During the height of the COVID-19 pandemic, The French Laundry and Bouchon Bistro, two high-end Napa Valley eateries, were forced to partially close down. This forced partial closure was the result of an order from the Napa County Health Officer directing all individuals in the county to stay home, except to conduct essential services and activities.[i] As a result of the partial closure, the plaintiffs claimed to suffer immense financial losses.
The plaintiffs sought to recoup their business losses by looking to their insurer, Hartford Fire Insurance Company (hereinafter “defendant”) for coverage under their applicable policies.[ii] The plaintiffs filed claims with the defendant, stating the business losses suffered as result of the COVID-19 pandemic were covered under the “physical damage” provisions of their applicable policies. The plaintiffs subsequently sued the defendant, as both of their claims were denied.
The plaintiffs sued the defendant in the Superior Court of California for Napa County. Shortly after, the defendant removed the case to federal court, and the court denied the plaintiffs’ motion to remand. The defendant proceeded to file a motion to dismiss on the grounds that the plaintiffs’ insurance policy specifically excluded losses or damages suffered from a virus under the “virus exclusion.” This exception reads in pertinent part, “We will not pay for loss or damage caused directly or indirectly by … [p]resence, growth, proliferation, spread or any activity of … [a] virus.”[iii] The trial court granted the defendant’s motion.[iv]
On appeal, the plaintiffs argued the district court improperly dismissed their complaint at the pleading stage before ample factual investigation could occur. In addition, the plaintiffs argued the district court disregarded California Supreme Court precedent, which requires an insurance policy to be read broadly and in conformance with the policyholder’s reasonable expectations for coverage.
In its opposition brief, the defendant made the argument the virus exception under the policy was unambiguous and the plaintiffs could not show that they suffered “physical damage” as a result of the COVID-19 pandemic.[v] The defendant relied on multiple recent California cases as well as federal cases concerning coverage for COVID-19 related losses. Chief among these was a recent 9th Circuit Court of Appeals case, Mudpie Inc. v. Travelers Cas. Ins. Co., 15 F.4th 885.[vi] In Mudpie, the court held under California law, shelter-in-place orders did not cause an insured to suffer “direct physical loss of or damage to property.”[vii] Thus, the defendant maintained the plaintiffs’ claims were properly denied.
In their reply brief, plaintiffs made the contention COVID-19 could cause “physical damage” to property, and therefore trigger coverage. The plaintiffs cited a recent California Court of Appeal case, Marina Pacific Hotels & Suites, LLC v. Fireman’s Fund Insurance Company 81 Cal.App.5th 96[viii], as well as other cases. Marina held the COVID-19 virus could cause direct physical loss or damage to property and the insurer’s virus exclusion did not bar coverage. Thus, the plaintiffs made the argument that, under Marina, the defendant’s policy should afford coverage.[ix]
There is a major split between recent California and federal appellate cases concerning how losses relating to the COVID-19 pandemic should be handled. Compelling arguments exists on both sides of the table, and both California and federal courts will have to grapple with how to handle the split in authority. Eventually, the question may have to be resolved by the United States Supreme Court concerning whether COVID-19 can cause physical damage to property and whether virus exclusions are enforceable.
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[i] ORDER OF THE NAPA COUNTY HEALTH OFFICER DIRECTING ALL INDIVIDUALS LIVING IN THE COUNTY TO SHELTER AT HOME EXCEPT THAT THEY MAY LEAVE TO PROVIDE OR RECEIVE CERTAIN ESSENTIAL SERVICES OR ENGAGE IN CERTAIN ESSENTIAL ACTIVITIES AND WORK FOR ESSENTIAL BUSINESSES AND ESSENTIAL GOVERNMENTAL SERVICES; EXEMPTING INDIVIDUALS EXPERIENCING HOMELESSNESS FROM THIS ORDER BUT URGING THEM TO FIND SHELTER AND GOVERNMENT AGENCIES TO PROVIDE IT; DIRECTING ALL BUSINESSES AND GOVERNMENTAL AGENCIES TO CEASE NONESSENTIAL OPERATIONS AT PHYSICAL LOCATIONS IN THE COUNTY; PROHIBITING ALL NON-ESSENTIAL GATHERINGS OF ANY NUMBER OF INDIVIDUALS; AND ORDERING CESSATION OF ALL NON-ESSENTIAL TRAVEL, Mar. 18, 2020, https://www.countyofnapa.org/DocumentCenter/View/16687/3-18-2020-Shelter-at-Home-Order.
[ii] French Laundry Partners, LP, et al v. Hartford Fire Insurance Co., et al, Case. No. 21-15927, 9th Circ. Ct. of Appeals (May 27, 2021).
[iii]Defendant’s Motion To Dismiss, French Laundry Partners, LP, et al v. Hartford Fire Insurance Co., et al, Case. No. 21-15927, 9th Circ. Ct. of Appeals (May 27, 2021).
[iv] Trial court’s ruling on Defendant’s Motion To Dismiss, French Laundry Partners, LP, et al v. Hartford Fire Insurance Co., et al, Case. No. 21-15927, 9th Circ. Ct. of Appeals (May 27, 2021).
[v] Defendant’s Answering Brief to Plaintiffs’ Opening Brief, Defendant’s Motion To Dismiss, French Laundry Partners, LP, et al v. Hartford Fire Insurance Co., et al, Case. No. 21-15927, 9th Circ. Ct. of Appeals (May 27, 2021).
[vi] Mudpie Inc. v. Travelers Cas. Ins. Co., 15 F.4th 885
[vii] Mudpie Inc. v. Travelers Cas. Ins. Co., 15 F.4th 885
[viii] Marina Pacific Hotels & Suites, LLC v. Fireman’s Fund Insurance Company 81 Cal.App.5th 96
[ix] Plaintiffs’ Reply In Support Of Opening Brief, French Laundry Partners, LP, et al v. Hartford Fire Insurance Co., et al, Case. No. 21-15927, 9th Circ. Ct. of Appeals (May 27, 2021).