Franklin EWC, Inc. v. The Hartford Financial Services Group, Inc.

Background

Franklin EWC, Inc. owned and operated the European Wax Center location in Fresno, California. Kathy Franklin was its sole owner and operator. Franklin EWC insured the salon under a business-owner policy issued by Sentinel Insurance Company, Ltd. The policy included business-interruption coverage and ran from June 8, 2019, through June 8, 2020.

The salon closed on March 19, 2020, because of California’s Executive Order N-33-20 and other public-health orders requiring nonessential businesses to close during the COVID-19 pandemic. The plaintiffs alleged business losses and the layoff of approximately 30 employees. Franklin EWC submitted a claim for lost business income, which Sentinel denied on April 8, 2020. The plaintiffs then sued Sentinel and Hartford Financial Services Group, Inc. The defendants moved to dismiss.

Sentinel’s Motion

The policy covered direct physical loss of or physical damage to covered property caused by a covered cause of loss. The policy also contained a virus exclusion for loss or damage caused directly or indirectly by the presence, growth, spread, or activity of a virus, regardless of any other contributing cause.

The court held that the virus exclusion applied based on the complaint’s repeated allegations that COVID-19 caused the direct physical loss or damage alleged to trigger coverage. The court therefore concluded that the exclusion barred coverage as a matter of law.

The plaintiffs argued that the policy’s civil-authority coverage applied because government closure orders prohibited access to the salon. The court rejected that argument. It explained that the provision required the closure orders to result directly from a covered cause of loss to property in the immediate area. According to the complaint, however, the orders were issued because of COVID-19, which was the excluded cause of loss. The court also rejected the plaintiffs’ concurrent-cause theory and their argument that the closure orders independently created a covered risk.

The plaintiffs alternatively relied on a limited virus-coverage provision providing up to $50,000 in coverage when a virus resulted from specified causes of loss, such as fire, lightning, explosion, windstorm or hail, smoke, vandalism, or water damage. The court held that the plaintiffs had not alleged that the virus resulted from any listed cause and had not supported their arguments that the provision was factually impossible to satisfy, unconscionable, void against public policy, or inequitable.

The court dismissed the plaintiffs’ contract-based claims for breach of contract, breach of the covenant of good faith and fair dealing, bad-faith denial of an insurance claim, unjust enrichment, and declaratory relief. It also dismissed the plaintiffs’ claims under California’s Unfair Competition Law because those claims were based on the policy. The unjust-enrichment claim failed for the additional reason that quasi-contract recovery is unavailable when an enforceable agreement governs the parties’ rights.

The court dismissed the fraudulent-misrepresentation claim because it was based on alleged representations contained in the policy, whose language did not provide coverage. To the extent the plaintiffs alleged separate affirmative misrepresentations, the court found that they had not identified when, where, or how those statements were made, as required for fraud claims. The court also dismissed the constructive-fraud claims because the plaintiffs had not alleged sufficiently specific conduct beyond the alleged misrepresentations and Sentinel had complied with the policy. The claim for injunctive relief was dismissed with prejudice because amendment would be futile in light of the other claims.

Hartford Financial Services Group’s Motion

The court separately addressed standing, a constitutional requirement that a plaintiff show an actual injury, a connection between that injury and the defendant’s conduct, and the possibility that a favorable decision would remedy the injury. Hartford Financial Services Group argued that the plaintiffs had not shown an injury traceable to it because, unlike Sentinel, it was not a party to the insurance policy and was not involved in investigating, handling, or denying the claim.

The plaintiffs did not dispute that they lacked a contract with Hartford Financial Services Group. Instead, they relied on allegations that the defendants acted together or had an agency or alter-ego relationship. The court found those allegations conclusory and insufficient to show a specific injury fairly traceable to Hartford Financial Services Group. The court also explained that “The Hartford” was a trade name referring to Hartford Financial Services Group and its subsidiaries, not a separate legal entity, and that the parent company was separate from its subsidiaries and had no significant business operations of its own.

The court held that the plaintiffs had not shown Article III standing to sue Hartford Financial Services Group and dismissed all claims against that defendant for lack of standing. The court did not address Hartford Financial Services Group’s other arguments concerning personal jurisdiction and pleading deficiencies.

Disposition

Judge Corley granted Sentinel’s and Hartford Financial Services Group’s motions to dismiss. The court allowed the plaintiffs to file an amended complaint within 21 days, but dismissed the injunctive-relief claim with prejudice. The order disposed of Docket Nos. 10 and 11.