MUDPIE, INC., Plaintiff-Appellant, v. TRAVELERS CASUALTY INSURANCE COMPANY OF AMERICA, Defendant-Appellee.
No. 20-16858
United States Court of Appeals for the Ninth Circuit
October 1, 2021
D.C. No. 4:20-cv-03213-JST. Appeal from the United States District Court for the Northern
Before: Morgan Christen and Danielle J. Forrest, Circuit Judges, and Michael M. Anello,* District Judge. Opinion by Judge Christen.
FOR PUBLICATION
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
OPINION
* The Honorable Michael M. Anello, United States District Judge for the Southern District of California, sitting by designation.
SUMMARY**
California Insurance Law
The panel affirmed the district court‘s order dismissing Mudpie, Inc.‘s claims against its insurer in Mudpie‘s diversity putative class action seeking to recover under the insurance policy‘s “Business Income” and “Extra Expense” coverage after state and local authorities in California issued several public health orders in response to the COVID-19 pandemic.
Mudpie filed suit on behalf of itself and a putative class of all retailers in California that: purchased comprehensive business insurance coverage from Travelers Casualty Insurance Company of America that included coverage for business interruption; filed a claim for lost businеss income following California‘s Stay at Home order; and were denied coverage. The parties disputed whether Mudpie adequately alleged a “direct physical loss of or damage” to property under the Policy.
The panel held that California courts would construe the phrase “physical loss of or damage to” as requiring an insured to allege physical alteration of the property. The panel rejected Mudpie‘s interpretation of “direct physical loss of or damage to” to be synonymous with “loss of use.” Mudpie‘s complaint did not identify a distinct, physical alteration of the property. The panel affirmed the district court‘s ruling that Mudpie‘s claimed losses were not covered by the Policy, and concluded that the district court did not err by dismissing Mudpie‘s claims for declaratory relief, breach of contract, and breach of the covenant of good faith and fair dealing.
The panel held that the Policy‘s Virus Exclusion barred coverage for Mudpie‘s claimed losses. The panel rejected Mudpie‘s argument that its losses were not subject to the Policy‘s Exclusion because the losses were caused by Stay at Home Orders that restricted Mudpie‘s use of its property, not directly by the virus. California courts apply the efficient proximate (meaning predominate) cause of the loss. The panel held that Mudpie did not plausibly allege that the efficient cause (the cause that set others in motion) was anything other than the spread of the virus throughout California, or that the virus was merely a remote cause of its losses.
** This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader.
COUNSEL
Andre M. Mura (argued), Eric H. Gibbs, and Amanda M. Karl, Gibbs Law Group LLP, Oakland, California; Victoria S. Nugent and Geoffrey Graber, Cohen Milstein Sellers & Toll PLLC, Washington, D.C.; for Plaintiff-Appellant.
Theodore J. Boutrous Jr. (argued), Richard J. Doren, and Deborah L. Stein, Gibson Dunn & Crutcher LLP, Los Angeles, California; Stephen E. Goldman and Wystan M. Ackerman, Robinson & Cole LLP, Hartford, Connecticut; for Defendant-Appellee.
Gabriel K. Gillett, John H. Mathias Jr., David M. Kroeger, and Michael F. Linden, Jenner & Block LLP, Chicago, Illinois; Angelo I. Amador, Restaurant Law Center, Washington, D.C.; for Amicus Curiae Restaurant Law Center.
Jeffrey R. White, Counsel; Tobias L. Millrood, President; American Associate for Justice, Washington, D.C., for Amicus Curiae American Association for Justice.
David B. Goodwin and Breanna K. Jones, Covington & Burling LLP, San Francisco, California; Jad H. Khazem, Covington & Burling LLP, Washington, D.C.; for Amicus Curiae United Policyholders.
Laura A. Foggan, Crowell & Moring LLP, Washington, D.C., for Amici Curiae American Property Casualty Insurance Association and National Association of Mutual Insurance Companies.
OPINION
CHRISTEN, Circuit Judge:
Mudpie, Inc. appeals а district court order dismissing its claims against Travelers Casualty Insurance Company of America (Travelers). Mudpie operates a children‘s store located in San Francisco that sells clothing, toys, books, and other goods. Mudpie alleges that it purchased a comprehensive
I
On March 4, 2020, Governor Gavin Newsom declared a state of emergency in California in response to the threat posed by COVID-19. Governor Newsom issued an executive order on March 12, 2020, that “[a]ll [California] residents are to heed any orders and guidance of state and local public health officials, including but not limited to the imposition of social distancing measures, to control the spread of COVID-19.”
The City and County of San Francisco issued a “Shelter in Place Order” on March 16, 2020.1 This order required residents to remain at their place of residence unless performing “essential activities.” Id. at 1. The Shelter in Place Order also declared that “[a]ll businesses with a facility in the County, except Essential Businesses ..., are required to cease all activities at facilities located within the County except Minimum Basic Operations.” Id. at 3. Failure to comply with San Francisco‘s Shelter in Place Order was deemed a misdemeanor punishable by a fine, imprisonment, or both. Id. at 1.
On March 19, 2020, Governor Newsom in conjunction with the State Public Health Officer ordered “all individuals living in the State of California to stay home or at their place of residence except as needed to maintain continuity of operations of the federal critical infrastructure sectors.” Mudpie alleges that it complied with the local and state orders (collectively, the Stay at Home Orders) and as a result, was not able to operate its store after March 16, 2020.
Mudpie filed a claim with Travelers under the Policy on April 27, 2020. In its letter denying the claim, Travelers stated that “[b]ecause the limitations on [Mudpie‘s] business operations were the result of the Governmental Order, as opposed to ‘direct physical loss or damage to property at the described premises’ ... this Business Income and Extra Expense coverage does not apply to [Mudpie‘s] loss.” Travelers further stated that the Policy‘s coverage excluded “‘loss or damage caused by or resulting from any virus‘—such as the COVID-19 virus.”
Mudpie filed suit in the United States District Court for the Northern District of California on behаlf of itself and a putative class of “[a]ll retailers in California that purchased comprehensive business insurance coverage from [Travelers] which includes coverage for business interruption, filed a claim for lost business income following California‘s Stay at Home order, and were denied coverage.” Mudpie‘s complaint asserted three causes of action: (1) a claim for declaratory relief that “its business
Travelers filed a motion to dismiss pursuant to
The district court granted Travelers’ motion, ruling that Mudpie “fail[ed] to allege any intervening physical force beyond the government closure orders” and thus was “not entitled to Business Income or Extra Expense coverage” pursuant to the Policy. The district court declined to consider Trаvelers’ argument that the Virus Exclusion barred Mudpie‘s recovery. The court dismissed the complaint without prejudice but gave Mudpie leave to amend. Mudpie responded by filing a notice advising “it [would] not be amending its Complaint, as permitted by the Court‘s Order.” The court then dismissed the complaint with prejudice, and Mudpie timely appealed.
II
We review de novo an order granting a motion to dismiss for failure to state a claim under
“When interpreting state law, we are bound to follow the decisions of the state‘s highest court, and when the state supreme court has not spoken on an issue, we must determine what result the court would reach based on state appellate court opinions, statutes and treatises.” Diaz v. Kubler Corp., 785 F.3d 1326, 1329 (9th Cir. 2015) (internal quotation marks and brackets omitted) (quoting Paulson v. City of San Diego, 294 F.3d 1124, 1128 (9th Cir. 2002) (en banc)). “We will ordinarily accept the decision of an intermediate appellate court as the controlling interpretation of state law,” Tomlin v. Boeing Co., 650 F.2d 1065, 1069 n.7 (9th Cir. 1981), “unless [we] find[] convincing evidence thаt the state‘s supreme court likely would not follow it,” Ryman v. Sears, Roebuck & Co., 505 F.3d 993, 994 (9th Cir. 2007).
III
Pursuant to the Policy, Travelers agreed to “pay for direct physical loss of or damage to [Mudpie‘s] Covered Property caused by or resulting from a Covered Cause of Loss.” At oral argument before our court, defense counsel agreed the “Covered Property” included Mudpie‘s storefront premises and its contents. The coverage also extended to certain losses to
[Travelers] will pay for the actual loss of Business Income [Mudpie] sustain[s] due to the necessary “suspension” of [Mudpie‘s] “operations” during the “period of restoration“. The “suspension” must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss....
....
[Travelers] will also pay Extra Expense (including Expediting Expenses) to repаir or replace the property, but only to the extent it reduces the amount of loss that otherwise would have been payable under [the “Business Income” provision].
Under California law, the burden is on the insured to establish that a claimed loss “is within the basic scope of insurance coverage.” Aydin Corp. v. First State Ins. Co., 959 P.2d 1213, 1215 (Cal. 1998). “[O]nce an insured has made this showing, the burden is on the insurer to prove the claim is specifically excluded.” Id. Where, as here, a policy covers “direct physical loss of or damage to” property, thе “direct physical loss requirement is part of the policy‘s insuring clause and accordingly falls within [the insured‘s] burden of proof.” MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 115 Cal. Rptr. 3d 27, 36 (Ct. App. 2010).
The parties dispute whether Mudpie adequately alleged a “direct physical loss of or damage to” property under the Policy, and they offer competing interpretations of that phrase. California courts require that we interpret an insurance policy according to the “clear and explicit” meaning оf the terms as used in their “ordinary and popular sense.” AIU Ins. Co. v. Superior Ct., 799 P.2d 1253, 1264 (Cal. 1990) (internal quotation marks omitted); Bay Cities Paving & Grading, Inc. v. Laws.’ Mut. Ins. Co., 855 P.2d 1263, 1270 (Cal. 1993) (“The clear and explicit meaning of the[] provisions, interpreted in their ordinary and popular sense, unless used by the parties in a technical sense or a special meaning is given to them by usage[,] controls judicial interpretation.“) (internal quotation marks and citations omitted). We must “construe [insurance policies] as would a reasonable layperson, not an expert, attorney, or a historian.” E.M.M.I. Inc. v. Zurich Am. Ins. Co., 84 P.3d 385, 391 n.2 (Cal. 2004) (citing Crane v. State Farm & Cas. Co., 485 P.2d 1129 (Cal. 1971)).
California courts have interpreted coverage provisions similar to the Policy‘s “direct physical loss of or damage to property” term.3 For example, in MRI Healthcare, the California Court of Appeal considered the meaning of the phrase “direct physical loss” in a business insurance policy. 115 Cal. Rptr. 3d at 31-32. The plaintiff in MRI Healthcare, MRI Healthcare Center (MHC), was required to demagnetize, or “ramp down,” its MRI machine when its landlord repaired storm damage to the roof over the room housing the machine. Id. at 32. After the roof was repaired, the machine failed to restart for
The California Court of Appeal affirmed the superior court‘s ruling, explaining “direct physical loss ‘contemplates an actual change in insured property ... occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory.‘” Id. at 37 (quoting AFLAC Inc. v. Chubb & Sons, Inc., 581 S.E.2d 317, 319 (Ga. Ct. App. 2003)). In other words, “[f]or loss to be covered, there must be a ‘distinct, demonstrable, physical alteration’ of the property.” Id. at 38. The court cited Couch on Insurance § 148:46,4 which explains:
The requirement that the loss be “physical” ... is widely held to exclude alleged losses that are intangible or incorporeal and, thereby, to preclude any claim against the property insurer when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property.
The California appellate court concluded there was no coverage because there had been no “distinct, demonstrable, physical alteration” of the MRI machine. MRI Healthcare, 115 Cal. Rptr. 3d at 38. Rather, the machine was turned off and could not be turned back on due to the inherent nature of the machine itself rather than actual physical damage or alteration. Id.
Mudpie сontends that under California law “direct physical loss of or damage to” property does not require actual damage to the property but merely requires that the property no longer be suitable for its intended purpose. In support, Mudpie cites Hughes v. Potomac Insurance Co. of the District of Columbia, 18 Cal. Rptr. 650 (Dist. Ct. App. 1962), abrogated on other grounds by Sabella v. Wisler, 377 P.2d 889 (Cal. 1963). But Hughes cannot bear the weight Mudpie places on it. First, Hughes did not purport to interpret a “direct physical loss” provision similar to the one at issue here. Hughes concerned whether a home insurance policy‘s definition of “dwelling” included the ground underneath a home in addition to the structure itself. See id. at 655. Second, contrary to Mudpie‘s suggestion, Hughes did not imply that an insured need not show any physical change to the insured property to prove “direct physical loss.” To the contrary, the court in Hughes concluded that the home sustained “real and severe damage when the soil beneath it slid away and left it overhanging a 30-foot cliff” and deemed the home uninhabitable. Id.5
Interpreting the phrase “direct physical loss of or damage to” property as requiring physical alteration of property is consistent with other provisions of Mudpie‘s Policy. Cf. Producers Dairy Delivery Co. v. Sentry Ins. Co., 718 P.2d 920, 927 n.7 (Cal. 1986) (“[L]anguage in a contract must be construed in the context of that instrument as a whole ... and cannot be found to be ambiguous in the abstract.“). For example, the Policy provides coverage for Business Income and Extra Expense only during the “period of restoration,” and it defines the “period of restoration” as ending on “[t]he date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or ... [t]he date when business is resumed at a new permanent location.” That this coverage extends only until covered property is repaired, rebuilt, or replaced, or the business moves to a new permanent location suggests the Policy contemplates providing coverage only if there are physical alterations to the property. To interpret the Policy to provide coverage absent physical damage would render the “period of restoration” clause superfluous.
Our conclusion that California courts would construe the phrase “physical loss of or damage to” as requiring an insured to allege physical alteration of its property is consistent with conclusions reached by other courts. See, e.g., Michael Cetta, Inc. v. Admiral Indem. Co., 506 F. Supp. 3d 168, 179 (S.D.N.Y. 2020) (interpreting the phrase “direct physical loss of or damage to” in an insurance policy and observing that “nearly every court to address this issue has concluded that loss of use of a premises due to a governmental closure order does not trigger business income coverаge premised on physical loss to property“); Promotional Headwear Int‘l v. Cincinnati Ins. Co., 504 F. Supp. 3d 1191, 1200 (D. Kan. 2020) (“[T]he overwhelming majority of cases to consider business income claims stemming from COVID-19 with similar policy language hold that ‘direct physical loss or damage’ to property requires some showing of actual or tangible harm to or intrusion on the property itself.“).
The Eighth Circuit recently considered whether the COVID-19 pandemic and related government-imposed restrictions constitute “accidental physical loss or accidental physical damage” to businеss property in Oral Surgeons, P.C. v. Cincinnati Insurance Co., 2 F.4th 1141 (8th Cir. 2021). There, an oral and maxillofacial surgery practice ceased non-emergency
Applying Iowa law, the Eighth Circuit interpreted the policy to require direct physical loss or physical damage, and concluded “there must be some physicality to the loss or damage of property—e.g., a physical alteration, physical contаmination, or physical destruction.” Id. at 1144. The Eighth Circuit observed that the policy covered business income and incurred extra expense only during the “period of restoration” and reasoned that the fact “the policy provides coverage until property ‘should be repaired, rebuilt or replaced’ or until business resumes elsewhere assumes physical alteration of the property, not mere loss of use.” Id.; see also O‘Brien Sales & Mktg., Inc. v. Transp. Ins. Co., 512 F. Supp. 3d 1019, 1023 (N.D. Cal. 2021) (relying on MRI Healthcare and holding that plaintiff‘s loss of use “unaccompanied by a distinct, demonstrable, physical alteration to the property” was insufficient to be compensable under its insurance policy). We affirm the district court‘s ruling that Mudpie‘s claimed losses are not covered by the Policy. The district court did not err by dismissing Mudpie‘s claims for declaratory relief, breach of contract, and breach of the covenant of good faith and fair dealing.6
IV
We also conclude that the Policy‘s Virus Exclusion bars coverage for Mudpie‘s claimed losses. The Policy specifies:
[Travelers] will not pay for lоss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.
Having ruled that Mudpie did not allege a direct physical loss, the district court did not rely on the Virus Exclusion when it dismissed Mudpie‘s complaint. Nevertheless, the parties fully briefed the applicability of the Virus Exclusion in the district court and we may affirm “on any basis the record supports, including one the district court did not reach.” Or. Short Line R.R. Co. v. Dep‘t of Revenue Or., 139 F.3d 1259, 1265 (9th Cir. 1998) (quoting Herring v. FDIC, 82 F.3d 282, 284 (9th Cir. 1995)).
Mudpie argues that its losses are not subject to thе Policy‘s Virus Exclusion because the losses were caused by Stay at Home Orders that restricted Mudpie‘s use of its property, not directly by the virus. Travelers contends that this exclusion bars coverage for all of Mudpie‘s claimed losses
California courts broadly interpret the term “resulting from” in insurance contracts. Mosley v. Pac. Specialty Ins. Co., 263 Cal. Rptr. 3d 28, 35 (Ct. App. 2020) (explaining “[t]he term ‘resulting from’ ‘broadly links a factual situation with the event creаting liability, and connotes only a minimal causal connection or incidental relationship‘“) (citation omitted). And “where there is a concurrence of different causes, the efficient cause—the one that sets others in motion—is the cause to which the loss is to be attributed, though the other causes may follow it, and operate more immediately in producing the disaster.” Sabella v. Wisler, 377 P.2d 889, 895 (Cal. 1963) (quoting 6 COUCH, INSURANCE § 1466 (1930)).
The California Supreme Court explained in Garvey v. State Farm Fire & Casualty Co., 770 P.2d 704 (Cal. 1989), that Sabella “impliedly recognized that coverage would not exist if the covered risk was simply a remote cause of the loss, or if an exсluded risk was the efficient proximate (meaning predominant) cause of the loss” and concluded “the fact that an excluded risk contributed to the loss would not preclude coverage if such a risk was a remote cause of the loss.” Id. at 707. California courts apply the efficient proximate cause doctrine developed in Sabella and reaffirmed in Garvey because the doctrine “creates a workable rule of coverage that provides a fair result within the reasonable expectations of both the insured and the insurer.” Julian v. Hartford Underwriters Ins. Co., 110 P.3d 903, 907 (Cal. 2005), as modified (May 5, 2005) (internal quotation marks omitted).
Mudpie‘s complaint does not allege an attenuated causal chain between the virus and Mudpie‘s losses. Nor does Mudpie dispute that the Stay at Home Orders that impacted Mudpie‘s business were issued in response to the COVID-19 pandemic, and the point is not debatable. The state authorities’ March 19 Stay at Home Order explained that COVID-19 had “rapidly spread throughout California” and “a State of Emergency ... exist[ed] in California as a result of thе threat of COVID-19.” Based on these findings, Californians were ordered to remain at home or at their place of residence except for purposes deemed essential. Though Mudpie argues it was the government orders that most directly caused its injury, Mudpie does not plausibly allege that “the efficient cause,” i.e., the one that set others in motion, Sabella, 377 P.2d at 895, was anything other than the spread of the virus throughout California, or that the virus was merely a remote cause of its losses. Cf. Garvey, 770 P.2d at 707. Accordingly, the Policy‘s Virus Exclusion bars coverage for Mudpie‘s claims.
V
The judgment of the district court is AFFIRMED.7
CHRISTEN, Circuit Judge