By Jeff Sistrunk

Law360 (September 11, 2020, 11:23 PM EDT ) A California federal court on Friday dismissed a barbershop owner's proposed class action accusing Farmers Insurance of improperly denying coverage for policyholders' losses due to government-mandated closures amid the COVID-19 pandemic, saying the company didn't allege the shutdowns stemmed from a covered physical loss of property.

U.S. District Judge Cathy Ann Bencivengo granted a motion to dismiss lodged by Farmers and its Truck Insurance Exchange unit and threw out the putative class action complaint brought by Pappy's Barber Shops, which operates two locations, one in San Diego, California, and another in nearby Poway.

The "business income" and "extra expense" provisions of the commercial property policy that TIE issued to Pappy's extended coverage for financial losses due to a "necessary suspension" of the barbershops' operations, attributable to "direct physical loss of or damage to" the properties.

Pappy's asserted that the direct physical loss prong doesn't require any tangible physical damage or alteration to its properties. Instead, Pappy's argued, that prerequisite was fulfilled by the barbershops' loss of the ability to operate as a result of the COVID-19 shutdown orders issued in March by San Diego Mayor Kevin Faulconer and California Gov. Gavin Newsom.

Judge Bencivengo was unconvinced, siding with Farmers and TIE in a decision that relied heavily on another California federal judge's Aug. 28 ruling that Travelers was not obligated to cover a Los Angeles restaurant's pandemic-related losses.

In that case, the restaurant, 10e, had asserted an argument similar to Pappy's — that the direct physical loss requirement could be met by the temporary impairment of the eatery's ability to run its business. But U.S. District Judge Stephen V. Wilson rejected that contention, finding that physical loss or damage occurs only when property undergoes a "distinct, demonstrable physical alteration. As such, Judge Wilson held, policyholders cannot "artfully plead temporary impairment to economically valuable use of property as physical loss or damage."

In Friday's order, Judge Bencivengo said Judge Wilson's analysis was "persuasive and equally applicable" to Pappy's case, and found that the barbershop owner had not plausibly claimed it is entitled to business interruption or extra expense coverage.

Pappy's didn't fare any better under the TIE policy's "civil authority" provision, which provided coverage for losses the barbershops sustains when a government order bars access to their premises because of direct physical loss of or damage to another property nearby.

As a preliminary matter, Judge Bencivengo noted that Pappy's complaint didn't allege that the COVID-19 shutdown orders prevented it from accessing its properties. Instead, Pappy's stated that the orders had barred it from operating its business, which is not the same thing, the district judge found.

"Plaintiffs fail to make any distinction between their place of business (i.e., the physical premises where they operate their business), and the business itself, but this distinction is relevant to coverage under the policy," Judge Bencivengo wrote. "The policy insures property, in this case plaintiffs' property and physical places of business, and not plaintiff's business itself."

In any event, the district judge found that Pappy's also did not include any facts in its complaint that would satisfy the other prerequisite for civil authority coverage — that the government orders be tied to loss or damage to a property other than Pappy's barbershops.

"Just as the complaint does not plausibly allege any direct physical loss of plaintiff's property, it also does not allege any direct physical loss or damage to property not at plaintiffs' places of business," Judge Bencivengo wrote.

Pappy's filed suit against Farmers and TIE on May 14, a little over a month after TIE denied coverage for the barbershops' financial losses due to the COVID-19 closure orders. Pappy's sought to represent both a nationwide class and a California subclass of policyholders that had purchased commercial property policies from Farmers insurers and had their pandemic-related claims denied.

Counsel for Pappy's and Farmers did not immediately respond to requests for comment late Friday. 

Pappy's is represented by Amber Lee Eck of Haeggquist & Eck LLP.

Farmers and TIE are represented by Michael M. Maddigan, Vanessa O. Wells and Vassi Iliadis of Hogan Lovells.

The case is Pappy's Barber Shops Inc. et al. v. Farmers Group Inc. et al., case number 3:20-cv-00907, in the U.S. District Court for the Southern District of California.

--Editing by Michael Watanabe.

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