Franklin EWC, Inc. v. Hartford Fin. Servs. Grp., Inc., Case No. 20-cv-04434 JSC

• Decision Date: 22 September 2020
• Docket Number: Case No. 20-cv-04434 JSC
• Citation: 488 F.Supp.3d 904
• Parties: FRANKLIN EWC, INC., et al., Plaintiffs, v. The HARTFORD FINANCIAL SERVICES GROUP, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of California

488 F.Supp.3d 904

FRANKLIN EWC, INC., et al., Plaintiffs,

v.The HARTFORD FINANCIAL SERVICES GROUP, INC., et al., Defendants.

Case No. 20-cv-04434 JSC

United States District Court, N.D. California.

Signed September 22, 2020

Nanci Eiko Nishimura, Andrew F. Kirtley, Brian Danitz, James Gerard Beebe Dallal, Cotchett Pitre & McCarthy LLP, Burlingame, CA, Anya N. Thepot, Murphy & McGonigle, RLLP, San Francisco, CA, for Plaintiffs.

Anthony John Anscombe, Cody Austin DeCamp, Steptoe & Johnson LLP, San Francisco, CA, Sarah D. Gordon, Pro Hac Vice, Steptoe and Johnson LLP, Washington, DC, for Defendants.

ORDER RE: MOTIONS TO DISMISS

Re: Dkt. Nos. 10 & 11

JACQUELINE SCOTT CORLEY, United States Magistrate Judge COVID-19 has wreaked economic havoc on American small businesses. This insurance coverage dispute arises out of that havoc; in particular, Plaintiffs allege that Defendants must cover their economic losses suffered as a result of government business closure orders issued to stem the spread of the virus.¹ Defendants move to dismiss on the grounds that Plaintiffs’ insurance policy provides no coverage for these economic losses as matter of law. (Dkt. Nos. 10, 11.)² After considering the insurance policy's language, the parties’ written submissions, and having had the benefit of oral argument on September 3, 2020, the Court concludes that, drawing all inferences from the complaint's allegations in Plaintiffs’ favor, the policy's virus exclusion bars coverage of Plaintiffs’ financial losses.

BACKGROUND

Franklin EWC, Inc. ("Franklin EWC") is a California corporation that owns and operates the European Wax Center, Fresno location ("EWC Fresno"). (Dkt. No. 1 at 12 ("Complaint") ¶ 20.)³ Plaintiff Kathy Franklin is the sole owner and operator of Franklin EWC. (Id. ) EWC Fresno is a waxing salon in the European Wax Center franchise, and is one of the most profitable European Wax Centers in California. (Id. ¶ 2.) EWC Fresno employed over 30 employees. (Id. ) Franklin EWC insured EWC Fresno with the "Spectrum Business Owner's Policy No. 21 SBA RS4714" (the "Policy"), entered into with defendant Sentinel Insurance Company, Ltd. ("Sentinel"). (Id. ¶ 3; Dkt. No. 11 at 11.) The Policy provides various forms of business interruption coverage, and Plaintiffs regularly paid the Policy's monthly premiums. (Complaint ¶ 3.) The Policy ran from June 8, 2019, to June 8, 2020. (Id. ¶ 13.)

On March 19, 2020, EWC Fresno was forced to close due to the State of California's Executive Order N-33-20 and other public health orders (the "Closure Orders") that required all non-essential businesses to immediately close due to the COVID-19 pandemic. (Id. ¶¶ 1, 6.) EWC Fresno's customers were unable to patronize the salon and, as a result, Plaintiffs have suffered business losses and laid off approximately 30 employees. (Id. ) On or after March 19, 2020, Franklin EWC filed a claim with Sentinel requesting coverage under the Policy for business income lost due to the Closure Orders. (Id. ¶ 56.) On April 8, 2020, Plaintiffs were notified that their claim was denied. (Id. ¶ 57.) This lawsuit against Sentinel and Hartford Financial Services Group ("HFSG") followed.

DISCUSSION

I. Sentinel's Motion to Dismiss

The Policy's Special Property Coverage Form provides that the insurer "will pay for direct physical loss of or physical damage to Covered Property at the premises ... caused by or resulting from a Covered Cause of Loss." (Dkt. No. 10-1 at 31.)⁴ A "Covered Cause of Loss" is defined as a "RISK[ ] OF DIRECT PHYSICAL LOSS" unless the loss is excluded by the Policy's "Exclusions" section. (Id. at 32.) The complaint alleges that the proliferation of the coronavirus caused "direct physical damage and loss" triggering coverage under the Policy. (Complaint ¶ 7 (emphasis removed).) Indeed, the complaint highlights the "physical damage to property caused by the virus " and that "the virus physically is causing property loss or damage. " (Id. (emphasis in original) (citing Orders of Napa and Sonoma County Health Officers).)

A. The Virus Exclusion

Sentinel moves to dismiss on the grounds that the Policy excludes from its coverage any loss caused directly or indirectly by a virus. In particular, the Virus Exclusion provision provides that the Special Property Coverage Form exclusions include the following:

i. "Fungi", Wet Rot, Dry Rot, Bacteria And Virus

We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss:

(1) Presence, growth, proliferation, spread or any activity of "fungi", wet rot, dry rot, bacteria or virus.

(Dkt. No. 10-1 at 127.)

Sentinel has met its burden of proving that the Virus Exclusion applies to Plaintiffs’ allegations of coverage. See State Farm Fire & Cas. Co. v. Martin , 872 F.2d 319, 321 (9th Cir. 1989) ("[T]he insurer bears the burden of proving ... the applicability of an exclusion[.]") (citation omitted). The complaint repeatedly alleges that the virus caused and continues to cause the risk of direct physical loss required for a Covered Cause of Loss. (Complaint ¶¶ 7, 12, 44, 54). Thus, as the loss was caused directly or indirectly by the virus, the Virus Exclusion applies under its plain and unambiguous language. See, e.g. , Waller v. Truck Ins. Exch., Inc. , 11 Cal. 4th 1, 18, 44 Cal.Rptr.2d 370, 900 P.2d 619 (1995), as modified on denial of reh'g (Oct. 26, 1995) ("The clear and explicit meaning of the [policy] provisions, interpreted in their ordinary and popular sense, unless used by the parties in a technical sense or a special meaning is given to them by usage [ ] controls judicial interpretation.") (internal quotations and citations omitted); Roug v. Ohio Sec. Ins. Co. , 182 Cal. App. 3d 1030, 1035, 227 Cal.Rptr. 751 (1986) ("An insurance policy is but a contract, and, like all other contracts it must be construed from the language used; when the terms are plain and unambiguous, it is the duty of courts to enforce the agreement.") (internal quotations and citations omitted); Cal. Civ. Code § 1638 ("The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.").

B. Civil Authority Coverage

Plaintiffs do not dispute in their complaint or their written opposition to the motion to dismiss that losses caused directly or indirectly by COVID-19 are excluded from Policy coverage. Instead, they contend that there is coverage under the Policy's "Civil Authority Coverage" provision ("Civil Authority Provision") notwithstanding the Virus Exclusion. It states:

q. Civil Authority

(1) This insurance is extended to apply to the actual loss of Business Income you sustain when access to your "scheduled premises" is specifically prohibited by order of a civil authority as the direct result of a Covered Cause of Loss to property in the immediate area of your "scheduled premises".

(Dkt. No. 10-1 at 41.) Plaintiffs argue that the provision applies because they lost business income, and because the Closure Orders prohibited access to their property "as a direct result of a Covered Cause of Loss." The Covered Cause of Loss, they insist, is the Closure Orders that created the "RISK[ ] OF DIRECT PHYSICAL LOSS" separate and independent from the virus. Thus, under Plaintiffs’ theory, the loss is created by the Closure Orders rather than the virus, and therefore the Virus Exclusion does not apply. Nonsense.

The plain language of the Civil Authority Provision provides that it applies when access is prohibited by order of the civil authority "as the direct result of a Covered Cause of Loss." (emphasis added). Under Plaintiffs’ theory, the Closure Orders (the orders of a civil authority) were issued as the direct result of the Closure Orders, a claimed Covered Cause of Loss. However, the Closure Orders cannot have been issued as a result of the Closure Orders; instead, as the complaint repeatedly alleges, they were issued as the direct result of COVID-19—a cause of loss that falls squarely within the Virus Exclusion. See Diesel Barbershop, LLC v. State Farm Lloyds , No. 5:20-CV-461-DAE, 479 F.Supp.3d 353, 360–62 (W.D. Tex. Aug. 13, 2020) (holding that an insurance policy's Virus Exclusion barred plaintiffs’ recovery for losses incurred during the COVID-19 pandemic where "[p]laintiffs [ ] pleaded that COVID-19 [was] in fact the reason for [county and state shutdown orders] being issued" and that, while the "[o]rders technically forced [plaintiffs’ properties] to close to protect public health, the [o]rders only came about sequentially as a result of the COVID-19 virus spreading .... [t]hus, it was the presence of COVID-19 ... that was the primary root cause of [p]laintiffs’ [losses].") (emphasis added).

Further, the Civil Authority Provision does not create coverage, it "extends" coverage when the civil authority orders are issued "as the direct result of a Covered Cause of Loss to property in the immediate area" of the insured's property. There is nothing in the complaint that supports an inference that the Closure Orders were issued as a direct result of the Closure Orders (Plaintiffs’ theory of the Covered Cause of Loss) and that the Closure Orders themselves caused damage to neighboring property. Plaintiffs’ theory for recovery under the Civil Authority Provision fails.

Plaintiffs’ reliance on a "concurrent cause" analysis does not save their coverage theory. They contend that so long as a non-excluded risk (here, the Closure Orders) is the "efficient proximate cause" of their Covered Cause of Loss that there is coverage under the Policy. At least two problems with this argument immediately stand out. First, as explained above, the complaint repeatedly alleges that the virus caused the risk of direct physical injury—therefore the virus is the excluded risk that would otherwise trigger a Covered Cause of Loss. (Complaint ¶¶ 7, 12, 44, 54.)...