Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am.

• Decision Date: 01 October 2021
• Docket Number: No. 20-16858,20-16858
• Parties: MUDPIE, INC., Plaintiff-Appellant, v. TRAVELERS CASUALTY INSURANCE COMPANY OF AMERICA, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

15 F.4th 885

MUDPIE, INC., Plaintiff-Appellant,

v.TRAVELERS CASUALTY INSURANCE COMPANY OF AMERICA, Defendant-Appellee.

No. 20-16858

United States Court of Appeals, Ninth Circuit.

Argued and Submitted August 11, 2021 San Francisco, California

Filed October 1, 2021

Rehearing En Banc Denied December 16, 2021

Andre M. Mura (argued), Eric H. Gibbs, and Amanda M. Karl, Gibbs Law Group LLP, Oakland, California; Victoria S. Nugent and Geoffrey Graber, Cohen Milstein Sellers & Toll PLLC, Washington, D.C.; for Plaintiff-Appellant.

Theodore J. Boutrous Jr. (argued), Richard J. Doren, and Deborah L. Stein, Gibson Dunn & Crutcher LLP, Los Angeles, California; Stephen E. Goldman and Wystan M. Ackerman,Robinson & Cole LLP, Hartford, Connecticut; for Defendant-Appellee.

Gabriel K. Gillett, John H. Mathias Jr., David M. Kroeger, and Michael F. Linden, Jenner & Block LLP, Chicago, Illinois; Angelo I. Amador, Restaurant Law Center, Washington, D.C.; for Amicus Curiae Restaurant Law Center.

Jeffrey R. White, Counsel; Tobias L. Millrood, President; American Associate for Justice, Washington, D.C., for Amicus Curiae American Association for Justice.

David B. Goodwin and Breanna K. Jones, Covington & Burling LLP, San Francisco, California; Jad H. Khazem, Covington & Burling LLP, Washington, D.C.; for Amicus Curiae United Policyholders.

Laura A. Foggan, Crowell & Moring LLP, Washington, D.C., for Amici Curiae American Property Casualty Insurance Association and National Association of Mutual Insurance Companies.

Before: Morgan Christen and Danielle J. Forrest, Circuit Judges, and Michael M. Anello,^* District Judge.

CHRISTEN, Circuit Judge:

Mudpie, Inc. appeals a district court order dismissing its claims against Travelers Casualty Insurance Company of America (Travelers). Mudpie operates a children's store located in San Francisco that sells clothing, toys, books, and other goods. Mudpie alleges that it purchased a comprehensive commercial liability and property insurance policy from Travelers (the Policy), and made a claim pursuant to the Policy's "Business Income" and "Extra Expense" coverage in 2020 after state and local authorities in California issued several public health orders in response to the COVID-19 pandemic. Mudpie claimed the orders prevented it from operating its store. Travelers denied the claim.

Mudpie filed a putative class action seeking declaratory relief and asserting claims for breach of contract and breach of the implied covenant of good faith and fair dealing. The district court granted Travelers’ motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), and Mudpie timely appealed. We have jurisdiction pursuant to 28 U.S.C. § 1291. We affirm the district court's judgment.

I

On March 4, 2020, Governor Gavin Newsom declared a state of emergency in California in response to the threat posed by COVID-19. Governor Newsom issued an executive order on March 12, 2020, that "[a]ll [California] residents are to heed any orders and guidance of state and local public health officials, including but not limited to the imposition of social distancing measures, to control the spread of COVID-19."

The City and County of San Francisco issued a "Shelter in Place Order" on March 16, 2020.¹ This order required residents to remain at their place of residence unless performing "essential activities." Id. at 1. The Shelter in Place Order also declared that "[a]ll businesses with a facility in the County, except Essential Businesses ..., are required to cease all activities at facilities located within the County except Minimum Basic Operations." Id. at 3. Failure to comply with San Francisco's Shelter in Place Order was deemed a misdemeanor punishable by a fine, imprisonment, or both. Id. at 1.

On March 19, 2020, Governor Newsom in conjunction with the State Public Health Officer ordered "all individuals living in the State of California to stay home or at their place of residence except as needed to maintain continuity of operations of the federal critical infrastructure sectors." Mudpie alleges that it complied with the local and state orders (collectively, the Stay at Home Orders) and as a result, was not able to operate its store after March 16, 2020.

Mudpie filed a claim with Travelers under the Policy on April 27, 2020. In its letter denying the claim, Travelers stated that "[b]ecause the limitations on [Mudpie's] business operations were the result of the Governmental Order, as opposed to ‘direct physical loss or damage to property at the described premises’ ... this Business Income and Extra Expense coverage does not apply to [Mudpie's] loss." Travelers further stated that the Policy's coverage excluded " ‘loss or damage caused by or resulting from any virus’ – such as the COVID-19 virus."

Mudpie filed suit in the United States District Court for the Northern District of California on behalf of itself and a putative class of "[a]ll retailers in California that purchased comprehensive business insurance coverage from [Travelers] which includes coverage for business interruption, filed a claim for lost business income following California's Stay at Home order, and were denied coverage." Mudpie's complaint asserted three causes of action: (1) a claim for declaratory relief that "its business income losses are covered and not precluded by exclusions or other limitations" in the Policy; (2) a claim for breach of contract; and (3) a claim for a breach of the implied covenant of good faith and fair dealing. Mudpie did not allege that COVID-19 was present in its storefront premises during the relevant period.

Travelers filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). The motion argued that Mudpie was not entitled to Business Income or Extra Expense coverage because Mudpie had "not alleged ... any facts demonstrating that [it] suffered a ‘direct physical loss of or damage to’ insured property," and because the Policy included a Virus Exclusion.² Mudpie countered "that its inability to operate and occupy its storefront following the government closure orders [wa]s a direct physical loss of property covered by [the Policy]."

The district court granted Travelers’ motion, ruling that Mudpie "fail[ed] to allege any intervening physical force beyond the government closure orders" and thus was "not entitled to Business Income or Extra Expense coverage" pursuant to the Policy. The district court declined to consider Travelers’ argument that the Virus Exclusion barred Mudpie's recovery. The court dismissed the complaint without prejudice but gave Mudpie leave to amend. Mudpie responded by filing a notice advising "it [would] not be amending its Complaint, as permitted by the Court's Order." The court then dismissed the complaint with prejudice, and Mudpie timely appealed.

II

We review de novo an order granting a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). L.A. Lakers, Inc. v. Fed. Ins. Co. , 869 F.3d 795, 800 (9th Cir. 2017). "[W]e accept the factual allegations of the complaint as true and construe them in the light most favorable to the plaintiff." Id. (quoting AE ex rel. Hernandez v. County of Tulare , 666 F.3d 631, 636 (9th Cir. 2012) ).

"When interpreting state law, we are bound to follow the decisions of the state's highest court, and when the state supreme court has not spoken on an issue, we must determine what result the court would reach based on state appellate court opinions, statutes and treatises." Diaz v. Kubler Corp. , 785 F.3d 1326, 1329 (9th Cir. 2015) (internal quotation marks and brackets omitted) (quoting Paulson v. City of San Diego , 294 F.3d 1124, 1128 (9th Cir. 2002) (en banc)). "We will ordinarily accept the decision of an intermediate appellate court as the controlling interpretation of state law," Tomlin v. Boeing Co. , 650 F.2d 1065, 1069 n.7 (9th Cir. 1981), "unless [we] find[ ] convincing evidence that the state's supreme court likely would not follow it," Ryman v. Sears, Roebuck & Co. , 505 F.3d 993, 994 (9th Cir. 2007).

III

Pursuant to the Policy, Travelers agreed to "pay for direct physical loss of or damage to [Mudpie's] Covered Property ... caused by or resulting from a Covered Cause of Loss." At oral argument before our court, defense counsel agreed the "Covered Property" included Mudpie's storefront premises and its contents. The coverage also extended to certain losses to Mudpie's "Business Income" and "Extra Expense" incurred to recover from a covered loss. In relevant part, the Policy provides:

[Travelers] will pay for the actual loss of Business Income [Mudpie] sustain[s] due to the necessary "suspension" of [Mudpie's] "operations" during the "period of restoration". The "suspension" must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss. ...

....

[Travelers] will also pay Extra Expense (including Expediting Expenses) to repair or replace the property, but only to the extent it reduces the amount of loss that otherwise would have been payable under [the "Business Income" provision].

Under California law, the burden is on the insured to establish that a claimed loss "is within the basic scope of insurance coverage." Aydin Corp. v. First State Ins. Co. , 18 Cal.4th 1183, 77 Cal.Rptr.2d 537, 959 P.2d 1213, 1215 (1998). "[O]nce an insured has made this showing, the burden is on the insurer to prove the claim is specifically excluded." Id. Where, as here, a policy covers "direct physical loss of or damage to" property, the "direct physical loss requirement is part of the policy's insuring clause and accordingly falls within [the insured's] burden of proof." MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co. , 187 Cal.App.4th 766, 115 Cal. Rptr. 3d 27, 36 (2010).

The parties dispute whether Mudpie adequately alleged a "direct physical loss of or damage to" property under the Policy, and they offer competing...