Franklin EWC, Inc. v. Hartford Fin. Servs. Grp., Inc.

• Decision Date: 14 December 2020
• Docket Number: Case No. 20-cv-04434-JSC
• Citation: 506 F.Supp.3d 854
• Court: U.S. District Court — Northern District of California
• Parties: FRANKLIN EWC, INC., et al., Plaintiffs, v. The HARTFORD FINANCIAL SERVICES GROUP, INC., et al., Defendants.

506 F.Supp.3d 854

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 December 14, 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, Steptoe & Johnson LLP, Cody Austin DeCamp, Steptoe Johnson, 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. 32 & 33

JACQUELINE SCOTT CORLEY, United States Magistrate Judge

This insurance dispute arises from the COVID-19 pandemic and government closure orders issued to stem its spread. Sentinel Insurance Company, Ltd. ("Sentinel") and Hartford Services Financial Group ("HFSG") move to dismiss Kathy Franklin and Franklin EWC, Inc.’s ("Franklin EWC's") amended complaint on the grounds that Plaintiffs’ insurance policy provides no coverage for Plaintiffs’ economic losses as a matter of law.¹ After considering Plaintiffs’ amended complaint, the parties’ written submissions, developments in the legal landscape involving COVID-19 business interruption coverage, and having had the benefit of oral argument on December 10, 2020, the Court GRANTS Defendants’ motions to dismiss Plaintiffs’ amended complaint.

BACKGROUND

The factual background and procedural history of this case are set forth in the Court's September 22, 2020 Order granting Defendants’ first motions to dismiss with leave to amend. (Dkt. No. 27.)² At issue are provisions from the "Spectrum Business Owner's Policy No. 21 SBA RS4714" (the "Policy") Franklin EWC entered into with Sentinel. (Dkt. No. 30 ("FAC") ¶ 3.) Following this Court's order on Defendants’ first motion to dismiss, Plaintiffs filed an amended complaint. (Dkt. No. 30.) Defendants subsequently filed the instant motions to dismiss, and the motions are fully briefed. (Dkt. Nos. 32-33, 35-38.)

DISCUSSION

Sentinel moves to dismiss Plaintiffs’ claims on the grounds that the Policy's Virus Exclusion bars coverage for Plaintiffs’ business losses and that Plaintiffs fail to otherwise state plausible claims for relief.

A. The Virus Exclusion

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.)³ 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 FAC alleges that the proliferation of coronavirus causes "direct physical damage and loss" triggering coverage under the Policy. (FAC ¶ 8). According to Plaintiffs, recent business closure orders issued pursuant to the State of California's Executive Order N-33-20 and other public health orders (the "Closure Orders") were issued because "the [c]oronavirus was proliferating onto virtually every surface and object in, on, and around commercial premises such as [EWC Fresno], and thereby causing direct physical damage and loss in and to the immediate area of such commercial premises[.]" (Id. (emphasis in original) (citing Orders of Napa and Sonoma County Health Officers).)

Sentinel contends that the Policy excludes from its coverage losses caused directly or indirectly by a virus:

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 showing that the Virus Exclusion applies to the FAC's coverage allegations. 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 Virus Exclusion's plain and unambiguous language excludes coverage for losses caused directly or indirectly by a virus. The FAC alleges that the coronavirus is a virus (FAC ¶ 5) and that it was "physical[ly] presen[t]" and "proliferat[ed]" onto EWC Fresno's premises. (FAC ¶¶ 9, 19.) The FAC further repeatedly alleges that the coronavirus caused—and continues to cause—the direct risk of physical loss required to establish a Covered Cause of Loss under the Policy. (FAC ¶¶ 8, 19, 49, 61) Therefore, drawing all inferences in the FAC in Plaintiff's favor, see Davis v. HSBC Bank Nev., N.A. , 691 F.3d 1152, 1159 (9th Cir. 2012), the FAC alleges that the coronavirus is the direct or indirect cause of Plaintiffs’ economic loss, and thus the Virus Exclusion bars coverage under its plain and unambiguous language, Franklin EWC, Inc. v. Hartford Fin. Servs. Grp., Inc. , No. 20-CV-04434-JSC, 488 F.Supp.3d 904, 907–08 (N.D. Cal. Sept. 22, 2020); see also 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).

The caselaw addressing COVID-19 business interruption coverage following this Court's prior Order is consistent with the Court's reasoning. Confronted with the same or similar virus exclusion provisions, numerous courts have determined that these provisions exclude coverage for business losses related to COVID-19. See, e.g. , Founder Inst. Inc. v. Hartford Fire Ins. Co. , No. 20-CV-04466-VC, 497 F.Supp.3d 678. 679–80 (N.D. Cal. Oct. 22, 2020) ; see also Raymond H Nahmad DDS PA v. Hartford Cas. Ins. Co. , No. 1:20-CV-22833, 499 F.Supp.3d 1188 (S.D. Fla. Nov. 2, 2020) ("Assuming for argument's sake that Plaintiffs had alleged facts triggering coverage under the Policy, the virus exclusion would still apply to bar coverage for Plaintiffs’ losses."); W. Coast Hotel Mgmt., LLC v. Berkshire Hathaway Guard Ins. Companies , No. 2:20-CV-05663-VAP-DFMx, 498 F.Supp.3d 1233, 1241–42 (C.D. Cal. Oct. 27, 2020) ("[T]he Virus Exclusion precludes coverage [because the complaint] contains multiple admissions that [the plaintiffs’] losses were caused directly or indirectly by a virus[.]"); Natty Greene's Brewing Co., LLC v. Travelers Cas. Ins. Co. of Am. , No. 1:20-CV-437, 503 F.Supp.3d 359. 364–65 (M.D.N.C. Nov. 30, 2020) ("The policies unambiguously exclude coverage for loss or damage caused directly or indirectly by, or resulting from, any virus.").

Plaintiffs’ insistence that the Virus Exclusion "relates solely to contamination on the insured premises" and that had Sentinel "intended to exclude risks associated with a pandemic[,]" the Policy could have referred explicitly to these risks or included a specific exclusion "targeted at pandemics (FAC ¶ 78) is unavailing. Nothing in the Virus Exclusion indicates it is limited to viruses arising from the insured premises rather than a pandemic. Other courts have arrived at similar conclusions. In Nahmad , "[the plaintiffs] offer[ed] no basis for construing ‘COVID-19’ or the ‘pandemic’ as a non-virus for purposes of [a virus] exclusion," and the court determined that "they could [not] plausibly do so as the global spread, proliferation, and activity of ‘coronavirus’ is the underlying pandemic at issue." Nahmad , 499 F.Supp.3d at 1190–91. In Boxed Foods Co., LLC v. California Capital Ins. Co. , No. 20-CV-04571-CRB, 497 F.Supp.3d 516. 523 (N.D. Cal. Oct. 26, 2020), as amended (Oct. 27, 2020), the court analyzed a virus exclusion that, like Sentinel's Virus Exclusion, "contemplate[d] situations where a virus indirectly contributes to or worsens a loss." The Boxed Foods court determined that the exclusion's language unambiguously barred coverage for business losses related to the COVID-19 pandemic, because "[e]ven if the [c]ourt accept[ed] [the plaintiffs’] distinction between a stand-alone virus and a pandemic, only COVID-19 can cause the COVID-19 pandemic and subsequently, civil authority orders and business income losses." Id. For this reason "COVID-19 remain[ed] the ‘indirect’ cause of the insured's harm," and therefore barred the plaintiffs’ recovery for economic losses under their policy—notwithstanding the plaintiffs’ efforts to characterize the virus exclusion as applying only to stand-alone viruses, not those that "escalate into a pandemic." Id.

The Court finds this reasoning persuasive. Contract interpretation is a matter of law, and "[c]ourts [should] not strain to create an ambiguity where none exists." Waller , 11 Cal. 4th at 18-19, 44 Cal.Rptr.2d 370, 900 P.2d 619 (citation omitted). When interpreting a contract, the parties’ mutual intent at the time of formation governs and "[s]uch intent is to be inferred, if possible, solely from the written provisions of the contract. Id. at 18, 44 Cal.Rptr.2d 370, 900 P.2d 619 (citations omitted) (emphasis added); see also 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.").

In sum, the Virus Exclusion applies under its plain and unambiguous language. Plaintiffs’ new allegations do not—and cannot—change its clear and explicit meaning. See AIU Ins. Co. v. Superior Court , 51 Cal. 3d 807, 822, 274 Cal.Rptr. 820, 799 P.2d 1253 (1990).

B. Regulatory Estoppel

Plaintiffs allege that the doctrine of regulatory...