‘Respiratory droplets’ theory doesn’t save insurance loss case

Oregon Mutual will no longer have to face a class action from businesses that were denied coverage of losses caused by COVID-19 shutdown orders, a federal magistrate in San Francisco ruled Thursday.

On what was their last chance to survive dismissal, the businesses advanced what they and plaintiffs in identical litigation call the "respiratory droplet" theory. They've argued that their properties have been damaged and are unfit for use because of contagions breached out by humans posing an immediate danger to people on the premises.

"At this point I don't see how you can fix this," U.S. Magistrate Judge Laurel Beeler said. "This is a wonderful thing for the court of appeals to decide."

The dismissal is the latest decision in favor of insurers in business interruption lawsuits. They've almost uniformly prevailed thus far in federal courts across the nation.

Coverage lawsuits hinge on whether closures imposed by government authorities to prevent the spread of the virus constitute a physical loss or damage.

Beeler dismissed in January the lawsuit from business owners, led by Chloe's Cafe in San Francisco. She found that there's no coverage for lost income resulting from closure orders, finding that there was only temporary loss of use of the business' property. Baker v. Oregon Mutual Insurance Company, 20-cv-05467 (N.D. Cal., filed Aug. 6, 2020).

During a short Zoom hearing, Beeler indicated she remains unconvinced that the class action should proceed. She noted that judges in the Northern District of California have unanimously decided that insurers properly denied coverage.

In a lawsuit from Mortar and Pestle Corp. against Atain Specialty Insurance, U.S. District Judge Maxine M. Chesney found that momentary impairment of property is not covered in their contract. She rejected arguments from the San Francisco restaurant that physical damage to its property is not required to trigger coverage and that the mere loss of use is sufficient, completely dismissing the complaint after one shot at leave to amend.

The California Court of Appeal, she found, has interpreted "direct physical loss," which is the disputed provision in most COVID-19 business interruption lawsuits, to require a "distinct, demonstrable, physical alteration of the property" or a "physical change in the condition of the property."

Referencing Chesney's ruling, Beeler told the businesses, "Everybody else says no."

Florida-based plaintiffs' attorney William F. Merlin responded that she's not bound to prior rulings guessing "what California law is on a novel issue that hasn't been addressed before." He noted numerous factors weighing against early dismissal, including that Chloe's Cafe did not have a virus exclusion in its policy and the "respiratory droplet" theory is continuing to work its way through the courts.

"We're developing the case law," he said. "There are changes in other cases."

Beeler replied that she doesn't see how the businesses will be able to support their claims of physical damage to their premises.

In another insurance coverage lawsuit in federal court in San Diego, U.S. District Judge Anthony Battaglia rejected the argument that the plaintiff's losses were caused by virus droplets physically contaminating all of its property.

"The court does not find that the presence of COVID-19 qualifies as physical damage to property because the virus harms human beings, not property," he wrote.

At least 1,539 lawsuits against insurers have been filed over coverage for business interruptions caused by the pandemic, according to University of Pennsylvania Law School professor Tom Baker.

Insurers have secured dismissals in 186 of 201 federal court cases that have reached the dismissal stage. Businesses have fared much better in state court, especially those without virus exclusions in their policies.

Still, coverage for government closures is in the early stages of litigation. Asbestos and some environmental liability issues have been decided years, sometimes decades, after they first arose.

Potential ambiguities over policy language are supposed to be construed in policyholders' favor.