Travelers urged the appellate court to affirm U.S. District Judge Jon S. Tigar's September ruling dismissing children's store Mudpie Inc.'s putative class action complaint, which accused the insurance company of wrongfully denying its claim for pandemic-related business interruption losses, as well as those of other policyholders.
Travelers said Mudpie was looking for coverage that does not exist in its property insurance policy, saying the store's losses were not covered by a fire or other physically damaging event, but by a virus, which is expressly excluded from the policy.
"As the court properly concluded, a mere loss of use of property that has sustained no physical impact whatsoever is not 'direct physical loss of or damage to property' under California law," Travelers said. "As the court reasoned, 'there is nothing to fix, replace or even disinfect for Mudpie to regain occupancy of its property.'"
In its May complaint, Mudpie said that thousands of retailers across the Golden State had been forced to close their doors due to shutdown orders through no fault of their own, but that Travelers and others were categorically denying them coverage despite the premiums they paid for their "all risk" property insurance policies. The suit alleged that these denials were based on "crabbed" interpretation of the policies and overly broad exclusions that are being made with little or no investigation.
Travelers swiftly moved to dismiss Mudpie's complaint, and Judge Tigar sided with the insurer in September, concluding that, because the retailer had not alleged that COVID-19 was present on its premises or directly caused its losses, no physical force led it to lose business.
While the judge rejected Travelers' argument that the phrase "physical loss or damage" refers only to a tangible physical alteration of the property, he found that the shutdown orders still caused no such loss or damage.
Without some intervening physical force prompting the shutdown orders or Mudpie's closure — and with no permanent loss of Mudpie's property — the retailer's claims for breach of contract and breach of covenant of good faith fail, the judge added.
Mudpie appealed the order last month, encouraging the Ninth Circuit to enlist the California Supreme Court's help to determine the core question in its appeal: whether business interruption coverage dependent on the existence of "direct physical loss of or damage" to a policyholder's property can be "reasonably construed to insure against the loss of business property to generate income as a direct result of state and local orders suspending, or severely curtailing, operations of non-essential businesses amid the COVID-19 pandemic."
Mudpie argued that Judge Tigar correctly rejected Travelers' assertion that "direct physical loss or damage" only includes tangible physical changes, but then erred by imposing additional requirements — that covered loss or damage be permanent or result from an intervening physical force — that are absent from the policy.
Mudpie said that if the Ninth Circuit opts to not seek California Supreme Court review of the case, it can decide the appeal itself and reverse Judge Tigar's decision.
In its answering brief Monday, Travelers argues that Mudpie's policy only covers financial losses when it has to close up shop because of physical loss of or damage to the property, which is not what happened in this case. The insurer said the government shutdown restricted Mudpie's use of its store, but did not damage or destroy the store or anything in it.
Travelers also noted that Mudpie's losses were caused by the coronavirus, which is expressly excluded from the policy.
"Legions of courts in California and elsewhere have enforced the same virus exclusion to dismiss lawsuits against Travelers and other insurers seeking business-income and extra-expense coverage attributable to the coronavirus and government orders issued to slow its spread," Travelers said.
The insurance company also urged the court not to certify Mudpie's physical loss or damage question to the California high court, arguing that Mudpie only bought coverage for direct physical loss or damage and that its losses stem from the coronavirus, which is excluded from the policy. Travelers said the California Supreme Court also recently denied a petition to transfer an appeal from the Court of Appeal in a similar virus insurance case.
Moreover, Travelers said, Mudpie chose to bring its suit in federal court and the insurance company has a right to a federal forum under the Class Action Fairness Act.
Representatives for the parties did not immediately respond to requests for comment Wednesday.
Mudpie is not the only business asking the Ninth Circuit to revive a coronavirus coverage suit.
Last week, Los Angeles restaurant Plan Check asked the appellate court to reverse a district court's decision to toss its proposed class action seeking coverage from AmGuard Insurance Co. for losses stemming from COVID-19 shutdown orders.
Also on Monday, a group of Minor League Baseball teams sought to revive their suit against their three Nationwide insurers, after an Arizona federal judge granted a bid by National Casualty Co., Scottsdale Indemnity Co. and Scottsdale Insurance Co. to dismiss the case.
Mudpie is represented by Andrew N. Friedman, Victoria S. Nugent and Karina G. Puttieva of Cohen Milstein Sellers & Toll PLLC; and Eric H. Gibbs, Amanda Karl, Andre M. Mura and Amy M. Zeman of Gibbs Law Group LLP.
Travelers is represented by Stephen E. Goldman and Wystan M. Ackerman of Robinson & Cole LLP; and Theodore J. Boutrous Jr., Richard J. Doren and Deborah L. Stein of Gibson Dunn & Crutcher LLP.
The case is Mudpie Inc. v. Travelers Casualty Insurance Co. of America, case number 20-16858, in the U.S. Court of Appeals for the Ninth Circuit.
--Additional reporting by Mike Curley, Jeff Sistrunk, Daphne Zhang and Mike Curley. Editing by Peter Rozovsky.
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