Case Information
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA BARBIZON SCHOOL OF SAN Case No. 20-cv-08578-TSH FRANCISCO, INC., et al., Plaintiffs, ORDER GRANTING MOTION TO DISMISS v. Re: Dkt. No. 8 SENTINEL INSURANCE COMPANY LTD, Defendant.
I. INTRODUCTION Plaintiffs Barbizon School Of San Francisco, Inc. and Barbizon School of Modeling Of
Manhattan, Inc. bring this action against their insurance company, Defendant Sentinel Insurance Company, LTD., seeking coverage for economic losses to their businesses caused by COVID-19. Pending before the Court is Sentinel’s Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). ECF No. 8. Plaintiffs filed an Opposition (ECF No. 19) and Sentinel filed a Reply (ECF No. 22). The Court finds this matter suitable for disposition without oral argument and VACATES the April 1, 2021 hearing. See Civ. L.R. 7-1(b). Having considered the parties’ positions, relevant legal authority, and the record in this case, the Court GRANTS Sentinel’s motion for the following reasons.
II. BACKGROUND
Plaintiffs are independently owned and operated licensees of Barbizon International, Inc., offering modeling, acting, and studio services at locations in New York City (Barbizon-NY) and on the West Coast (Barbizon-West). Compl. ¶ 10, ECF No. 1.
A. The West Coast Policy
Barbizon-West procured insurance coverage under Policy Number 57 SBA UZ9898 for the policy period July 8, 2019, through July 8, 2020. The West Coast Policy was issued as of April 19, 2019. Id. ¶ 11. The basic coverage provisions of the policy are written on the “Special Property Coverage Form,” Form SS 00 07 07 05, which states:
A. COVERAGE
We will pay for direct physical loss of or physical damage to Covered Property at the premises described in the Declarations (also called "scheduled premises" in this policy) caused by or resulting from a Covered Cause of Loss.
Id. ¶ 12. “Covered Property” under the Special Property Coverage Form includes the “building(s) and structure(s) described in the Declarations,” Special Property Coverage Form, A(1)(a). ¶ 13. Under the Special Property Coverage Form in the West Coast policy “Covered Cause of Loss” is defined as follows: B. 3. Covered Causes of Loss RISKS OF DIRECT PHYSICAL LOSS unless the loss is: a. Excluded in Section B., EXCLUSIONS; or b. Limited in Paragraph A.4. Limitations; that follow. ¶ 15. “Section B., EXCLUSIONS” of the Special Property Coverage Form,” Form SS 00 07
07 05, for the West Coast Policy does not itself have a virus exclusion. An exclusion was, however, added to “Section B., EXCLUSIONS” of the West Coast Policy through a “LIMITED FUNGI, BACTERIA OR VIRUS COVERAGE” Endorsement, Form SS 40 93 07 05. ¶ 16.
One portion of the virus endorsement removes all virus coverage from the Special Property Coverage Form by adding an exclusion to Seсtion B of the Special Property Coverage Form:
2. The following exclusion is added to Paragraph B.1. Exclusions of the … Special Property Coverage Form…:
i. “Fungi”, Wet Rot, Dry Rot, Bacteria And Virus We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss: 1 (1) Presence, growth, proliferation, spread or any activity of “fungi”, wet rot, dry rot, bacteria or virus. 2
But if “fungi”, wet rot, dry rot, bacteria or virus results in a "specified cause of loss" to Covered Property, we will pay for the loss or damage caused by that “specified cause of loss”.
This exclusion does not apply:
(1) When “fungi”, wet or dry rot, bacteria or virus results from fire or lightning; or (2) To the extent that coverage is provided in the Additional Coverage – Limited Coverage for “Fungi”, Wet Rot, Dry Rot, Bacteria and Virus with respect to loss or damage by a cause of loss other than fire or lightning.
This exclusion applies whether or not the loss event results in widespread damage or affects a substantial area. 18. The virus endorsement then adds some very limited virus coverage: b. We will pay for loss or damage by “fungi”, wet rot, dry rot, bacteria and virus. As used in this Limited Coverage, the term loss or damage means: (1) Direct physical loss or direct physical damage to Covered Property caused by "fungi", wet rot, dry rot, bacteria or virus, including the cost of removal of the “fungi”, wet rot, dry rot, baсteria or virus; (2) The cost to tear out and replace any part of the building or other property as needed to gain access to the “fungi”, wet rot, dry rot, bacteria or virus; and (3) The cost of testing performed after removal, repair, replacement or restoration of the damaged property is completed, provided there is a reason to believe that “fungi”, wet rot, dry rot, bacteria or virus are present. ¶ 19. That limited virus coverage is limited further by the requirement that, for coverage to
apply, the loss must be due to a limited number of things. The coverage is restricted by this language:
a. The coverage described in 1.b. below only applies when the “fungi”, wet or dry rot, bacteria or virus is the result of one or more of the following causes that occurs during the policy period and only if all reasonable means were used to save and preserve the property from further damage at the time of and after that occurrence.
(1) A “specified cause of loss” other than fire or lightning; ¶ 20. “Specified Cause of Loss” is defined in the Special Property Coverage Form as follows: 19. “Specified Cause of Loss” means the following: Fire; lightning; explosion, windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; water damage. Id. ¶ 21. As a result, the virus endоrsement states that Sentinel will pay for “[d]irect physical loss or direct physical damage to Covered Property caused by . . . virus,” provided that such “direct physical loss or direct physical damage” is caused by a virus that “is the result of” “explosion, windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; water damage.” Id. ¶ 22.
B. The New York Policy
Barbizon-NY procured insurance coverage under Policy Number 57 SBA BG9898 for the policy period September 14, 2019, through September 14, 2020. The New York policy was issued as of July 3, 2019, almost three months after the West Coast policy. Id. ¶ 23. The New York pоlicy, like the West Coast policy, is based upon “Special Property Coverage Form,” Form SS 00 07 07 05, which states: A. COVERAGE We will pay for direct physical loss of or physical damage to Covered Property at the premises described in the Declarations (also called “scheduled premises” in this policy) caused by or resulting from a
Covered Cause of Loss. ¶ 24. The New York policy does not include the virus endorsement. ¶¶ 26-27. Beginning on March 7, 2020, New York Governor Andrew Cuomo and New York City Mayor Bill DeBlasio issued a series of executive orders. Among other things, those executive orders, declared “a State disaster emergency for the entire State of New York,” closed all schools, and ultimately required the closure of non-essential businesses in New York City. ¶¶ 35-41. The NY policy provides “Civil Authority Coverage” as follows:
q. Civil Authority
(1) This insurance is extended to apply to the actual loss of Business Income you sustain when access to your “scheduled premises” is specifically prohibited by order of a civil authority as the direct result of a Covered Cause of Loss to property in the immediate area of your “scheduled premises”. (2) The coverage for Business Income will begin 72 hours after the order of a civil authority and coverage will end at the earlier of: (a) When access is permitted to your “scheduled premises”, or (b) 30 consecutive days after the order of the civil authority. ¶ 42. The Civil Authority coverage is triggered by an “order of a сivil authority as the direct
result of a Covered Cause of Loss to property in the immediate area” of the NY Location. ¶ 43. “Immediate area” is not defined.
The NY policy provides “Business Income” coverage as follows: o. Business Income
(1) We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “operations” during the “period of restoration”. The suspension must be caused by direct physical loss of or physical damage to property at the “scheduled premises”, including personal property in the open (or in a vehicle) within 1,000 feet of the “scheduled premises”, caused by or resulting from a Covered Cause of Loss. * * * (5) With respect to the сoverage provided in this Additional Coverage, suspension means: (a) The partial slowdown or complete cessation of your business activities; or
(b) That part or all of the “scheduled premises” is rendered untenantable as a result of a Covered Cause of Loss if coverage for Business Income applies to the policy. ¶ 58. The NY policy also provides “Extended Business Income” coverage. The “Extended Business Income” coverage in the Special Property Coverage Form is entirely replaced by the following from the “Stretch for Schools” Endorsement:
r. Extended Business Income
(1) If the necessary suspension of your “operations” produces a Business Income loss payable under this policy, wе will pay for the actual loss of Business Income you incur during the period that: (a) Begins on the date property is actually repaired, rebuilt or replaced and “operations” are resumed; and
(b) Ends on the earlier of:
(i) The date you could restore your “operations” with reasonable speed, to the condition that would have existed if no direct physical loss or damage occurred; or
(ii) 30 consecutive days after the date determined in (1)(a) above. Loss of Business Income must be caused by direct physical loss or physical damage at the “scheduled premises” caused by or resulting from a Covered Cause of Loss. (2) With respect to the coverage provided in this Additional Coverage, suspension means:
(a) The partial slowdown or complete cessation of your business activities; and (b) That a part or all of the “scheduled premises” is rendered untenantable as a result of a Covered Cause of Loss. ¶ 61. The “Stretch for Schools” endorsement increases the 30-day period of loss under the NY
Policy’s “Extended Business Income” coverage to 120 days: 4. Extended Business Income In the Extended Business Income Additional Coverage, paragraph 4.j.(1)(b)(ii) of the Standard Property Coverage Form and paragraph 5.r.(1)(b)(ii) of the Special Property Coverage Form are amended to read as follows: (b) 120 consecutive days after the date determined in (a) above. ¶ 62. The “Stretch for Schools” endorsement аlso increases the limits for “Business Income
and Extra Expense” coverage:
c. Business Income and Extra Expense
(1) If Business Income or Extra Expense are provided under this policy, the most we will pay in any one occurrence in subparagraph (3) is increased from $50,000 to $500,000 in any one occurrence at each premises. (2) The Limit of Insurance stated above is the maximum Limit of Insurance available for this coverage under this policy. ¶ 63.
C. Plaintiffs’ Allegations
Plaintiffs filed the present complaint on December 4, 2020, alleging they were forced to close the insured locations in March 2020 due to the COVID-19 pandemic, which was caused by the pervasive presence of the virus SARS-CoV-2. Id. ¶ 28. They allege “[t]he presence of the SARS-CoV-2 virus involves a physical interaction with property, making it dangerous and lеss valuable. This damage is direct, in that the presence of SARS-CoV-2 virus particles renders property dangerous and less valuable,” id. ¶ 53, and that “Barbizon-NY was unable to use the NY Location because of the virus.” Id. ¶ 54.
On June 26, 2020, Plaintiffs submitted claims to Sentinel for business interruption losses at the insured locations. Id. ¶ 29. Sentinel denied the claims that same day. Id. ¶ 30. In a letter dated that day, Sentinel denied coverage under the New York policy by stating: “We have completed a review of your loss and have determined that since the coronavirus did not cause property damage at your place of business or in the immediate area, this loss is not covered.” Id. ¶ 31. Similarly, in separate letter dated the same day, Sentinel denied coverage under the West Coast policy with identical language stating: “We have completed a review of your loss and have determined that since the coronavirus did not cause property damage at your place of business or in the immediate area, this loss is not covered.” Id. ¶ 32. The West Coast letter went on to state that: “Even if the virus did cause damage, it is excluded from the policy, and the limited coverage available for losses caused by virus does not apply to the facts of your loss.” Id. ¶ 33. Barbizon-NY asserts three causes of action: (1) breach of contract; (2) breach of duty of good faith and fair dealing; and (3) unfair business practices, Cal. Bus. & Prof. Code §§ 17200 et seq. (“UCL”). Id. ¶¶ 34-88. Barbizon-West asserts a single cause of action for violation of the UCL. ¶¶ 78-88. Barbizon-West’s UCL сlaim rests on the theory that although the West Coast Policy provides certain limited coverage for virus-related losses, Sentinel has allegedly “taken the position that a virus cannot cause ‘direct physical loss of or physical damage to’ property under any circumstances.” ¶¶ 79-80 (emphasis in original). Barbizon-West thus claims Sentinel’s “sale and marketing of the Limited Fungi, Bacteria Or Virus Coverage constitutes false, unfair, fraudulent, and/or deceptive business practices” under the UCL. ¶¶ 81-83.
Sentinel filed the present motion on February 2, 2021, seeking dismissal of all claims.
III. LEGAL STANDARD
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) “tests the legal
sufficiency of a claim. A claim may be dismissed only if it appears beyond doubt that the plaintiff
can prove no set of facts in support of his claim which would entitle him to relief.”
Cook v.
Brewer
,
In considering a motion to dismiss, the court accepts factual allegations in the complaint as
true and construes the pleadings in the light most favorable to the nonmoving party.
Manzarek v.
St. Paul Fire & Marine Ins. Co.
,
IV. DISCUSSION
Sentinel argues Plaintiffs’ claims must be dismissed because the policies do not cover their losses. Specifically, Sentinel argues Barbizon-NY is not entitled to business income and extra expense coverage because it fails to allege any direct physical loss of or damage to property, as required for all forms of coverage under the policy. Mot. at 1. Although Plaintiffs note in their complaint that Barbizon-West’s policy has a virus exclusion while Barbizon-NY’s policy does not, Sentinel argues that distinction is meaningless because, under either policy, Plaintiffs must demonstrate an entitlement to coverage in the first instance. Id. It maintains Barbizon-NY cannot do so because it suffered no direct physical loss of or damage to its property. Id. at 1-2.
Sentinel argues Barbizon-NY has not stated a plausible claim to “Civil Authority” coverage for the additional reason that it has not alleged facts meeting the requirements for Civil Authority Coverage. Id. at 2. It notes that Barbizon-NY does not allege any property in the immediate area of the scheduled premises suffered direct physical loss, and it argues Barbizon-NY has not plausibly alleged that access to its business was specifically prohibited as it fails to identify a single civil authority order doing so. Id. It also notes the government orders were issued to limit the spread of COVID-19, not because of property damage. Id. Sentinel argues Barbizon-NY fails to state a plausible claim under the UCL because it has not alleged a breach of the policy or shown there is coverage. It notes that at least nine courts in California have rejected similar UCL claims in lawsuits seeking coverage for COVID-19 business interruption losses, and that Barbizon-NY “cannot manufacture a claim by attempting to assign to Sentinel a position it does not hold, and it cannot create coverage where none exists. Contrary to Barbizon-NY’s insistence, a plaintiff’s claim does not turn on a theoretical assessment of whether any virus anywhere could сause harm.”
Finally, as to Barbizon-West’s UCL claim, Sentinel argues Barbizon-West premises its sole cause of action under California’s UCL on an illusory coverage argument that has been rejected. It contends that Barbizon-West asks this Court to theorize that coverage under the policy’s limited virus coverage “is an impossibility even though it has not even attempted to show entitlement to such coverage.” at 3.
A. Insurance Policy Interpretation
“[I]nterpretation of an insurance policy is a question of law.”
Waller v. Truck Ins. Exch.,
Inc.
,
damage because the virus does not cause physical alteration of the property. Mot. at 8-9. In response, Plaintiffs argue the phrase “direct physical loss of or physical damage to” is ambiguous, noting that different courts have interpreted this language in different ways and “the Court cannot find this language to be unambiguous without concluding that those other interpretations, adopted by other reasonable jurists, are unreasonable.” Opp’n at 12.
Under California law, the insured has the initial burden of proving that its loss is covered.
MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co.
,
governmental orders associated with it cause or constitute property loss or damage for purposes of
insurance coverage.”
Out West Rest. Grp., Inc. v. Affiliated Ins. Co.
,
Plaintiffs cite Mudpie in support of their position that COVID-19 on property would be capable of causing damage to property. Opp’n at 13. However, although the Mudpie court noted the phrase “direct physical loss of” property alone does not require physical alteration to property, it nevertheless held that where, as here, an insurance policy requires “direct physical loss of or damage” and provides for coverage through a “period of restoration” that ends when the property at the premises “should be repaired, rebuilt or replaced with reasonable speed and similar quality,” the “damage contemplated by the [p]olicy is physical in nature.” Mudpie , 2020 WL 5525171at *4 (citation omitted; emphasis added). Plaintiffs also fail to acknowledge that the court held that a “loss of functionality” does not constitute a direct physical loss of property absent an external physical force that “induced a detrimental change in the property’s capabilities” beyond the government closure orders. at *4-6. Mudpie thus rejected the same argument Plaintiffs advance here.
Plaintiffs also rely on
Crisco v. Foremost Insurance Company Grand Rapids, Michigan
,
which a landslide swept away the sub adjacent and lateral support essential to the stability of the
insured dwelling.
The cases Plaintiffs cite are also distinguishable because this case involves a virus, which
“can be disinfected and cleaned” from surfaces.
See, e.g., O’Brien
,
contrast to the weight of California decisions, including other state court decisions, that have
rejected the argument that temporary deprivation of loss of use of property as a result of
government closure orders is sufficient for direct physical loss.
See Musso
,
In sum, the Court finds that Plaintiffs have not plausibly alleged “direct physical loss of or
damage to” property, as required by the policies, and their alleged losses are not covered as a
matter of law. Because the Court finds that Plaintiffs cannot allege direct physical loss or damage,
it need not address the scope of the Barbizon-West policy’s virus exemption.
See Kevin Barry
Fine Art Assocs.
,
As noted above, the New York policy also provides coverage for when access to a premise is prohibited by order of a civil authority. Compl. ¶¶ 42-43. Plaintiffs argue entitlement to civil authority coverage because “[t]he Complaint alleges that the losses were caused by the “pervasive presence of the virus SARS-Cov-2 in the cities where the Insured Locations are located.’” Opp’n at 23 (quoting Compl. ¶ 28). However, coverage under this provision is limited to “when access to your ‘scheduled premises’ is specifically prohibited by order of a civil authority as the direct result of a Covered Cause of Loss to property in the immediate area of your ‘scheduled premises.’” Compl. ¶ 42. Here, Plaintiffs concede that “access” to Barbizon-NY’s property was not “specifically prohibited by” civil authority orders. Opp’n at 28. Barbizon-NY claims only that it was prohibited “from using its insured property,” id ., but it does not point to any factual allegations that it was specifically prohibited from accessing its property. That is because the civil authority orders on which Barbizon-NY relies reduced the in-person workforce; they did not deny access to property. See Food for Thought Caterers Corp. v. Sentinel Ins. Co., Ltd. , 2021 WL 860345, at *6 (S.D.N.Y. Mar. 6, 2021) (Governor Cuomo’s Executive Order “does not amount to denial of access to the property” as the “owner of the property could continuе to access the property despite the total reduction in the workforce”).
Second, the government orders were issued to prevent the spread of COVID-19, not in
response to property damage.
See Mudpie
,
Finally, Barbizon-NY fails to identify any property in the immediate area of its property
that experienced direct physical loss. Instead, it asserts the “Complaint alleges that the losses were
caused by the ‘pervasive presence of the virus SARS-Cov-2 in the cities where the Insured
Locations are located.’” Opp’n at 9:22-24 (quoting Compl. ¶ 28). But such general allegations
are not enough. As the
Food for Thought
court noted, “generalized statements” and “speculative
assertions” based on state and local government closure orders, including Mayor DeBlasio’s
executive orders, “cannot serve as a substitute for a specific allegation that any property near the
insured’s premises was in fact damaged.”
D. Viability of Plaintiffs’ Causes of Action
While the Court is sympathetic to Plaintiffs’ situation, as discussed above, they have not
shown they are entitled to coverage under the policies. And, to the extent Barbizon-NY’s breach
of the covenant of good faith and fair dealing claim and Plaintiffs’ UCL claim rely upon the
existence of coverage under the policies, they must also be dismissed.
See, e.g., Waller
, 11 Cal.
4th at 36 (“It is clear that if there is no potential for coverage and, hence, no duty to defend under
the terms of the policy, there cаn be no action for breach of the implied covenant of good faith and
fair dealing because the covenant is based on the contractual relationship between the insured and
the insurer.”);
Krantz v. BT Visual Images
,
In addition to Plaintiffs’ claim under the unlawful prong of the UCL, the complaint seems to allege two other bases for the UCL claim. Compl. ¶¶ 79-86. Paragraphs 79-85 allege that Sentinel’s sale and marketing of its limited fungi, bacteria or virus coverage is a false, unfair, fraudulent and deceptive business practice because the coverage is worthless. In addition, paragraph 86 alleges that Sentinel’s marketing and sale of the New York policy without clearly and unmistakably stating its view that a virus can never be a covered cause of loss is a false, unfair, fraudulent, and deсeptive business practice. However, the allegations in the complaint with respect to these theories of UCL liability are threadbare. As to the limited virus coverage, the complaint does not plead sufficient factual information that would allow the Court to infer that the promised coverage is worthless. As to the New York policy, the complaint does not allege any facts to show how the marketing and sale is deceptive. In their opposition, Plaintiffs devote only two paragraphs to their UCL claim, which simply assert that the complaint states a claim. In the very next paragraph, Plaintiffs state that if the Court determines additional allegations are necessary, Plaintiffs request leave to amend. The Court does believe additional allegations are necessary, as the current allegations underlying the UCL claim do not allege enough factual information to make the claim plausible under Iqbal and Twombly . And the Court will grant leave to amend.
V. CONCLUSION
For the reasons stated above, the Court GRANTS Sentinel’s motion to dismiss WITH LEAVE TO AMEND . [3] The amended complaint shall be filed by April 21, 2021. IT IS SO ORDERED.
Dated: March 31, 2021 THOMAS S. HIXSON United States Magistrate Judge
Notes
[1] Although Barbizon-NY’s claims pertain to property in New York, California and New York law
27
on the coverage issues here do not conflict.
See Emps. Mut. Cas. Co. v. N. Am. Specialty
Flooring, Inc.
,
[2] Plaintiffs also cite to two recent state court decisions –
P.F. Chang’s China Bistro, Inc. v.
27
Certain Underwriters at Lloyd’s of London
, No. 20STCV17169 (Cal. Super. Ct. Feb. 4, 2021) and
Goodwill Industries of Orange Cty., Cal. v. Philadelphia Indemnity Ins. Co.
,
[3] As the Court did not consider any documents contained therein, the parties’ requests for judicial 28 notice (ECF Nos. 9, 20, 23) are denied as moot.