COVID-19 Business Interruption Insurance Case Dismissed After Denial of Claim

On October 27, in the Northern District of California, District Judge Charles R. Breyer granted a motion to dismiss in favor of California Capital Insurance Company, an insurance company who denied the plaintiff, Boxed Foods, an insurance payout for loss of business income as a result of a civil stay-at-home order originating from the COVID-19 pandemic that closed the plaintiff’s restaurants for several months. In granting the defendant’s motion, the court reaffirmed numerous foundational rules of insurance contract law within the novel landscape of the current COVID-19 pandemic. 

First, the court summarily ruled that a “Virus Exclusion” clause, a standardized exclusionary clause that says, as in this case, “the Virus Exclusion precludes coverage for any loss directly or indirectly caused by a virus” applies to property damage, business income, and extra expenses when the clause is silent as to what type of payout to which the exclusion applies. The plaintiff argued that the “reasonable expectations” doctrine, a legal standard that says that ambiguous clauses should be interpreted as to the expectations of the parties at the time of contract formation, would limit the virus exclusion to only payouts for property damage in a property insurance contract.  The court disagreed, not with the plaintiff’s understanding of the doctrine, but that the “Virus Exclusion” clause was ambiguous. Judge Breyer said no ambiguity existed for the clause, given that other clauses within the insurance contract specified when said exclusion only applied to certain types of payouts, e.g. business income, leading the court to interpret the “Virus Exclusion” clause as applying to property damage, business income, and extra expenses. 

Second, the court held, California recognizes the “efficient proximate cause” rule. This rule, the district judge elaborated, says that when two events (one covered and one excluded) are responsible for a loss, the insurance contract shall only payout proceeds if the covered event “predominates and sets the other cause of loss in motion.” In this case, the plaintiff’s policy contained a Civil Authority provision which said “we will pay for the actual loss of business income you sustain…caused by action of civil authority that prohibits access to the…premises.” The plaintiff averred that while the “Virus Exclusion” clause would bar property damage payout due to the COVID-19 pandemic, it would not bar coverage for loss of business income since the proximate cause of the lost revenue was the forced closure by the state’s civil order and not the pandemic. The court disagreed with the reasoning, holding that while the civil order technically barred the plaintiff’s entry to their business, and thus forced lost revenue, “the civil…order() would not exist absent the presence of COVID-19; COVID-19 is therefore the efficient proximate cause of (the) (p)laintiff’s losses.”

Third, the court proclaimed that while the “Virus Exclusion” clause in the plaintiff’s insurance contract had settled meaning, that, as a matter of California law, extrinsic evidence may be submitted to a court (via the initial complaint) for review (which the court must consider) to advocate for another reasonably susceptible meaning of a similar clause. For example, in this case, the plaintiff attempted to argue that the “Virus Exclusion” clause did not apply to pandemics, since the drafters of the clause did so prior to the commencement of the COVID-19 pandemic. To support their alternative construction of the “Virus Exclusion” clause, the plaintiff requested the court to consider “statements made to insurance regulators” by the drafters of the clause. The court noted that while the reviewing judge would normally be required to consider these statements, such a mandate only applies if the statements are placed within the original complaint as precedent is clear that “the court cannot consider statements that have not been alleged in the complaint.”

The plaintiff is represented by Birka-White Law Offices.