covers "direct physical loss of or damage to" covered property and contains Business Income, Extra Expense, Civil Authority, and Income Support Property provisions; "Period of Restoration" starts with a direct physical loss or damage and ends when property is repaired, rebuilt, or replaced.
- Sand People closed stores in March 2020 due to the spread of COVID-19 and Hawai‘i government orders limiting non-essential business activity; it alleged class claims and sought coverage for pandemic-related business interruption.
- Defendants denied coverage; they moved to dismiss the Amended Complaint for failure to allege a covered "direct physical loss or damage" and therefore no trigger for Business Income or Civil Authority coverage.
- The court dismissed all coverage-based claims with limited leave to amend, concluding Sand People failed to plausibly allege either (a) physical presence/contamination at its properties or (b) the required causal link between physical loss elsewhere and the Hawai‘i closure orders. The court also declined to reach ancillary tort claims given the dismissal of coverage.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the spread or "imminent threat" of COVID-19 at or near insured premises constitutes a "direct physical loss of or damage to" property triggering Business Income coverage | The rapid spread and imminent risk rendered stores untenantable or unusuable, amounting to physical loss | Mere threat or risk without allegation of viral presence or tangible, physical alteration is insufficient; policy requires actual physical loss/damage | Dismissed — allegations of threat/imminence without pleaded physical contamination or tangible loss do not plausibly trigger coverage |
| Whether government closure orders alone trigger Business Income coverage as a "loss of" property or deprivation of functionality | Closure orders deprived Sand People of use/possession; "loss of" need not be permanent or involve physical alteration | "Loss of" contemplates permanent dispossession or physical deprivation; period-of-restoration language shows coverage requires something to repair/replace | Dismissed — temporary inability to use premises from closure orders does not show direct physical loss/damage under the policy |
| Whether Civil Authority coverage is triggered by closure orders issued "in response to" physical loss elsewhere | Orders prohibited access and were issued in response to physical loss/damage elsewhere, so Civil Authority coverage applies | Civil Authority requires a showing of direct physical loss/damage to other property that caused the order; preventative orders absent such allegations do not qualify | Dismissed — plaintiff failed to allege physical loss to other property causally linked to the orders |
| Whether related statutory and tort claims (bad faith, UDAP, declaratory relief) survive absent coverage | Misrepresentation and bad-faith theories can proceed based on defendants’ alleged denial of valid coverage | Those claims depend on a viable coverage claim; without coverage they fail; complaint lacks particularized misrepresentation allegations | Dismissed without prejudice — ancillary claims fail if coverage not plausibly pleaded; limited leave to amend to plead specific misrepresentations |
Key Cases Cited
- Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002) (presence of airborne contaminant may cause coverage only if contamination renders property unusable or an imminent release would do so)
- Hampton Foods, Inc. v. Aetna Cas. & Sur. Co., 787 F.2d 349 (8th Cir. 1986) (physical, extraneous structural damage permitting mitigation costs where property function was threatened)
- Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1 (Cal. Ct. App. 1996) ("prophylactic" costs incurred before release of hazardous material not covered as property damage)
- Ass'n of Apartment Owners of Imperial Plaza v. Fireman's Fund Ins. Co., 939 F. Supp. 2d 1059 (D. Haw. 2013) (requiring direct impact on physical matter of property for "direct physical loss or damage")
- Hart v. Ticor Title Ins. Co., [citation="126 Hawai'i 448"] (Haw. 2012) (insurance policies construed for reasonable lay expectations and ambiguities resolved for insured)
- Motorists Mut. Ins. Co. v. Hardinger, [citation="131 F. App'x 823"] (3d Cir. 2005) (presence of contaminant can raise fact issue when it nearly eliminates property functionality)