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Law360 (September 14, 2020, 7:12 PM EDT ) A California federal judge on Monday found that Travelers Casualty Insurance Co. of America doesn't need to cover a San Francisco retailer's business losses resulting from COVID-19 shutdowns, saying the retailer hasn't alleged it has suffered physical damage to or loss of its property.
U.S. District Judge Jon S. Tigar dismissed without prejudice a proposed class action by children's clothing boutique Mudpie Inc., concluding that because the retailer hasn't alleged that COVID-19 is present or directly caused the loss, there is no physical force that led it to lose business.
Instead, Mudpie's complaint rests entirely on the allegations that government stay-at-home orders caused it to lose business, which Judge Tigar said isn't enough. While the judge rejected Travelers' argument that "physical loss or damage" only relates to physical alteration of the property, the shutdown orders still didn't cause any such loss or damage.
While Mudpie leaned on other cases that found that physical alteration to a property isn't necessary to constitute a physical loss, the judge wrote that Mudpie is suffering no permanent loss of its property, so once the orders are lifted, the retailer will get its property back without any need to repair, replace or even disinfect the site.
The judge added that there is a provision of the insurance policy that directly states that the insurer will not pay out for any loss or damage caused by or resulting from a "loss of use or loss of market," which also undermines Mudpie's argument.
In its May complaint, Mudpie said that 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 the premiums paid for business interruption policies.
The suit says the denials are based on "crabbed" interpretation of the policies and overly broad exclusions that are being made with little or no investigation.
In Monday's order, Judge Tigar wrote that because the government shutdown orders were preventative in nature — seeking to prevent the spread of the virus — that lends credence to Travelers' argument that they were not issued in response to physical loss or damage.
Without some intervening physical force prompting the shutdown orders or Mudpie's closure — and with no permanent loss of Mudpie's property — the retailer's claims for breach of contract and breach of covenant of good faith fail, the judge wrote. But he allowed Mudpie to amend its complaint because of the still-developing area of law concerning business interruption insurance relating to COVID-19.
The question of physical loss has been at the center of many COVID-19 business interruption suits, with several recent decisions finding that the virus and shutdown orders don't constitute such a loss. In August, judges in California and Florida found that restaurants in those states had failed to allege that their properties had suffered physical loss or damage as a result of the pandemic.
"We are disappointed with the opinion, and we are considering our options at this point," Eric Gibbs of Gibbs Law Group, representing Mudpie, told Law360 late Monday.
A spokesperson for Travelers declined to comment Monday.
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.
Travelers is represented by Stephen E. Goldman and Wystan M. Ackerman of Robinson & Cole LLP and Andrew B. Downs and Linda B. Oliver of Bullivant Houser Bailey PC.
The case is Mudpie Inc. v. Travelers Casualty Insurance Co. of America, case number 4:20-cv-03213, in the U.S. District Court for the Northern District of California.
--Additional reporting by Dorothy Atkins, Hailey Konnath and Jeff Sistrunk. Editing by Steven Edelstone.
Update: This story has been updated with comment from Mudpie's attorney.
For a reprint of this article, please contact reprints@law360.com.
