Rulings affirm no coverage for COVID-related business interruption claims

In a much-anticipated decision, on Oct. 1, the 9th U.S. Circuit Court of Appeals in Mudpie, Inc. v. Travelers Casualty Insurance Company of America, 2021 DJDAR 10439, held that business income and extra expense losses incurred following business closures ordered in response to COVID-19 do not fall within the insuring agreement of property policies that provide coverage for "direct physical loss or damage" to property. The 9th Circuit also held that the virus exclusion precludes coverage for COVID-19 losses.

On the same day, relying on Mudpie, the 9th Circuit also ruled in favor of insurers in two other appeals arising from COVID-19 business interruption claims: Selane Products, Inc. v. Continental Casualty Company, 21-55123, and Chattanooga Professional Baseball LLC et al. v. National Casualty Co., 20-17422.

The Mudpie Ruling

In Mudpie, the insured sued after California state and local authorities issued public health orders in response to the COVID-19 pandemic. The lawsuit was brought on behalf of Mudpie, a children's clothing and toy boutique, and a putative class of California retailers that (1) purchased comprehensive business insurance coverage from Travelers, which included coverage for business interruption; (2) filed a claim for lost business income subsequent to California's stay-at-home order; and (3) were denied coverage.

At issue was whether the insured adequately alleged a "direct physical loss of or damage to" its property under the Travelers policy. The 9th Circuit held that California courts construe the phrase "physical loss of or damage to" as requiring an insured to allege physical alteration of the property. The court reasoned that California courts have historically distinguished between uncovered claims involving "intangible," "incorporeal" and "economic" losses and claims for covered losses, "physical ones." It further reasoned that other policy provisions and references such as the "period of restoration" reflected that the policy only extends coverage to "physical" losses. Otherwise, such language would be superfluous. Here, the insured's pleadings failed to allege the requisite physical alteration to property. Accordingly, the 9th Circuit rejected the insured's interpretation of "direct physical loss of or damage to" to be tantamount to "loss of use."

The 9th Circuit further held that the policy's virus exclusion barred all coverage for the insured's claimed losses. The 9th Circuit rejected the insured's argument that its losses were not subject to the policy's virus exclusion because the losses were not directly caused by virus, but rather were caused by stay-at-home orders preventing the insured's use of its property.

In rejecting the insured's argument, the 9th Circuit explained that California courts apply the "efficient proximate (i.e., predominate) cause of the loss" doctrine. Applying that here, the 9th Circuit held that the insured did not plausibly allege that the efficient cause was "anything other than the spread of the virus throughout California, or that the virus was merely a remote cause of its losses."

Precedent

Relying on its decision in Mudpie, the 9th Circuit summarily dispensed with other insureds' business interruption claims in the two other cases.

In Selane, the 9th Circuit affirmed dismissal of a putative class action. Reviewing policy language nearly identical to the wording in Mudpie, the court ruled that the insured plaintiffs had failed to plead that the virus had resulted in "physical alterations" to covered property for two reasons. First, the 9th Circuit held that the insured "did not allege that SARS-CoV-2 was present on its property to cause any damage." Second, the 9th Circuit indicated that the insured alleged that the stay-at-home orders caused it to suspend its operations, but it "did not plausibly allege that the stay-at-home orders caused its property to sustain any physical alterations." Therefore, the 9th Circuit ruled that there was no coverage under the business income and extra expenses endorsements.

The Mudpie court also rejected the argument that a microbe exclusion proved microscopic organisms -- ergo, a virus -- can result in "physical loss or damage" to property. The 9th Circuit indicated that the insured's argument was "unavailing" because the insured "did not allege that SARS-CoV-2 was present on its property to cause any damage."

Further, the 9th Circuit considered the applicability of the policies' civil authority coverage, concluding that no such coverage was available since the virus did not cause physical loss or damage to property and the insuring agreement requires that civil authority be imposed as a result of "physical loss of or damage to covered property." The court again noted that the insured did not allege any direct physical loss of or damage to the property.

In Chattanooga, the 9th Circuit rejected claims for business interruption coverage brought by minor league baseball teams, holding that a virus exclusion (nearly identical to the virus exclusion in Mudpie) applied to preclude coverage. In so ruling, the Chattanooga court considered and rejected the minor league teams' argument that regulatory estoppel should apply. Noting that only one of the 10 states where the minor league teams were venued even recognize the doctrine of regulatory estoppel, the 9th Circuit rejected the estoppel theory, concluding that the insurers were not relying on an interpretation of the virus exclusion that was inconsistent with any interpretation previously presented.

The 9th Circuit specifically indicated that "[a]lthough the test for equitable estoppel varies somewhat across the ten states ... absent misrepresentations regarding the scope of coverage made to the insured, equitable estoppel cannot be used to expand the scope of coverage." The 9th Circuit continued to represent that the insureds "do not allege that they relied on misrepresentations in their policies or misrepresentations made by the Insurers."

The Rulings and Their Context

According to the University of Pennsylvania's Covid Coverage Litigation Tracker, 2,030 insurance coverage actions have been filed in response to insurance coverage disputes arising from COVID-19. As of Oct. 4, the website identifies that insurers have been granted full dismissals with prejudice 84.3% of the time in federal courts and 64.2% of the time in state courts.

With its rulings in Mudpie, Selane and Chattanooga, the 9th Circuit joins other circuits that have barred property coverage for business interruption losses arising from the pandemic. At this point, appellate courts in the 6th, 8th, 9th and 11th circuits have ruled in favor of insurers on coverage issues arising from COVID-19.