US panel asks businesses what insured harm they incurred

Attorneys for several businesses faced skeptical questions from a federal appellate panel Wednesday in challenges to dismissals of their claims against insurers for denying coverage due to closures prompted by the COVID-19 virus.

A 9th U.S. Circuit Court of Appeals panel considered three appeals, two by California businesses and a third by minor league baseball teams, from decisions by district judges dismissing claims against insurers that denied coverage.

The insurance companies' defense relies on the lack of physical damage to the property. While state governments ordered businesses to shut down to minimize risk to the public, the insurers say that loss is not covered.

Attorneys for the companies, especially the baseball teams and San Francisco children's retailer Mudpie Inc., argued that the most important cause of the loss wasn't any physical damage but the stay-at-home orders by Gov. Gavin Newsom and other government officials. But they said those losses should be covered because the businesses were forced to close.

"Physical loss can mean dispossession even if there is no physical damage to property," said Gibbs Law Group LLP Andre M. Mura, who represents Mudpie. "This is a novel question of law."

Theodore J. Boutrous Jr., a partner with Gibson, Dunn & Crutcher LLP who represents Travelers Casualty Insurance Company of America, said Mudpie's insurance policy does not cover the store's economic losses due to government orders.

"This was a direct and immediate reaction to the coronavirus," he said. "No California judge, state or federal, hasn't dismissed these types of lawsuits."

The justices seemed wary of issuing a sweeping ruling while numerous cases work their way through the courts in situations that are not identical. Insurers have prevailed in most of them.

"It may be difficult to get to a uniform answer," Justice Morgan B. Christen, an appointee of President Barack Obama, said during one of the hearings. "I'm concerned about a ruling that may be overly broad."

A Chatsworth dental appliances manufacturer, Selane Products Inc., also argued the dismissal of its claim should be reversed.

Kirk A. Pasich of Pasich LLP argued the virus didn't cause "a physical change to the naked eye" but said the presence of droplets could spread the virus in the air and on surfaces. The only way to mitigate the danger, he said, was to shut down. "We stopped it by closing," he told the panel.

One possible option advocated by Mura was to certify a question for the California Supreme Court.

9th Circuit Judge Danielle J. Forrest (nee Hunsaker), an appointee of President Donald Trump, asked an attorney for an insurer in another case why that shouldn't happen.

Kannon K. Shanmugam, a partner with Paul, Weiss, Rifkind, Wharton & Garrison LLP who represents Continental Casualty Company in its dispute with Selane Products, said state law requires "some form of physical alteration."

"It really would require a sweeping expansion of coverage," he added. "It would be a waste of judicial resources to certify a question to the California Supreme Court."

Boutrous also said there was "no reason to go to the California Supreme Court."

"I'm trying to wrap my head around the argument," Forrest said to Mura. "What actually changed to your client's property?"

Mura said it "could no longer be used for its intended use."

The cases heard on Wednesday were: Mudpie Inc. v. Travelers Casualty Insurance Company of America, 20-16858 (9th Cir., filed Sept. 24, 2020); Chattanooga Pro Baseball, et al v. National Casualty Company et al., 20-17422 (9th Cir., filed Dec. 16, 2020); Selane Products, Inc. v. Continental Casualty Company, 21-55123 (9th Cir., filed Feb. 16, 2021).

The third member of the panel was Senior U.S. District Judge Michael M. Anello of the Southern District of California, sitting by designation.