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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Jury’s Findings Interpreting Insurance Contract Affirmed
Post 5105
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Madelaine Chocolate Novelties, Inc. (“Madelaine Chocolate”) appealed the district court’s judgment following a jury verdict in favor of Great Northern Insurance Company (“Great Northern”) concerning storm-surge damage caused by “Superstorm Sandy” to Madelaine Chocolate’s production facilities.
In Madelaine Chocolate Novelties, Inc., d.b.a. The Madelaine Chocolate Company v. Great Northern Insurance Company, No. 23-212, United States Court of Appeals, Second Circuit (June 20, 2025) affirmed the trial court ruling in favor of the insurer.
BACKGROUND
Great Northern refused to pay the full claim amount and paid Madelaine Chocolate only about $4 million. In disclaiming coverage, Great Northern invoked the Policy’s flood-exclusion provision, which excludes, in relevant part, “loss or damage caused by ....
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Contract Interpretation is Based on the Clear and Unambiguous Language of the Policy
In Associated Industries Insurance Company, Inc. v. Sentinel Insurance Company, Ltd., No. 23-CV-10400 (MMG), United States District Court, S.D. New York (June 16, 2025) an insurance coverage dispute arising from a personal injury action in New York State Supreme Court.
The underlying action, Eduardo Molina v. Venchi 2, LLC, et al., concerned injuries allegedly resulting from a construction accident at premises owned by Central Area Equities Associates LLC (CAEA) and leased by Venchi 2 LLC with the USDC required to determine who was entitled to a defense from which insurer.
KEY POINTS
Parties Involved:
CAEA is insured by Associated Industries Insurance Company, Inc. ...
Exclusion Establishes that There is No Duty to Defend Off Site Injuries
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Attack by Vicious Dog Excluded
In Foremost Insurance Company, Grand Rapids, Michigan v. Michael B. Steele and Sarah Brown and Kevin Lee Price, Civil Action No. 3:24-CV-00684, United States District Court, M.D. Pennsylvania (June 16, 2025)
Foremost Insurance Company (“Foremost”) sued Michael B. Steele (“Steele”), Sarah Brown (“Brown”), and Kevin Lee Price (“Price”) (collectively, “Defendants”). Foremost sought declaratory relief in the form of a declaration that
1. it owes no insurance coverage to Steele and has no duty to defend or indemnify Steele in an underlying tort action and
2. defense counsel that Foremost has assigned to Steele in the underlying action may withdraw his appearance.
Presently before the Court are two ...
ZIFL Volume 29, Issue 10
The Source for the Insurance Fraud Professional
See the full video at https://lnkd.in/gK_P4-BK and at https://lnkd.in/g2Q7BHBu, and at https://zalma.com/blog and at https://lnkd.in/gjyMWHff.
Zalma’s Insurance Fraud Letter (ZIFL) continues its 29th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year by ClaimSchool and is written by Barry Zalma. It is provided FREE to anyone who visits the site at http://zalma.com/zalmas-insurance-fraud-letter-2/ You can read the full issue of the May 15, 2025 issue at http://zalma.com/blog/wp-content/uploads/2025/05/ZIFL-05-15-2025.pdf
This issue contains the following articles about insurance fraud:
Health Care Fraud Trial Results in Murder for Hire of Witness
To Avoid Conviction for Insurance Fraud Defendants Murder Witness
In United States of America v. Louis Age, Jr.; Stanton Guillory; Louis Age, III; Ronald Wilson, Jr., No. 22-30656, United States Court of Appeals, Fifth Circuit (April 25, 2025) the Fifth Circuit dealt with the ...
Professional Health Care Services Exclusion Effective
Post 5073
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This opinion is the recommendation of a Magistrate Judge to the District Court Judge and involves Travelers Casualty Insurance Company and its duty to defend the New Mexico Bone and Joint Institute (NMBJI) and its physicians in a medical negligence lawsuit brought by Tervon Dorsey.
In Travelers Casualty Insurance Company Of America v. New Mexico Bone And Joint Institute, P.C.; American Foundation Of Lower Extremity Surgery And Research, Inc., a New Mexico Corporation; Riley Rampton, DPM; Loren K. Spencer, DPM; Tervon Dorsey, individually; Kimberly Dorsey, individually; and Kate Ferlic as Guardian Ad Litem for K.D. and J.D., minors, No. 2:24-cv-0027 MV/DLM, United States District Court, D. New Mexico (May 8, 2025) the Magistrate Judge Recommended:
Insurance Coverage Dispute:
Travelers issued a Commercial General Liability ...
A Heads I Win, Tails You Lose Story
Post 5062
Posted on April 30, 2025 by Barry Zalma
"This is a Fictionalized True Crime Story of Insurance Fraud that explains why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers. The story is designed to help everyone to Understand How Insurance Fraud in America is Costing Everyone who Buys Insurance Thousands of Dollars Every year and Why Insurance Fraud is Safer and More Profitable for the Perpetrators than any Other Crime."
Immigrant Criminals Attempt to Profit From Insurance Fraud
People who commit insurance fraud as a profession do so because it is easy. It requires no capital investment. The risk is low and the profits are high. The ease with which large amounts of money can be made from insurance fraud removes whatever moral hesitation might stop the perpetrator from committing the crime.
The temptation to do everything outside the law was the downfall of the brothers Karamazov. The brothers had escaped prison in the old Soviet Union by immigrating to the United...