By Dorothy Atkins

Law360 (May 12, 2020, 7:20 PM EDT ) A San Francisco-based children's clothing boutique hit Travelers Casualty Insurance Co. with a proposed class action in California federal court Monday, accusing the insurer of wrongfully denying small businesses coverage for losses resulting from government-mandated shutdowns related to COVID-19.

In a 17-page complaint, Mudpie Inc. says thousands of retailers across the Golden State have been forced to close their doors due to shutdown orders through no fault of their own, yet the Hartford, Connecticut-based insurance company and others are categorically denying them coverage despite premiums paid for business interruption policies.

The suit says the denials are based on "crabbed" interpretation of the policies and overly broad exclusions, and are being made with little or no investigation.

"That gets insurance law exactly backwards — and raises the specter of bad-faith denials," the suit says.

Mudpie says it submitted an insurance claim after it was forced to close in mid-March, but Travelers "swiftly" denied it coverage based on an unreasonable interpretation of the policy, leaving the small business in financial straits.

The complaint asserts a breach of contract and breach of implied covenant of good faith and fair dealing. It seeks to certify a California class of retailers who purchased comprehensive business insurance coverage but were denied coverage, ultimately eyeing damages, attorney fees and costs.

Mudpie's counsel, Amy Zeman of Gibbs Law Group, said in a statement Monday that this is one of many lawsuits the firm is preparing to file on behalf of small business owners who have been broadly refused coverage by major insurance companies.

"Retailers and small businesses across the country took the responsible step of purchasing and paying hefty premiums for insurance coverage to protect against severe business interruption risks, and now they are being unfairly denied coverage," Zeman said.

Travelers said in a statement Tuesday that it recognizes COVID-19 has affected many in unexpected ways and that the company is taking steps to support customers, agents, brokers and communities during this difficult time.

"In our standard commercial property policies that include business interruption coverage, we have very specific exclusions stating that losses resulting from a virus or bacteria are not covered," the statement says.

Since local governments began issuing shutdown orders in March, dozens of businesses have filed suits against insurance companies seeking to be reimbursed for business losses. But in April, Travelers became the first insurer to sue for a ruling backing its coverage denial.

The company sued Geragos & Geragos APC in California federal court, arguing it has no duty to cover the law firm for business losses during the COVID-19 pandemic because the virus has not caused "physical loss or damage" to the firm's offices. The law firm had filed a series of suits in Los Angeles Superior Court accusing Travelers of wrongfully denying coverage to it and several other California businesses.

Mudpie is represented by Eric H. Gibbs, Andre M. Mura, Karen Barth Menzies, Amy M. Zeman and Steve Lopez of Gibbs Law Group and Andrew N. Friedman, Victoria S. Nugent, Julie Selesnick, Geoffrey Graber, Eric Kafka and Karina G. Puttieva of Cohen Milstein Sellers and Toll PLLC.

Counsel information for Travelers wasn't immediately available Tuesday.

The case is Mudpie Inc. v. Travelers Casualty Insurance Co. of America, case number 3:20-cv-03213, in the U.S. District Court for the Northern District of California.

--Additional reporting by Mike Curley. Editing by Philip Shea.

For a reprint of this article, please contact reprints@law360.com.