O'Brien Sales and Marketing, Inc. v. Transportation Insurance Company

• Court: District Court, N.D. California
• Decided: January 12, 2021
• Docket: 3:20-cv-02951
• Status: Unknown

Opinion

1 2 3 4 IN THE UNITED STATES DISTRICT COURT 5 FOR THE NORTHERN DISTRICT OF CALIFORNIA 6 7 O'BRIEN SALES AND MARKETING, Case No. 20-cv-02951-MMC INC., on behalf of itself and others 8 similarly situated, ORDER GRANTING DEFENDANT'S 9 Plaintiff, MOTION TO DISMISS; VACATING HEARING; DISMISSING SECOND 10 v. AMENDED COMPLAINT WITH PREJUDICE 11 TRANSPORTATION INSURANCE COMPANY, 12 Defendant. 13

14 Before the Court is Transportation Insurance Company’s (“TIC”) Motion, filed 15 November 23, 2020, “to Dismiss Plaintiff’s Second Amended Complaint.” Plaintiff 16 O’Brien Sales and Marketing, Inc. (“O’Brien”) has filed opposition, to which TIC has 17 replied. Having read and considered the papers filed in support of and in opposition to 18 the motion, the Court deems the matter appropriate for determination on the parties’ 19 respective written submissions, VACATES the hearing scheduled for January 15, 2021, 20 and rules as follows. 21 BACKGROUND 22 The instant action, like many other actions filed in this district, arises in the context 23 of the COVID-19 pandemic and the significant impact the pandemic has had on business 24 operations nationwide. O’Brien, a marketing agency (see Second Am. Compl. (“SAC”) 25 ¶ 13), alleges that, “[d]ue to safety concerns about COVID-19, and in accordance with 26 state orders, [it] stopped using its business offices to host clients and vendors” (see id. 27 ¶ 53), and could not, at times, access its business premises (see id. ¶ 58). O’Brien 1 further alleges it submitted, under an insurance policy (“Policy”) issued by TIC, a claim for 2 business income lost and expenses incurred as a result of the above-described 3 disruption. (See id. ¶¶ 59-60.) 4 The Policy provides “Business Income and Extra Expense” coverage as follows:1

5 1. Business Income

6 a. Business Income means:

7 (1) Net Income . . . that would have been earned or incurred . . . ; and 8 (2) Continuing normal operating expenses incurred . . . . 9 b. We will pay for the actual loss of Business Income you sustain due to 10 the necessary “suspension” of your “operations” during the “period of restoration.”2 The “suspension” must be caused by direct physical loss 11 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. 12 . . . 13 2. Extra Expense 14 a. Extra Expense means reasonable and necessary expenses you 15 incur during the “period of restoration” that you would not have incurred if there had been no direct physical loss of or damage to 16 property caused by or resulting from a Covered Cause of Loss.

17 b. We will pay Extra Expense (other than the expense to repair or replace property) to: 18 (1) Avoid or minimize the “suspension” of business and to 19 continue “operations” at the described premises or at replacement premises or temporary locations, including 20

21 1 TIC’s unopposed request that the Court take judicial notice of the Policy, submitted as Exhibit A to the Declaration of Jason Deitzel, is hereby GRANTED. See 22 Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994) (holding, “documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not 23 physically attached to the pleading, may be considered in ruling on a Rule 12(b)(6) motion to dismiss”). 24 2 The Policy defines “[p]eriod of restoration” as the period of time that “[b]egins 25 with the date of direct physical loss or damage caused by or resulting from any Covered Cause of Loss at the described premises” and ends on the earlier of “[t]he date when the 26 property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality” or “[t]he date when business is resumed at a new 27 permanent location.” (See Decl. of Jason Deitzel (“Deitzel Decl.”) Ex. A at 32 (emphasis relocation expenses and costs to equip and operate the 1 replacement premises or temporary locations; or

2 (2) Minimize the “suspension” of business if you cannot continue “operations.” 3 c. We will also pay Extra Expense . . . to repair or replace the property, 4 but only to the extent it reduces the amount of loss that otherwise would have been payable under Paragraph 1. Business Income 5 above. 6 (See Deitzel Decl. Ex. A at 37-38 (emphasis added).)3 7 The Policy also provides for “Civil Authority” coverage as follows:

8 Civil Authority

9 1. When the Declarations show that you have coverage for Business Income and Extra Expense, you may extend that insurance to apply to 10 the actual loss of Business Income you sustain and reasonable and necessary Extra Expense you incur caused by action of civil authority 11 that prohibits access to the described premises. The civil authority action must be due to direct physical loss of or damage to property at 12 locations, other than described premises, caused by or resulting from a Covered Cause of Loss. 13 (See Deitzel Decl. Ex. A at 63 (emphasis added).) 14 O’Brien alleges TIC denied the above-referenced claim. (See SAC ¶ 60.) 15 Based on the foregoing allegations, O’Brien brings three causes of action for 16 “Declaratory Judgment,” each of which is asserted on behalf of itself and one of three 17 putative classes, namely, a “Business Income Class,” an “Extra Expense Class,” and a 18 “Civil Authority Class.” Additionally, O’Brien brings, on behalf of itself, a cause of action 19 titled “Breach of Contract.” 20 LEGAL STANDARD 21 Dismissal under Rule 12(b)(6) of the Federal Rules of Civil Procedure "can be 22 based on the lack of a cognizable legal theory or the absence of sufficient facts alleged 23 under a cognizable legal theory." See Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 24 699 (9th Cir. 1990). Rule 8(a)(2), however, "requires only 'a short and plain statement of 25 the claim showing that the pleader is entitled to relief.'" See Bell Atlantic Corp. v. 26

27 3 The page numbers for the Policy, as used herein, are those affixed to the top of 1 Twombly, 550 U.S. 544, 555 (2007) (quoting Fed. R. Civ. P. 8(a)(2)). Consequently, "a 2 complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual 3 allegations." See id. Nonetheless, "a plaintiff's obligation to provide the grounds of his 4 entitlement to relief requires more than labels and conclusions, and a formulaic recitation 5 of the elements of a cause of action will not do." See id. (internal quotation, citation, and 6 alteration omitted). 7 In analyzing a motion to dismiss, a district court must accept as true all material 8 allegations in the complaint and construe them in the light most favorable to the 9 nonmoving party. See NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). "To 10 survive a motion to dismiss, a complaint must contain sufficient factual material, accepted 11 as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 12 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). "Factual allegations must be 13 enough to raise a right to relief above the speculative level[.]" Twombly, 550 U.S. at 555. 14 Courts "are not bound to accept as true a legal conclusion couched as a factual 15 allegation." See Iqbal, 556 U.S. at 678 (internal quotation and citation omitted). 16 DISCUSSION 17 In the First Amended Complaint (“FAC”), O’Brien asserted, as it does in the SAC, 18 three claims seeking declaratory judgment and one claim for breach of contract, each 19 based on the above-described denial of coverage. By order filed October 9, 2020, the 20 Court, finding O’Brien had failed to plausibly allege a covered loss under the Policy, 21 dismissed the FAC and afforded O’Brien leave to amend. By the instant motion, TIC 22 argues O’Brien has again failed to plausibly allege a covered loss under the Policy. 23 A. Business Income and Extra Expense Provisions 24 As set forth above, the Business Income and Extra Expense provisions both 25 require, for coverage thereunder, “direct physical loss of or damage to” the insured’s 26 property. (See Deitzel Decl. Ex. A at 37-38.) TIC argues O’Brien still fails to allege 27 sufficient facts demonstrating such loss or damage. 1 In resolving the instant dispute, the Court applies California law.4 See Stanford 2 Univ. Hosp. v. Fed. Ins. Co., 174 F.3d 1077, 1083 (9th Cir. 1999). Under California law, 3 “interpretation of an insurance policy is a question of law.” See Waller v. Truck Ins. Exch., 4 11 Cal. 4th 1, 18 (1995). “Words used in an insurance policy are to be interpreted 5 according to the plain meaning which a layman would ordinarily attach to them.” Reserve 6 Ins. Co. v. Pisciotta, 30 Cal. 3d 800, 807 (1982) (noting “[c]ourts will not adopt a strained 7 or absurd interpretation in order to create an ambiguity where none exists”). 8 Here, O’Brien argues, “[u]nder California law, there is a ‘physical loss’ of property 9 when the property can no longer [be] used for its intended purposes.” (See Opp. at 10 10:21-22.) As discussed below, the Court finds O’Brien’s proposed definition sweeps too 11 broadly. 12 The California Court of Appeal has interpreted “direct physical loss” to require a 13 “distinct, demonstrable, physical alteration of the property” or a “physical change in the 14 condition of the property.” See MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. 15 Ins. Co., 187 Cal. App. 4th 766, 771, 779-80 (2010) (internal quotations and citations 16 omitted) (construing insurance policy providing coverage for “direct physical loss to 17 business personal property”).5 18 In light thereof, “a detrimental economic impact,” such as loss of use, 19 “unaccompanied by a distinct, demonstrable, physical alteration of the property,” is 20 insufficient. See MRI, 187 Cal. App. 4th at 779; see also 10E, LLC v. Travelers 21 Indemnity Co. of Conn., No. 2:20-CV-04418-SVW-AS, 2020 WL 5359653, at *5 (C.D. 22

23 4 There is no dispute that California law governs the policy here at issue. 24 5 As noted, the policy in MRI covered “direct physical loss to” property, rather than “direct physical loss of” property, the phrase used in the policy here at issue. Even 25 assuming the use of a different preposition can be deemed to expand the meaning of the policy language, however, the “loss” must still be “physical.” See Total Intermodal Servs. 26 Inc. v. Travelers Prop. Cas. Co. of Am., No. CV 17-04908 AB (KSx), 2018 WL 3829767, at *1, *4 (C.D. Cal. July 11, 2018) (finding, where insured cargo was erroneously sent to 27 China and not capable of being returned, such “permanent dispossession” of physical 1 Cal. Sept. 2, 2020) (finding, where policy provided coverage for “direct physical loss of or 2 damage to” property, “[a]n insured cannot recover by attempting to artfully plead 3 temporary impairment to economically valuable use of property as physical loss or 4 damage”); W. Coast Hotel Mgmt., LLC v. Berkshire Hathaway Guard Ins. Cos., No. 20- 5 cv-05663-VAP-DFMx, 2020 WL 6440037, at *4 (C.D. Cal. Oct. 27, 2020) (rejecting 6 plaintiffs’ contention “that the loss of use of their properties is sufficient to trigger 7 coverage” where policy provided coverage for “direct physical loss of or damage to” 8 property; finding “detrimental economic impact alone . . . is not compensable under a 9 property insurance contract” (internal quotation, citation, and emphasis omitted)).6 7 10 Additionally, as TIC points out, the Policy expressly provides that “loss of use” is 11 not covered. (See Deitzel Decl. Ex. A at 20 (“We will not pay for loss or damage caused 12 by or resulting from . . . loss of use.”)); see also Mudpie, Inc. v. Travelers Cas. Ins. Co. of 13 Am., No. 20-CV-03213-JST, 2020 WL 5525171, at *6 (N.D. Cal. Sept. 14, 2020) (finding 14 policy provision stating insurer “‘will not pay for loss or damage caused by or resulting 15 from . . . loss of use’ . . . suggests that the ‘direct physical loss of . . . property’ clause was 16 not intended to encompass a loss where the property was rendered unusable without an 17 intervening physical force” (alterations in original) (citation omitted)).8 18 6 O’Brien’s reliance on Thee Sombrero, Inc. v. Scottsdale Ins. Co., 28 Cal. App. 19 5th 729 (2018), and Hendrickson v. Zurich Am. Ins. Co. of Ill., 72 Cal. App. 4th 1084 (1999), is unavailing, as the insurance policies at issue in those cases, unlike the Policy 20 here, expressly covered “[l]oss of use of tangible property that is not physically injured.” See Thee Sombrero, Inc., 28 Cal. App. 5th at 733; Hendrickson, 72 Cal. App. 4th at 21 1087. 22 7 To the extent O’Brien alternatively argues “direct physical loss of or damage to” property is ambiguous, such argument is unavailing, see Lockheed Martin Corp. v. Cont’l 23 Ins. Co., 134 Cal. App. 4th 187, 197 (2005) (holding, “if a term in an insurance policy,” when used in an “analogous” context, “has been judicially construed, it is not ambiguous” 24 (internal quotation and citation omitted)), and to the extent O’Brien relies on cases involving insurance policies similar to the Policy here at issue and holding loss of use 25 alone suffices, the Court finds more persuasive the authorities cited herein finding to the contrary. 26 8 O’Brien’s reliance on the definition of “[p]roperty damage” in the Policy’s 27 Businessowners Liability Coverage Form (see Deitzel Decl. Ex. A at 105), is misplaced, 1 Next, O’Brien argues that, in any event, it has plausibly alleged COVID-19 caused 2 “direct physical loss of or damage to” its business premises. O’Brien has failed, however, 3 to add any allegations sufficient to show COVID-19 has caused a “distinct, demonstrable, 4 physical alteration” of the covered property or a “physical change in [its] condition.” See 5 MRI, 187 Cal. App. 4th at 779-80 (internal quotation, citation, and emphasis omitted). 6 Although O’Brien has added allegations that some individuals “who work at O’Brien’s 7 office building” (see SAC ¶ 45-46), as well as “[t]wo of O’Brien’s employees” (see id. 8 ¶ 49), “have tested positive for COVID-19” (see id. ¶¶ 45-46, 49), it has not, as TIC points 9 out, alleged COVID-19 was present in the covered premises. Moreover, even assuming, 10 arguendo, O’Brien had alleged COVID-19 has been, at some point, physically present in 11 the covered property, “the presence of the virus itself, or of individuals infected with the 12 virus, at [O’Brien’s] business premises or elsewhere [does] not constitute direct physical 13 loss of or damage to property.” See Pappy's Barber Shops, Inc. v. Farmers Grp., Inc., 14 No. 20-CV-907-CAB-BLM, 2020 WL 5847570, at *1 (S.D. Cal. Oct. 1, 2020). 15 Indeed, as one source cited in the SAC notes, contaminated surfaces can be 16 disinfected and cleaned (see SAC ¶ 33 n.2 (citing newsletter from University of Arizona 17 titled, “People Unite Against the Threat of COVID-19,” dated March 30, 2020)); see also 18 People Unite Against the Threat of COVID-19, Univ. of Ariz. (Mar. 30, 2020), 19 https://acis.cals.arizona.edu/community-ipm/home-and-school-ipm-newsletters/ipm- 20 newsletter-view/ipm-newsletters/2020/03/30/people-unite-against-the-threat-of-covid-19, 21 thereby demonstrating COVID-19 does not cause “physical alteration” or “physical 22 change in the condition” of property, see MRI, 187 Cal. App. 4th at 779-80 (internal 23 quotation, citation, and emphasis omitted); see also Uncork & Create LLC v. Cincinnati 24 Ins. Co., No. 20-cv-00401, 2020 U.S. Dist. LEXIS 204152, *13 (S.D.W. Va. Nov. 2, 2020) 25 (finding, “even actual presence of the virus would not be sufficient to trigger coverage for 26 physical damage or physical loss to the property”; noting, “[b]ecause routine cleaning . . . 27 eliminates the virus on surfaces, there would be nothing for an insurer to cover”); Mama 1 *21-22, *24-25 (S.D. Fla. June 11, 2018) (holding presence of construction debris in 2 restaurant did not constitute “direct physical loss of or damage to” property; finding, “[t]he 3 fact that the restaurant needed to be cleaned more frequently does not mean Plaintiff 4 suffered a direct physical loss or damage”). 5 Accordingly, the Court finds O’Brien has failed to plausibly allege coverage under 6 the Business Income and Extra Expense provisions. 7 B. Civil Authority Provision 8 As set forth above, the Civil Authority provision provides coverage for losses 9 caused “by action of civil authority that prohibits access to” the insured property “due to 10 direct physical loss of or damage to property at locations, other than described premises.” 11 (See Deitzel Decl. Ex. A at 63.) 12 In reliance thereon, O’Brien asserts “the Governor of California has issued 13 Executive Orders, including Executive Order N-33-20, that limit or reduce the normal 14 business operations of businesses in O’Brien’s community,” and “[t]he premise of [such] 15 shutdown orders is that the virus is physically present in proximity to [its] Covered 16 Property.” (See Opp. at 22:3-5, 22:11-12.) 9 As with the Business Income and Extra 17 Expense provisions, however, the Civil Authority provision requires “direct physical loss 18 of or damage to” property, and O’Brien, for the same reasons as set forth above with 19 respect to the covered premises, has failed to plausibly allege such loss or damage with 20 respect to any other property. 21 Further, it is apparent from the plain language of the cited civil authority orders that 22

23 9 In support of such asserted premise, O’Brien points out that the executive orders alleged here were issued in connection with a declared “State of Emergency” (see SAC 24 ¶ 54), which, under California law, “means the duly proclaimed existence of conditions of disaster or of extreme peril to the safety of persons and property,” see Cal. Gov’t Code 25 §§ 8558(b), 8625. Even if one were to accept, arguendo, O’Brien’s implicit contention that the cited statute could reasonably be interpreted to mean the Governor cannot 26 declare a State of Emergency predicated solely on extreme peril to the safety of persons, neither such statute nor an order issued pursuant thereto can alter the Policy’s 27 requirement that the covered losses be caused by “direct physical loss of or damage to” 1 such directives were issued to stop the spread of COVID-19 and not as a result of any 2 || physical loss of or damage to property. (See Def.’s Req. for Judicial Notice (“RJN”), filed 3 Nov. 23, 2020, Ex. C (Governor’s “Executive Order” dated March 19, 2020) at 3 (“This 4 || Order is being issued to protect the public health of Californians. . . . [;] we want to bend 5 || the curve, and disrupt the spread of the virus”);!° see also SAC { 57 (alleging “executive 6 || orders were issued due to the ‘community spread’ of COVID-19”).) 7 Accordingly, the Court finds O’Brien has failed to plausibly allege coverage under 8 || the Civil Authority provision. 9 Consequently, given such finding, as well as the findings previously discussed 10 || above regarding the Business Income and Extra Expense provisions, the Court, although 11 sympathetic to O’Brien’s difficult circumstances amidst the ongoing pandemic, finds the g 12 || SAC is subject to dismissal and, given O’Brien’s failure to cure the previously identified s 13 deficiencies in the FAC, such dismissal will be without further leave to amend. 14 CONCLUSION 8 15 For the reasons stated above, the Motion to Dismiss is hereby GRANTED, and the 16 || instant action is hereby DISMISSED with prejudice. 17 IT IS SO ORDERED.

19 || Dated: January 12, 2021 [effin Uf Chats MAXINE M. CHESNEY 20 United States District Judge 21 22 23 24 25 26 27 ‘0 TIC’s unopposed request that the Court take judicial notice of the above- 2g || teferenced Executive Order is hereby GRANTED. See Fed. R. Evid. 201(b).