Ninth Circuit Holds that Even Comprehensive Commercial Property Insurance Policies Do Not Cover Business Income Losses from the Pandemic

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By Jackson Sullivan

On October 1, 2021, the Ninth Circuit decided Mudpie, Inc. v. Travelers Casualty Insurance Company of America, Case No. 20-16858 (9th Cir.).  The opinion affirmed the district court’s order dismissing Petitioner Mudpie, Inc.’s claims against its insurer, Travelers Casualty Insurance Company of America. Mudpie sought to recover—under its comprehensive business insurance coverage policy—losses suffered during the COVID-19 pandemic due to state and local emergency orders. The court held that the phrase “physical loss of or damage to” would require the insured to allege a “physical alteration of its property” in order to recover under the policy, and the policy’s “Virus Exclusion” terminology barred coverage for Mudpie’s claimed losses. Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir. 2021).

On March 4, 2020, Governor Newsom proclaimed a state of emergency in California, ordering all residents of California to “heed any orders and guidance of state and local public health officials, including, but not limited to, the imposition of social distancing measures, to control the spread of COVID-19.” On March 16, 2020, the City and County of San Francisco issued an order requiring all non-essential businesses “to cease all activities at facilities located within the County except Minimum Basic Operations.”

On May 11, 2020, Mudpie filed a class action complaint on behalf of itself and a putative class of all retailers in California that purchased comprehensive business insurance coverage from Travelers and were subsequently denied coverage for claims of lost business income following the state and local emergency orders. On June 3, 2020, Travelers filed a Motion to Dismiss the complaint on the grounds that the policy contained (as noted above) a Virus Exclusion that excepted coverage for any “loss or damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease,” and that Mudpie did not allege facts demonstrating a “direct physical loss of or damage to” the insured property.

On September 14, 2020, the District Court for the Northern District of California filed an order granting the motion to dismiss without prejudice, ruling that Mudpie failed “to allege any intervening physical force beyond the government closure orders.” The district court declined to consider Travelers’ argument that the Virus Exclusion categorically barred recovery. Mudpie filed notice that no amended complaint would be filed and a Notice of Appeal to the Ninth Circuit Court of Appeals was filed on September 23, 2020, following the district court’s dismissal with prejudice.

The Ninth Circuit affirmed the district court’s dismissal, holding that “Mudpie’s claimed losses are not covered by the Policy,” and that the district court “did not err by dismissing Mudpie’s claims.” Mudpie, 15 F.4th. at 893.  The Court also ruled on the issue of the Virus Exclusion, holding that “the Policy’s Virus Exclusion bars coverage for Mudpie’s claims” because Mudpie did not dispute that “the Stay at Home Orders that impacted Mudpie’s business were issued in response to the COVID-19 pandemic, and the point is not debatable.” Id. at 894.

Mudpie filed a petition for rehearing en banc on October 29, 2021.

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