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Appeals court rules against policyholders in COVID-19 case

Posted On: Oct. 1, 2021 5:20 PM CST


Policyholders lost again on Friday when a fourth federal appeals court ruled on the question of whether insurance provides coverage for COVID-19-related business interruption losses, just as did three other federal appeals courts.

The latest case, a putative class action, was filed by a San Francisco children’s store, Mudpie Inc., against a Travelers Cos. Inc. unit, according to the ruling by the 9th U.S. Circuit Court of Appeals in San Francisco in Mudpie Inc. v. Travelers Casualty Insurance Co. of America.

The three-judge panel’s unanimous ruling affirmed a decision by the U.S. District Court in Oakland, California.

Mudpie filed the litigation after Travelers refused to provide coverage under its comprehensive commercial liability and property insurance policy’s business income and extra expense provisions, according to the ruling.

“Mudpie contends that under California law ‘direct physical loss or damage to’ property does not require actual damage to the property, but merely requires that the property no longer be suitable for its intended purpose,” the ruling said.

But, it says, unlike the cases Mudpie relies upon, its complaint “does not identify a  ‘distinct demonstrable, physical alteration of the property,’” the ruling said, citing an earlier opinion, “and it does not allege that Mudpie was permanently dispossessed of its property.

“Instead,” the ruling said, “Mudpie alleges the Stay at Home Orders temporarily prevented Mudpie from operating its stores as it intended, and urges us to interpret ‘direct physical loss of or damage to’ to be synonymous with ‘loss of use.’
“We cannot endorse Mudpie’s interpretation because California courts have carefully distinguished ‘intangible,’ ‘incorporeal,’ and ‘economic’ losses from ‘physical’ ones,” it said.

The ruling cited the decision by the 8th U.S. Circuit Court of Appeals in July in Oral Surgeons, P.C. v. The Cincinnati Insurance Co., which issued a similar ruling. 

The 6th U.S. Circuit Court of Appeals in Cincinnati also ruled against a restaurant on the issue last month in Santo’s Italian Café LLC v. Acuity Insurance Co.

The 11th U.S. Circuit court of Appeals in Atlanta also ruled against a dental practice, Gilreath Family & Cosmetic Dentistry v. The Cincinnati Insurance Co.

The 9th Circuit panel said the policy’s virus exclusion also bars coverage. “Mudpie’s complaint does not allege an attenuated causal chain between the virus and Mudpie’s losses,” it said, in affirming the lower court decision.

Citing the Mudpie ruling, on Friday the 9th Circuit appeals court panel also issued two other COVID-19 business interruption rulings against policyholders: Chattanooga Professional Baseball LLC, DBA Chattanooga Lookouts et al. v. National Casualty Co. and Selane Products Inc. v. Continental Casualty Co.