Baldwin Academy, Inc. v. Markel Insurance Company

• Court: District Court, S.D. California
• Decided: December 21, 2020
• Docket: 3:20-cv-02004
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 9 10 UNITED STATES DISTRICT COURT 11 SOUTHERN DISTRICT OF CALIFORNIA 12 13 BALDWIN ACADEMY, INC. and Case No.: 3:20-cv-02004-H-AGS PERICO HOLDINGS USA, LLC, 14 ORDER DENYING DEFENDANT Plaintiffs, 15 MARKEL INSURANCE v. COMPANY’S MOTION TO DISMISS 16 MARKEL INSURANCE COMPANY and 17 [Doc. No. 7.] DOES 1 through 10, inclusive, 18 Defendants. 19 On September 9, 2020, Plaintiffs Baldwin Academy, Inc. and Perico Holdings USA, 20 LLC (collectively, “Plaintiffs”) filed a complaint against Defendant Markel Insurance 21 Company in California state court. (Doc. No. 1-3 Ex. 2, Compl.) On October 13, 2020, 22 Defendant removed the action to federal court on the basis of diversity jurisdiction. (Doc. 23 No. 1.) On October 23, 2020, Defendant filed a motion to dismiss Plaintiffs’ complaint for 24 failure to state a claim. (Doc. No. 7.) On November 25, 2020, Plaintiffs filed their 25 opposition. (Doc. No. 8.) On December 7, 2020, Defendant filed its reply. (Doc. No. 26 11.) On December 14, 2020, the Court took the matter under submission. (Doc. No. 27 13.) For the reasons that follow, the Court denies Defendant’s motion to dismiss. 28 1 Background 2 The following facts are taken from Plaintiffs’ Complaint. (Doc. No. 1-3 Ex. 2.) 3 Baldwin Academy (“Baldwin”) is a preschool in the Pacific Beach community of San 4 Diego County, California. (Id. ¶ 8.) Plaintiffs purchased an insurance policy for coverage 5 of Baldwin from Defendant, which was effective from June 12, 2019 to June 12, 2020 (the 6 “Policy”). (Id. ¶ 9.) On Saturday, March 14, 2020, a parent of one of Baldwin’s students 7 notified Baldwin staff that she had tested positive for COVID-19, and that the student’s 8 grandparent had also tested positive for COVID-19. (Id. ¶ 15.) Plaintiffs allege the parent 9 who tested positive for COVID-19 had repeatedly visited Baldwin’s campus during the 10 week of March 8, 2020 through March 13, 2020 to drop off and pick up a student. (Id. 11 ¶ 16.) After receiving the parent’s email, Baldwin staff notified parents on Sunday, March 12 15, 2020 that the school was temporarily closing and that there would be no classes for the 13 week of March 16, 2020. (Id. ¶ 17.) On Monday, March 16, 2020, San Diego Mayor Kevin 14 Faulconer issued Executive Order No. 2020-1 in response to the spread of COVID-19 (the 15 “San Diego Order”). (Id. ¶ 19.) On Thursday, March 19, 2020, California Governor Gavin 16 Newsom issued Executive Order N-33-20, which directed all Californians to stay at home 17 (the “California Order”). (Id. ¶ 21.) On March 20, 2020, Baldwin initiated a business 18 income loss claim with Defendant for the closure of the preschool. (Id. ¶ 27.) On April 20, 19 2020, Defendant denied Baldwin’s claim. (Id. ¶ 29.) Plaintiffs allege they appealed 20 Defendant’s denial three times over the subsequent months, and that Defendant reaffirmed 21 its denial each time. (Id. ¶ 31.) On September 9, 2020, Plaintiffs filed a complaint against 22 Defendant for (1) breach of contract, (2) breach of the implied covenant of good faith and 23 fair dealing, and (3) declaratory relief. (Id. ¶¶ 33–48.) By the present motion, Defendant 24 moves pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss the complaint for 25 failure to state a claim upon which relief can be granted. (Doc. No. 7 at 1–2.) 26 /// 27 /// 28 /// 1 Discussion 2 I. Legal Standards 3 A. Federal Rule of Civil Procedure 12(b)(6) 4 A defendant may move to dismiss a complaint for failing to state a claim upon which 5 relief can be granted under Federal Rule of Civil Procedure 12(b)(6). See Conservation 6 Force v. Salazar, 646 F.3d 1240, 1241 (9th Cir. 2011). Federal Rule of Civil Procedure 7 8(a)(2) requires that a pleading stating a claim for relief containing “a short and plain 8 statement of the claim showing that the pleader is entitled to relief.” The function of this 9 pleading requirement is to “give the defendant fair notice of what the . . . claim is and the 10 grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). 11 “Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable 12 legal theory or sufficient facts to support a cognizable legal theory.” Mendiondo v. 13 Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008). To survive a 12(b)(6) 14 motion, a plaintiff must plead “enough facts to state a claim to relief that is plausible on its 15 face.” Twombly, 550 U.S. at 570. A claim is facially plausible when a plaintiff pleads 16 “factual content that allows the court to draw the reasonable inference that the defendant is 17 liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). In 18 reviewing the plausibility of a complaint, courts “accept factual allegations in the complaint 19 as true and construe the pleadings in the light most favorable to the nonmoving party.” 20 Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). 21 Nonetheless, courts do not “accept as true allegations that are merely conclusory, 22 unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Secs. Litig., 23 536 F.3d 1049, 1055 (9th Cir. 2008) (quoting Sprewell v. Golden State Warriors, 266 F.3d 24 979, 988 (9th Cir. 2001)). 25 “Generally, district courts may not consider material outside the pleadings when 26 assessing the sufficiency of a complaint under Rule 12(b)(6) of the Federal Rules of Civil 27 Procedure.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 998 (9th Cir. 2018) (citing 28 Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). Courts “may, however, 1 consider materials that are submitted with and attached to the Complaint.” United States v. 2 Corinthian Colleges, 655 F.3d 984, 999 (9th Cir. 2011) (citing Lee, 250 F.3d at 688); see 3 In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1051 (9th Cir. 2014) (“In reviewing the 4 sufficiency of a complaint, [courts] limit [them]selves to the complaint itself and its 5 attached exhibits, documents incorporated by reference, and matters properly subject to 6 judicial notice.”). 7 Where a motion to dismiss is granted, “leave to amend should be granted ‘unless the 8 court determines that the allegation of other facts consistent with the challenged pleading 9 could not possibly cure the deficiency.’” DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 10 655, 658 (9th Cir. 1992) (quoting Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 11 F.2d 1393, 1401 (9th Cir. 1986)). In other words, where leave to amend would be futile, 12 the Court may deny leave to amend. See DeSoto, 957 F.2d at 658. 13 B. Insurance Contract Interpretation 14 Since federal jurisdiction in this action is based on diversity of citizenship, the 15 substantive law of California governs the interpretation of insurance policy provisions. 16 Stanford Univ. Hosp. v. Fed. Ins. Co., 174 F.3d 1077, 1083 (9th Cir. 1999); Humboldt 17 Bank v. Gulf Ins. Co., 323 F. Supp. 2d 1027, 1032 (N.D. Cal. 2004). Interpretation of an 18 insurance policy is a question of law for the court. Powerine Oil Co., Inc. v. Superior Court, 19 118 P.3d 589, 597 (Cal. 2005). Such interpretation must give effect to “the mutual intention 20 of the parties at the time the contract is formed . . . .” Waller v. Truck Ins. Exch., Inc., 900 21 P.2d 619, 627 (Cal. 1995). To determine the intent of the parties behind an insurance 22 contract, the Court “look[s] first to the language of the contract in order to ascertain its 23 plain meaning,” reading the language in its “ordinary and popular sense, unless used by the 24 parties in a technical sense or a special meaning is given to them by usage.” Id. (internal 25 citations and quotation marks omitted). “A policy provision will be considered ambiguous 26 when it is capable of two or more constructions, both of which are reasonable.” Id. (citing 27 Bay Cities Paving Grading, Inc. v. Lawyers’ Mutual Insurance Co., 855 P.2d 1263, 1271 28 1 (Cal. 1993)). Language in an insurance contract “must be interpreted as a whole, and in the 2 circumstances of the case, and cannot be found to be ambiguous in the abstract.” Id. 3 “Insurance coverage is interpreted broadly so as to afford the greatest possible 4 protection to the insured.” MacKinnon v. Truck Ins. Exch., 73 P.3d 1205, 1213 (Cal. 2003) 5 (citations omitted). When there is ambiguity in an insurance policy, the policy’s exclusions 6 and exceptions are strictly construed against the insurer and liberally interpreted in favor 7 of the insured in order to protect the insured’s reasonable expectation of coverage. La Jolla 8 Beach & Tennis Club, Inc. v. Indus. Indem. Co., 884 P.2d 1048, 1053 (Cal. 1994); see also 9 Delgado v. Heritage Life Ins. Co., 203 Cal. Rptr. 672, 677 (Cal. Ct. App. 1984). Any 10 limitation of coverage must be “stated precisely and understandably, in words that are part 11 of the working vocabulary of the average layperson.” Haynes v. Farmers Ins. Exch., 89 12 P.3d 381, 385 (Cal. 2004). Furthermore, the burden is on the insurer to “phrase exceptions 13 and exclusions in clear and unmistakable language.” MacKinnon, 73 P.3d at 1213 (quoting 14 State Farm Mut. Auto. Ins. Co. v. Jacober, 514 P.2d 953, 957–58 (Cal. 1973)). 15 Nevertheless, “[a]n insurance company can choose which risks it will insure and which it 16 will not, and coverage limitations set forth in a policy will be respected.” Fidelity & Deposit 17 Co. v. Charter Oak Fire Ins. Co., 78 Cal. Rptr. 2d 429, 432 (Cal. Ct. App. 1998) (citing 18 Legarra v. Federated Mutual Ins. Co., 42 Cal. Rptr. 2d 101, 105 (Cal. Ct. App. 1995)). 19 The insured bears the burden of establishing that a claim is within the basic scope of 20 coverage. MacKinnon, 73 P.3d at 1213. But the burden is on the insurer to establish that 21 the claim is specifically excluded. Id. (citing Aydin Corp. v. First State Ins. Co., 959 P.2d 22 1213, 1215 (Cal. 1998)). 23 II. Analysis 24 Over the past few months there have been several insurance coverage cases relating 25 to the COVID-19 pandemic. Most of these cases involved the applicability of “Business 26 Income” and “Civil Authority” insurance coverage to business shutdowns caused by 27 COVID-19, as well as “Virus Exclusion” provisions. See Franklin EWC, Inc. v. Hartford

28 Fin. Servs. Grp., Inc., No. 20-CV-04434 JSC, 2020 WL 5642483, at *2 (N.D. Cal. Sept. 1 22, 2020); W. Coast Hotel Mgmt., LLC v. Berkshire Hathaway Guard Ins. Companies, No. 2 2:20-cv-05663-VAP-DFMx, 2020 WL 6440037, at *3 (C.D. Cal. Oct. 27, 2020); Boxed 3 Foods Co., LLC v. California Capital Ins. Co., No. 20-CV-04571-CRB, 2020 WL 6271021, 4 at *3 (N.D. Cal. Oct. 26, 2020). As Defendant notes, these cases have uniformly rejected 5 attempts to claim coverage for business losses resulting from the COVID-19 pandemic 6 under Business Income and Civil Authority provisions. (Doc. No. 7-1 at 4 n.5.) This case 7 is unique as Plaintiffs do not claim coverage under a traditional Business Income provision 8 or Civil Authority provision. Rather, they seek coverage under a “Communicable Disease 9 Endorsement,” which specifically provides coverage for loss of business income resulting 10 from communicable diseases. (Doc. No. 1-3 Ex. 2 ¶ 10.) 11 Defendant argues Plaintiffs’ complaint fails to state a valid claim for relief because 12 the Policy precludes coverage of their insurance claim as a matter of law. (Doc. No. 7-1 at 13 1.) Plaintiffs attached the Policy to their complaint; thus, for purposes of this motion, the 14 Court may consider its provisions. See Lee, 250 F.3d at 688. The issue is whether the 15 “California Business Income Changes – Communicable Disease and Food Contamination” 16 Endorsement provides coverage for Plaintiffs’ claim (the “Endorsement”). (Doc. No. 1-4

17 at 63–65.) The Endorsement states in relevant part: 18 A.1. We will pay for the actual loss of Business Income you sustain as a result of a temporary shutdown or “suspension” of your entire “operations” at your described 19 premises during the “period of restoration”. The shutdown or “suspension” of your 20 “operations” must be the result of an order or recommendation from a local, state or federal Board of Health or any other governmental authority having jurisdiction over 21 your “operations”. Such shutdown or “suspension” must be caused by or result from 22 a Covered Cause of Loss as described in Paragraph 3. below. 23 (Id. at 63.) Paragraph 3 states: 24 A.3. A Covered Cause of Loss is an outbreak, at premises described in the Declarations, of a . . . a. “Communicable disease” such as, but not limited to, 25 meningitis, measles or Legionnaire’s disease . . . 26 (Id. at 64.) There appears to be no dispute among the parties that COVID-19 counts as a 27 “communicable disease” under the Policy’s definition. Rather, Defendant contends that the 28 Endorsement allegedly imposes three conditions that claims must satisfy in order to be 1 eligible for coverage: (1) an “outbreak” of a “communicable disease” at “[the insured] 2 premises,” (2) a “shutdown or ‘suspension’” of operations as a “result of an order or 3 recommendation from a . . . governmental authority,” and (3) the government-ordered 4 shutdown being “caused by or result from” “an outbreak, at [the insured] premises.” (Doc. 5 No. 7-1 at 1.) Plaintiffs’ claim allegedly fails on three grounds: (1) there was no “outbreak” 6 at Baldwin, (2) Baldwin’s closure was voluntary, occurred before the issuance of 7 government orders, and thus was not “the result of an order or recommendation from 8 a . . . governmental authority,” and (3) any government-ordered closure was not “caused 9 by” and did not “result from” anything that happened at Baldwin. (Id. at 6.) The Court 10 disagrees. 11 The Court concludes that Plaintiffs have stated a claim sufficient to survive the 12 instant motion to dismiss. First, Plaintiffs have plausibly alleged the existence of an 13 “outbreak” of COVID-19 at Baldwin. Plaintiffs allege a parent of a Baldwin student 14 notified Baldwin that she and another member of the student’s household had tested 15 positive for COVID-19, and that the parent had repeatedly visited Baldwin’s campus and 16 interacted with other students and members of Baldwin’s staff during the week prior to her 17 positive test result. (Doc. No. 1-3 Ex. 2 ¶¶ 15–16.) Taking these alleged facts as true gives 18 rise to a plausible inference that an outbreak of COVID-19 occurred at Baldwin. See Iqbal, 19 556 U.S. at 678. The proper definition of “outbreak” in the context of the Endorsement, 20 and whether the circumstances at Baldwin satisfy that definition, are issues that would 21 benefit from a more complete record. Second, Plaintiffs have plausibly alleged that the 22 shutdown of Baldwin’s operations was “the result of an order or recommendation from” 23 from the Mayor of San Diego and the Governor of California.1 Plaintiffs allege that the 24 Baldwin closure first took effect on Monday, March 16, 2020, which is the same day that 25 the San Diego Order was issued. (Doc. No. 1-3 Ex. 2 ¶¶ 18–19.) The San Diego Order 26

1 Defendant requests that the Court take judicial notice of the San Diego Order and the California 27 Order. (Doc. No. 7-1 at 4 n.4.) Plaintiffs do not oppose the request for judicial notice and relied on the 28 orders in their complaint. The Court grants Defendant’s request as the orders are matters of public record, 1 prohibited gatherings of 50 or more people, among other measures, and recommended 2 taking action to “slow the pace of community spread and avoid unnecessary strain on our 3 medical system.” (Doc. No. 7-5 Ex. 4.) On March 29, 2020, the California Order was 4 issued, which ordered all residents to stay home for the foreseeable future. (Doc. No. 1-3 5 Ex. 2 ¶ 21.) These allegations are sufficient to state a plausible claim for coverage under 6 the Policy. Arguments concerning what actions the San Diego and California Orders 7 required or recommended Baldwin take, the nature, timing, and duration of Baldwin’s 8 shutdown, and other issues are better addressed with a developed record and are more 9 properly the subject of a motion for summary judgment. At this time, without sufficient 10 development of the record, the Court declines to decide whether Plaintiffs’ claim is outside 11 the scope of the Endorsement’s coverage as a matter of law. See L&M Tire Co., Inc. v. 12 Goodyear Tire & Rubber Co., No. 3:12-CV-02720-H (RBB), 2013 WL 12157581, at *3 13 (S.D. Cal. Jan. 11, 2013). 14 As for the third alleged requirement, the Court is skeptical of Defendant’s argument 15 that the language of the Endorsement unambiguously imposes a “second causation 16 requirement.” (Doc. No. 7-1 at 11.) Defendant argues that the Endorsement requires that 17 the government-ordered shutdown must be caused by the outbreak at the premises; i.e., a 18 business reports an outbreak to a local health authority, who as a result “shut[s] down the 19 premises and post[s] a quarantine or other notice on the door.” (Id.) Defendant locates this 20 alleged requirement in the last sentence of Section A.1. of the Endorsement – “Such 21 shutdown or ‘suspension’ must be caused by or result from a Covered Cause of Loss [i.e., 22 an outbreak]” – by defining “shutdown” in the sentence as a government-ordered or 23 recommended shutdown. (Id.) The Court does not agree that the Endorsement necessarily 24 requires this causal relationship.2 For example, an alternative plausible reading of the 25 2 Defendant cites to Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., No. 20-CV-03213-JST, 2020 26 WL 5525171, at *6 (N.D. Cal. Sept. 14, 2020), in support of its argument that the Endorsement unambiguously requires a causal nexus between the triggering event, i.e., the local outbreak, and the 27 government order. (Doc. No. 7-1 at 13.) The Court does not consider Mudpie to be analogous to the 28 present case. The Civil Authority insurance provision in Mudpie states: “The civil authority action must 1 Endorsement is that the “shutdown or ‘suspension’ of your operations” must be the result 2 of two independent events: (1) an outbreak of a communicable disease at the premises, and 3 (2) a government order or recommendation to shut down operations, i.e., the two 4 requirements already addressed above. Under this potential reading of the provision, the 5 government order or recommendation could be issued in response to external 6 circumstances, and need not be the direct product of the localized outbreak. As such, the 7 Court declines to determine whether the Endorsement unambiguously contains a third 8 requirement at this stage of the proceedings, without the benefit of a developed evidentiary 9 record and briefing on the issue. For now, Plaintiffs have plausibly alleged they are entitled 10 to coverage under the Endorsement.3 11 /// 12 /// 13 /// 14 /// 15 /// 16 /// 17

18 contrast, the Endorsement states: “Such shutdown or ‘suspension’ must be caused by or result from [an outbreak].” (Doc. No. 1-4 at 63 (emphasis added).) It does not state “such government order or 19 recommendation must be caused by or result from an outbreak,” which would be more comparable to the 20 Mudpie provision. Whether, as Defendant argues, “shutdown” should be interpreted to mean “government-ordered shutdown” remains to be seen, but the Court considers the Endorsement and Mudpie 21 provision to be dissimilar.

22 3 On December 15, 2020, Defendant filed a Notice of Supplemental Authority regarding a report and recommendation issued December 14, 2020 in Terry Black’s Barbecue, LLC v. State Automobile 23 Mutual Insurance Co., No. 1:20-CV-776-RP (W.D. Tex. Dec. 14, 2020) (Hightower, M.J.). (Doc. No. 14.) 24 The Court notes that Defendant improperly included additional argument and analysis in its notice of supplemental authority. See Desper Prod., Inc. v. QSound Labs, Inc., 157 F.3d 1325, 1335 (Fed. Cir. 1998) 25 (The rule allowing for the filing of a notice of supplemental authority “permits a party to bring supplemental authorities to the court’s attention, not supplemental argument”); Hall v. Shinseki, 717 F.3d 26 1369, 1373 n.4 (Fed. Cir. 2013); United States v. LaPierre, 998 F.2d 1460, 1466 n.5 (9th Cir. 1993). Nevertheless, the cited authority is not analogous to the present case for similar reasons as Mudpie, (see 27 supra note 2), and is a decision from the Western District of Texas; as such, it is neither persuasive nor 28 binding on this Court. 1 In sum, the Court considers the disputed issues to be better suited for disposition on 2 ||a motion for summary judgment, after the circumstances of Baldwin’s shutdown and other 3 ||relevant facts have been more completely developed. For now, Plaintiffs have sufficiently 4 || pled a claim against Defendant for breach of contract for allegedly failing to provide the 5 ||insurance coverage required by the Policy.* The Court therefore declines to dismiss 6 || Plaintiffs’ complaint. 7 Conclusion 8 For the reasons stated above, the Court denies Defendant’s motion to dismiss in its 9 || entirety. 10 IT IS SO ORDERED. 11 || DATED: December 21, 2020 12 [+ MARILYN WN. HUFF, Distric e 13 UNITED STATES DISTRICT COURT 14 15 16 17 18 19 20 21 22 23 24 25 |\* Regarding Plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing, Defendant argues that Plaintiffs’ alleged inability to demonstrate that it wrongfully withheld benefits 26 || forecloses any finding of insurance bad faith. (Doc. No. 7-1 at 13-14.) Because the Court concludes that > Plaintiffs have sufficiently stated a claim for breach of contract, the Court cannot conclude at this time 7 that Defendant did not breach the implied covenant in its dealings with Plaintiffs. Accordingly, the Court 28 denies Defendant’s motion to dismiss Plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing.