Ninth Circuit Agrees with Other Federal Appellate Circuits: No Coverage for Covid-19 Claims

In three cases, the United States Court of Appeals for the Ninth Circuit today joined its sister-Circuits in holding that COVID-19 related business interruption losses are not insured by property policies covering “direct physical loss of or damage to” property.

In Mudpie, Inc. v. Travelers Casualty Insurance Company of America, Case No. 20-16858, --- F.4th ---, (9th Cir. Oct. 1, 2021) (applying California law), Mudpie, a purveyor of children’s clothes, toys, and other goods, sought business income and extra expense coverage from its insurer after it was forced to close due to orders from California and local authorities.  The insurer denied coverage because Mudpie’s policy covered “direct physical loss of or damage to” property “caused by or resulting from a covered Cause of Loss;” and included a virus exclusion for “loss or damage caused by or resulting from any virus…that induces…physical distress, illness or disease.”  The trial court agreed there was no coverage and Mudpie appealed.

Before the Ninth Circuit, Mudpie contended that the phrase “direct physical loss of or damage to” does not require actual damage to the property but merely that the property “no longer be suitable for its intended purpose”; and was synonymous with “loss of use.”  The Ninth Circuit disagreed.  It rejected these efforts to convert claims for purely economic losses into claims for physical loss or physical damage to covered property insured by a property insurance policy.

The Court found that California precedent distinguishing uncovered “‘intangible’ ‘incorporeal,’ and ‘economic’ losses” from covered “‘physical ones’” required affirming the district court.  Because the physical properties of Mudpie’s premises were not altered by the government orders, Mudpie suffered no covered loss.  The Court also observed that other policy provisions – such as the period of restoration – underscored that only “physical” losses triggered coverage.  If no physical injury were required, the “period of restoration -- ending on “[t]he date when the property at the described premises should be repaired, rebuilt, or replaced with reasonable speed and similar quality; or . . . [t]he date when business is resumed at a new permanent location” -- was surplusage.  The Court further noted other COVID-19 coverage cases supported its decision, including Oral Surgeons, P.C. v. Cincinnati Insurance Co., 2 F.4th 1141 (8th Cir. 2021).

The Ninth Circuit also found that the policy’s virus exclusion barred coverage.  Mudpie argued that the exclusion was inapplicable because its losses were not directly caused by a virus, but rather by government orders.  Applying California’s “efficient proximate cause” rule—instructing that “the [cause] that sets others in motion…is the cause to which the loss is to be attributed, though the other causes may follow it, and operate more immediately in producing the disaster”—the Court held that the virus exclusion barred coverage because the Coronavirus prompted the government orders shuttering Mudpie’s business.

Wasting no time, the Ninth Circuit immediately applied Mudpie in Selane Products, Inc. v. Continental Casualty Company, Case No. 21-55123 (9th Cir. Oct. 1, 2021).  There, the Court affirmed the dismissal of a putative class action seeking coverage for COVID-19 business interruption losses under substantially identical policy language.  As in Mudpie, the Selane plaintiffs failed to plead that the Coronavirus was present on, or resulted in “physical alterations” to, covered property.  The Court also rejected the argument that the Policy’s microbe exclusion establishes that microscopic organisms could cause physical loss or damage to property and, therefore, by extension so could viruses.  In Selane, the Court also found that plaintiffs failed to state a claim for Civil Authority coverage—requiring, among other things, that the “civil authority action was required because of” physical loss of or damage to covered property—because the Coronavirus/COVID-19 caused no physical loss or damage.

In the final Ninth Circuit case in the trio of rulings issued today, Chattanooga Professional Baseball LLC, et al. v. National Casualty Company, et al., Case No 20-17422 (9th Cir. Oct. 1, 2021), a consortium of “minor” league professional baseball teams located in ten states sued after their insurers denied coverage for their COVID-19 business interruption claims.  On appeal, the sole issue was whether their policies’ virus exclusions—which were essentially identical to the Mudpie exclusion—applied.  Plaintiffs argued that the exclusion was inapplicable because their losses were “attributable to other causes not implicated by the virus, including the attendant disease, resulting pandemic, government responses to the pandemic, and Major League Baseball (MLB) not supplying players.” Applying the laws of 10 states where the teams’ ballparks are located -- California, Idaho, Indiana, Maryland, Oregon, South Carolina, Tennessee, Texas, Virginia, and West Virginia --the Ninth Circuit’s opinion quickly dispatched plaintiffs’ argument.  Although the causation standards analysis varied based on state law, the Court found the virus exclusion applicable under the law of every one of these l0 jurisdictions and rejected policyholders’ arguments regarding regulatory estoppel (under federal and state law) and equitable estoppel.  The Court found that, of the ten states implicated in this appeal, only one has explicitly recognized the doctrine of regulatory estoppel (West Virginia), and the Teams failed to establish that the other nine states would adopt the doctrine if presented with the opportunity. And it found no estoppel theories viable because the insurers were not attempting to rely on an interpretation of the virus exclusion contrary to one they earlier advocated.

Mudpie, Selane Products, and Chattanooga Professional Baseball are the fifth, sixth, and seventh straight wins for insurers in federal appellate courts on COVID-19 business interruption cases.  Crowell & Moring LLP represented the American Property Casualty Insurance Association and National Association of Mutual Insurance Companies as amici curiae in the Mudpie and Selane Products cases.