Court dockets, both in the state and federal court systems, have seen a massive influx of COVID-19 business interruption insurance cases since the pandemic began in March of 2020. More recently, cases have been moving more expeditiously through the federal courts, and the circuit courts are starting to issue decisions. Most recently, the Ninth Circuit has spoken and its decisions provide important guidance for policyholders with pending COVID-19 coverage cases in California federal courts.
On Friday, October 1, the Ninth Circuit Court of Appeals issued opinions in two cases involving the question of whether insurance provides coverage for business interruption losses associated with COVID-19 related government orders: Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am. and Selane Prod., Inc. v. Cont’l Cas. Co. In both cases, the insurance policies contained a virus exclusion, which the policyholders sought to avoid by asserting that their losses were caused by the orders rather than by the virus itself.
In Mudpie, the panel ruled against the policyholder because its complaint did “not identify a ‘distinct demonstrable, physical alteration of the property.’” The panel affirmed the district court’s decision to grant the insurer’s motion to dismiss because the court found there was no “physical loss of or damage to” where Mudpie failed to allege any physical source for its loss and/or damage. The opinion does not address, however, the types or amounts of any physical force or intrusion that may be required to trigger coverage, which—to the extent required— would appear to be questions for experts and a trier of fact.
Similarly, in Selane, the panel found the policyholder “did not plausibly allege that its property sustained any physical alterations.” The panel also affirmed the district court’s holding that the policyholder’s allegations were insufficient to alleged “direct physical loss of or damage to” its property.
However, notably, in both opinions, the Court made a point of expressing that the policyholder failed to allege that COVID-19 was present at its property.
Unless and until California state courts rule otherwise (the first COVID coverage case, The Inns By the Sea v. California Mutual Insurance Co., is set for argument on November 10, 2021), these decisions provide little guidance as to how California state appellate courts view these issues.
For now, though, the decisions set the standard for policyholders litigating their COVID-19 insurance claims in courts within the Ninth Circuit, requiring that they allege—at a minimum—that their loss or damage was caused by the presence of COVID-19/SARS-CoV-2 and some resulting physical alteration, a standard adopted by some courts across the country based on an excerpt from an insurance treatise which, itself, apparently conceived of the phrasing based on a single federal trial court decision that has since been abrogated by state appellate law. See, e.g., K.C. Hopps, Ltd. v. The Cincinnati Ins. Co., No. 20-437 (W.D. Mo. Sept. 21, 2021) (consistent with the Eighth Circuit’s recent opinion in Oral Surgeons, while orders alone may not trigger coverage, the presence of virus may sufficiently affect property to cause direct physical loss); Marshall v. Safety Ins. Co., 2021 WL 2226454, at *3 (Mass. Super. May 21, 2021), Verveine Corp. v. Strathmore Ins. Co., 2020 WL 8766370, at *4 (Mass. Super. Dec. 21, 2020) (each distinguishing cases finding coverage because “the Complaint here does not allege that the COVID-19 virus was actually present in plaintiffs’ restaurants, resulting in physical contamination of the premises”).
Thus, even with the Ninth Circuit, its recent opinions should be readily distinguishable from cases premised on the actual presence of COVID-19/SARS-CoV-2 and resulting damage or intrusion into the property (whether its air, surface, or otherwise) and/or loss of the property’s use for its intended purpose.