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Law360 (July 6, 2021, 6:05 PM EDT ) The maker of Bratz Dolls and other toys failed to show pandemic-related government closure orders caused any property damage, a California federal judge has ruled, holding that the toymaker cannot get business interruption coverage under its policy with Affiliated FM Insurance Co.
U.S. District Judge Michael W. Fitzgerald on Friday tossed MGA Entertainment Inc.'s COVID-19-related loss suit and closed the case. The toymaker did not demonstrate how the government closure orders created any tangible property damage required for coverage under its policy, the judge said.
"Under the plain meaning of the policy's terms, business interruption coverage is triggered only when plaintiff's property suffers 'a direct physical loss or damage of the type insured,'" the judge said, but MGA failed to demonstrate its property incurred "distinct, demonstrable, physical alteration."
The toymaker only alleged the government closure orders "interfered with the use or value of its property — not that the restrictions caused direct physical loss or damage," the judge continued.
MGA first sued AFM in state court before the insurer moved the action to federal court last November. According to the suit, the toymaker's products are manufactured in China, Poland and Ohio, with 65% of MGA's retailer orders coming from the U.S. However, the U.S.' and China's government restriction orders due to the pandemic interrupted the toymaker's supply chain, products manufacturing and shipments.
As a result, the toymaker said, it was not able to deliver ordered products on time and suffered lost revenues when retail buyers canceled their orders. MGA said it has also incurred extra expenses for shipping, cleaning and sanitation, and putting up personal protective equipment on its property.
The toymaker made an insurance claim under its AFM all-risk commercial property and general liability policy in April 2020. AFM subsequently denied the claim but acknowledged that coverage could be possible under the policy's communicable disease provision due to the actual presence of COVID-19-positive individuals in MGA's California and Ohio headquarters.
But MGA maintained the loss of use and closure of its manufacturing facilities and distribution centers caused by the government orders are covered under the policy and sued the insurer in October.
"Under California law, losses from inability to use property do not amount to 'direct physical loss of or damage to property' within the ordinary and popular meaning of that phrase," Judge Fitzgerald said on Friday. "An insured cannot recover by attempting to artfully plead temporary impairment to economically valuable use of property as physical loss or damage."
Counsel for the parties could not be immediately reached for comment on Tuesday.
MGA is represented by Michael J Bidart of Shernoff Bidart Echeverria LLP.
AFM is represented by Daniel Lewis Allender of Robins Kaplan LLP.
The case is MGA Entertainment Inc. v. Affiliated FM Insurance Company et al., case number 2:20-cv-10499, in the U.S. District Court for the Central District of California.
--Editing by Janice Carter Brown.
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