Mudpie, Inc. sued on its own behalf and a presumed group of all California dealers who purchased a comprehensive business insurance coverage from Travelers Casualty Insurance Company of America that included coverage for business interruptions; filed a claim for lost business income following California's Stay at Home order; and was denied coverage. In Mudpie, Inc. v. Travelers Casualty Insurance Company of America No. 20-16858, United States Court of Appeals, Ninth Circuit (October 1, 2021), the Ninth Circuit decided the effort to obtain business interruption coverage for losses due to state closure orders.
Mudpie, Inc. appealed a district court decision dismissing its claim against Travelers Casualty Insurance Company of America (Travelers). Mudpie runs a children's store in San Francisco that sells clothes, toys, books and other goods. Mudpie claimed that it purchased comprehensive commercial liability and property insurance from travelers (Policen), and made a claim under the insurance's "Business Income" and "Extra Expense" coverage in 2020 after state and local government in California issued several public health orders in response. on the covid-19 pandemic. Mudpie claimed that the orders prevented it from running its store. Travelers denied the claim because there was no physical loss of property and its "virus exclusion" was applied.
On March 4, 2020, Governor Gavin Newsom declared a state of emergency in California in response to the covid-19 threat. The city and county of San Francisco issued a "Shelter in Place Order" on March 16, 2020. The order required residents to remain in their homes if they did not perform "essential activities." Shelter in Place Order also stated that "[a] ll companies with a facility in the county, excluding significant companies…, Are obliged to cease all activities at facilities located within the county except for Minimum Basic Activities." Failure to comply with the San Francisco Shelter in Place Order was considered an offense punishable by a fine, imprisonment or both.
Mudpie claimed that it followed local and state orders (together, Stay at Home Orders) and as a result, could not operate its store after March 16, 2020.
Mudpie presented a claim with travelers according to the policy, in his letter rejecting the claim Travelers there was no direct physical loss or damage to property in the described premises and that coverage for business income and additional costs may does not apply to Mudpie's loss. Travelers further stated that the insurance coverage excludes "& # 39; loss or damage caused by or resulting from any virus & # 39; – such as the COVID-19 virus. "
Mudpie sued on behalf of himself and a presumed class of others in a similar manner.  Travelers moved to resign. District Court granted Travelers 'request. District Court declined to consider travelers' argument that The virus ruled out Mudpie's recovery. The court dismissed the complaint without prejudice but gave Mudpie permission to correct it. with prejudice and Mudpie appealed.
Travelers promised through their policy to "pay for direct physical loss of or damage to [Mudpie’s] Covered Property… Caused by or a result of a covered cause of loss."
Under California law the burden is on the insured to establish that an alleged loss "is within the fundamental scope of the insurance cover." The parties questioned whether Mudpie adequately alleged "direct physical loss of or damage to" property under the policy, and offered competing interpretations of that phrase. California courts require the USCA to interpret insurance according to the "clear and explicit" meaning of the terms used in their "common and popular sense." [ AIU Ins. Co. v. Superior Ct. 799 P.2d 1253, 1264 (Cal. 1990)]
In California, "direct physical loss" considers an actual change in insured property caused by an accident or other temporary event immediately after the property making that it becomes unsatisfactory. In other words, in order for a loss to be covered, there must be a distinct, demonstrable, physical alteration of the property.
Mudpie argues that California law does not require "direct physical loss of or damage to" property to actually damage the property. property but only requires that the property is no longer suitable for the intended purpose.
California courts, in the opinion of the Ninth Circuits, would interpret the phrase "physical loss of or damage to" as that an insured must claim physical alteration of his property. The vast majority of cases for considering corporate income claims derived from covid-19 with similar policy language claim that direct physical loss or damage to property requires some demonstration of actual or tangible damage to or encroachment on the property itself.
Therefore, Ninth Circuit confirmed the district court's decision that Mudpie's alleged losses are not covered by the insurance. In addition, the Ninth Circuit left no stone unturned by concluding that the insurance's virus exclusion precludes coverage for Mudpie's alleged losses.
California courts interpret the term "resulting from" in insurance contracts broadly. Mosley v. Pac. Specialty Ins. Co. 263 Cal.Rptr.3d 28, 35 (Ct. App. 2020). And where there is a simultaneity of different causes, the effective cause – the one that sets others in motion – is the cause to which the loss is to be attributed, although the other causes may follow it, and act more immediately to cause the catastrophe. The Supreme Court of California declared in Garvey v. State Farm Fire & Casualty Co. 770 P.2d 704 (Cal. 1989). California courts apply the doctrine of effective proximal cause because the doctrine creates a working rule for coverage that provides a fair result within reasonable expectations of both the insured and the insurer. Mudpie also does not deny that the Stay at Home orders affecting Mudpie's operations were issued in response to the covid-19 pandemic. Although Mudpie claims that it was the government order that most directly caused its damage, Mudpie does not claim that the "effective cause", ie the one that set others in motion, was anything other than the spread of the virus throughout California, or that the virus only was a distant cause of its losses. Consequently, the policy's virus exclusion blocks coverage for Mudpie's claims. is not a covered cause of loss, many were surprised. Then it also found that the effective cause that triggers all other causes was the virus and the orders that followed its ability to infect citizens of the state. If any person or entity caused harm to Mudpie and its described class members, it was not travelers but the State of California who took the opportunity to do business from Mudpie who might want to claim damages under the Fifth Amendment for the State to take over its activities. in California in an effective condemnation of Mudpie's business.
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to the position of insurance consultant specializing in insurance coverage, insurance claims management, bad insurance fraud and insurance fraud. almost equally for insurers and policyholders.
He also acts as an arbitrator or mediator for insurance-related disputes. He has practiced law in California for more than 44 years as a lawyer for insurance coverage and claims management and more than 54 years in the insurance industry.
He is available at http://www.zalma.com and firstname.lastname@example.org. Zalma is the first recipient of the first annual Claims Magazine / ACE Legend Award. For the past 53 years, Barry Zalma has devoted his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to enable insurers and their claims staff to become professionals in insurance claims.
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