A federal appellate court has ruled against a San Francisco retailer’s claim for loss of income during California’s mandated COVID-19 closures because there wasn’t direct physical damage to the property.
Mudpie, Inc.’s putative class action case for denial of coverage against Travelers Casualty Insurance Company of America had previously been dismissed by the U.S. District Court for the Northern District of California.
In upholding the district court’s decision, the appellate ruling noted Mudpie hadn’t argued permanent dispossession of its property.
“Instead, Mudpie alleges the Stay at Home Orders temporarily prevented Mudpie from operating its store as it intended, and urges us to interpret ‘direct physical loss of or damage to’ to be synonymous with ‘loss of use.’ We cannot endorse Mudpie’s interpretation because California courts have carefully distinguished ‘intangible,’ ‘incorporeal,’ and ‘economic’ losses from ‘physical’ ones,” the ruling states.
Business interruption insurance usually requires a direct physical loss of or damage to certain property, Professor Joseph Lavitt, who teaches insurance law and torts at UC Berkeley, said in an email response to the Northern California Record.
“It is quite common to see courts reach the conclusion that property damage means tangible and harmful physical alteration of the insured property that results in a total cessation of insured’s business. Courts have recognized, however, that airborne contaminants, if extensive enough, may render a property uninhabitable and thus result in a covered, total cessation of insureds business,” Lavitt said.
In finding Mudpie had not met its burden of proving direct physical damage to property, the court cited, among other cases, the 2010 state appellate court decision in MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co.
“Unfortunately, blanket COVID-related shut down orders created a Catch-22,” Lavitt said. “Lacking any incentive to determine the fact and duration of any individual COVID virus contamination, insureds lacked proof when it came time to prove their claims. The COVID 19 virus may not have entered the structure. Or, if it did, it likely died quickly, or could have been cleaned up. The best solution for this problem will be to clarify and tighten insurance protection against the risk of government shut-downs.”
The unanimous Ninth Circuit panel decision, authored by Justice Morgan Christen, was handed down last month.