By Shawn Rice

Law360 (April 1, 2021, 6:32 PM EDT ) A California federal magistrate judge on Wednesday tossed two Barbizon acting and modeling schools' coverage suit against Sentinel Insurance Company Ltd. over business interruption losses at its West and East Coast locations tied to the COVID-19 pandemic and government shutdown orders.

U.S. District Magistrate Judge Thomas S. Hixson found no physical loss or change to the San Francisco and Manhattan acting studios run by Barbizon International Inc. that would trigger coverage for its losses.

Barbizon's West Coast policy excluded viruses but offers limited coverage if a special event caused the damage, according to the suit, but the East Coast policy had no virus exclusion.

Judge Hixson did not address the scope of the virus exclusion under the West Coast policy, however. Instead, he said, the schools "have not plausibly alleged 'direct physical loss of or damage to' property, as required by the policies, and their alleged losses are not covered as a matter of law."

Barbizon filed suit in December arguing that Sentinel must cover losses from the forced closure of its East and West Coast studios. The presence of the coronavirus made the locations unusable, according to the suit. The schools brought claims for breach of contract, bad faith and unfair business practices.

Sentinel fraudulently marketed its insurance coverage under the policies, Barbizon alleged. The policyholder said Sentinel wrongfully took the position that a virus can't cause a "direct physical loss of or physical damage to" property under any circumstances. The insurer moved to dismiss.

Judge Hixson sided with Sentinel in Wednesday's order, saying the presence of the virus that causes COVID-19 does not constitute a physical loss or damage. The coronavirus did not physically change the acting and modeling studios, the judge ruled, saying the virus "can be disinfected and cleaned" from surfaces.

Judge Hixson also held that there was no civil authority coverage under the New York policy. Barbizon was not denied access to the studios, but only forced to reduce the number of people at the locations, he said. The government orders were preventive measures not in response to property damage, the judge said.

Although Barbizon's claims for breach of contract, bad faith and unfair business practices were dismissed, Judge Hixson allowed the schools to amend the suit to more clearly allege how Sentinel's sale and marketing of its fungi, bacteria and virus coverage in the policies was fraudulent.

"As to the limited virus coverage, the complaint does not plead sufficient factual information that would allow the court to infer that the promised coverage is worthless. As to the New York policy, the complaint does not allege any facts to show how the marketing and sale is deceptive," the judge said.

Gregory A. Blue of Lachtman Cohen PC, counsel for the schools, told Law360 on Thursday that he was not surprised by the result based on all the decisions from the Northern District of California "coming out this way."

"Nevertheless, our interpretation of the policy is an entirely reasonable one, and has been recognized as such by judges. We respectfully believe that the Court erred in its interpretation of California law, and we are considering whether to appeal," he said.

Representatives for the insurer did not respond to requests for comment.

The schools are represented by Gregory A. Blue of Lachtman Cohen PC.

Sentinel is represented by Laurie Edelstein, Johanna Oh and Sarah D. Gordon of Steptoe & Johnson LLP.

The case is Barbizon School of San Francisco Inc. et al v. Sentinel Insurance Company Ltd., case number 3:20-cv-08578, in the U.S. District Court for the Northern District of California.

--Additional reporting by Daphne Zhang. Editing by Peter Rozovsky.

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