No Physical Damage No Coverage
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Posted on April 28, 2022 by Barry Zalma
EVEN THE NINTH CIRCUIT AGREES

In Rialto Pockets, Inc.; Brookhurst Venture, LLC; City Of Industry Hospitality Venture, Inc.; and 22 more plaintiffs, et al. v. Beazley Underwriting Limited, and Certain Underwriters At Lloyds London, Including Beazley Furlonge Ltd, No. 21-55196, United States Court of Appeals, Ninth Circuit (April 20, 2022) the 24 Plaintiffs appealed the district court’s dismissal of their operative complaint in an insurance coverage dispute.

Plaintiffs are 24 affiliated companies who operate 23 so-called “gentlemen’s” clubs and a retail store, and they claim coverage under a single policy issued by Defendant Beazley Underwriting Ltd. (“Beazley”) to non-party affiliate The Spearmint Rhino Companies Worldwide, Inc.

Plaintiffs alleged that all 24 businesses were closed as a result of the Covid-19 Governmental Orders, including stay-at-home orders issued by the State of California and relevant local governments. After Beazley denied coverage for economic losses resulting from the closures, Plaintiffs sued asserting a single claim for breach of the insurance policy. The district court granted a motion to dismiss Plaintiffs’ operative amended complaint.
FACTS ALLEGED

The “relevant coverage provision” is referred to as the “Time Element” provision, which addresses certain economic losses resulting from physical damage or loss to insured property. Specifically, that provision states that:

“[t]his Policy insures Time Element loss, as set forth in the Time Element Coverages, directly resulting from direct physical loss or physical damage insured by this Policy occurring during the Period of Insurance to Property Insured by this Policy” (emphasis added by the court).

According to the complaint, Beazley breached this coverage obligation by failing to pay Plaintiffs for the Time Element losses that directly resulted from the Covid-19 Governmental Orders or were caused by the Covid-19 Governmental Orders.
ANALYSIS

Plaintiffs’ claim of coverage is foreclosed by the California Court of Appeal’s decision, Inns by the Sea v. California Mut. Ins. Co., 286 Cal.Rptr.3d 576 (Ct. App. 2021) and the Ninth Circuit’s decision Ryman v. Sears, Roebuck & Co., 505 F.3d 993, 995 (9th Cir. 2007).

The decision in the Inns by the Sea case addressed the interpretation of analogous policy language providing coverage for a suspension of operations “caused by direct physical loss of or damage to property at [the insured’s] premises,” and it did so in the context of comparable alleged losses based “on the situation created by the [Covid-19 Governmental] Orders.” 286 Cal.Rptr.3d at 582, 590 (second emphasis added). The court rejected such coverage as a matter of law.

Inns by the Sea held that, under well-settled California insurance law, the “mere loss of use of physical property to generate business income, without any other physical impact on the property, does not give rise to coverage for direct physical loss.” (emphasis added).

Even assuming that the alleged physical presence of the virus on the insured’s premises might be thought to give rise to a physical impact or to direct physical damage, there still was no coverage.

The relevant coverage language required that the alleged loss be “caused by” the claimed direct physical damage, but the insured’s own allegations confirmed “the lack of causal connection between the alleged physical presence of the virus on [the insured’s] premises and the suspension of [its] operations.” Even if the insured “had thoroughly sterilized its premises to remove any trace of the virus,” the insured “would still have continued to incur a suspension of operations because the Orders would still have been in effect and the normal functioning of society still would have been curtailed.”

The complaint expressly alleges that the losses “directly result[ed] from the Covid-19 Governmental Orders” or were “caused by the Covid-19 Governmental Orders.” The plaintiffs, because there was no way they could, did not allege direct physical damage to their property. Consequently, under Inns by the Sea, the claimed losses did not “directly result[] from direct . . . physical damage . . . to Property,” as required by the relevant policy language.

Because Plaintiffs’ asserted losses do not fall within the scope of the insurance policy, the district court correctly granted Defendant’s motion to dismiss.
ZALMA OPINION

When even the notoriously liberal Ninth Circuit refuses to ignore the clear and unambiguous language of a policy of insurance that requires there be direct physical damage to property to recover under a time element coverage (business interruption) cover because of orders of the state shutting the business, it is time for lawyers and litigants to stop trying. They might want to consider that their losses are due to a taking of their property by the state in violation of the Fifth and Fourteenth Amendments to the U.S. Constitution.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected].

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