October 1, 2021

Mudpie Inc. v. Travelers Casualty Insurance Company of America (9th Cir. Oct. 1, 2021)

The Ninth Circuit issued its much-anticipated decision on whether the language of widely-used commercial general liability and property policies cover business income lost during the COVID-19 pandemic as a result of various government orders seeking to control the spread of the virus.

When the plaintiff in this case, a children’s bookstore, sought coverage for business losses resulting from having to close its business during the COVID-19 pandemic, its insurer denied coverage on the grounds that the insured had not suffered a “direct physical loss of or damage to” insured property, and any coverage for lost business income and expense depended on such a loss. The insurer further asserted that the policy’s virus exclusion barred coverage in any event.

Applying California law and following the Eighth Circuit’s recent decision in Oral Surgeons, P.C. v. Cincinnati Insurance Co., 2 F.4th 1141 (8th Cir. 2021), the Ninth Circuit agreed with the insurer. The standard policy language requires there be actual physical damage or alteration to the property before business interruption coverage may be trigged, not simply a loss of use of the property for its intended purpose as the policyholder argued. The court’s conclusion was confirmed by the additional policy provision that business interruption coverage ends when the property is rebuilt, repaired, or replaced—all of which occur only when there is physical harm to the property. The court further held that coverage was excluded by the policy’s virus exclusion. The court rejected the policyholder’s argument that the government orders, rather than the virus, were the “efficient proximate cause” of the loss because the policyholder did not plausibly allege that that the cause that set the orders in motion was anything other than the virus or that the virus was so remotely involved in the orders that it could be deemed anything other than the cause of the loss.