9th Circuit Rejects COVID Business Interruption Suit; Doesn’t Address Physical Presence Question

The 9th Circuit Court of Appeals ruled Friday that government orders that forced a business to shut its doors because of the COVID-19 pandemic did not cause a direct physical loss that was covered by its insurance policy.

The decision in Mudpie Inc. v. Travelers was the third ruling by a federal appellate court to reject policyholder lawsuits seeking coverage for business income lost during COVID shutdowns. But the decision, like similar rulings by the 8th and 6th Circuits, did not address the question as to whether the presence of SARS-CoV-2 on a property would trigger coverage.

The 9th Circuit panel affirmed a U.S. District Court ruling in favor of Travelers, rejecting Mudpie’s argument that government stay-at-home orders caused a loss of use that was covered by the policy. The appellate court said a virus exclusion in the policy also barred coverage.

“Though Mudpie argues it was the government orders that most directly caused its injury, Mudpie does not plausibly allege that ‘the efficient cause,’ i.e., the one that set others in motion … was anything other than the spread of the virus throughout California, or that the virus was merely a remote cause of its losses,” the opinion says.

Mudpie operates a San Francisco children’s store that sells books, toys and clothing. It was forced to close its doors for a time after Gov. Gavin Newsom in March 2020 ordered the closure of all “non-essential” businesses to prevent the spread of COVID-19.

After Travelers rejected Mudpie’s business-interruption claim, the company filed a class-action lawsuit that attempted to include all retailers that had filed similar claims against Travelers and were denied coverage.

U.S. District Judge Jon S. Tigar for the Northern District of California granted Traveler’s motion to dismiss the lawsuit, but allowed Mudpie an opportunity to amend its complaint. When Mudpie declined to change its pleadings, Tigar dismissed the lawsuit with prejudice.

The 9th Circuit cited a July 2 decision by the 8th Circuit that dismissed a similar lawsuit filed against Cincinnati Insurance Co. by an oral surgery practice.

“The 8th Circuit observed that the policy covered business income and incurred extra expense only during the ‘period of restoration’ and reasoned that the fact ‘the policy provides coverage until property should be repaired, rebuilt or replaced’ or until business resumes elsewhere assumes physical alteration of the property, not mere loss of use,” the decision in Mudpie says.

Still untested is the question of whether the appellate courts will find a physical loss or damage if a complaint alleges that the virus was physically present on a property. A footnote in the 8th Circuit’s opinion noted that it the panel was not rendering any opinion about whether a policyholder can recover if the virus was physically present.

Similarly, the 11th Circuit affirmed an Aug. 31 unpublished decision that upheld a ruling against a dental practice, finding that government orders that limited operations did not constitute a direct physical loss or damage.

Also on Friday, the 9th Circuit ruled against policyholders seeking coverage for business income lost because of COVID shutdown orders in two unpublished decisions.

In Chattanooga Professional Baseball v. National Casualty Co., the appellate court affirmed a ruling by the U.S. District Court in Arizona against minor league baseball because of a virus exclusion in the policies.

In Selane Products Inc. v Continental Casualty Co., the 9th Circuit affirmed a Central California District Court ruling that stay-at-home orders issued because of the pandemic did not create a covered loss.