HealthNOW Medical Center, Inc v. State Farm General Insurance Co.

Background

HealthNOW Medical Center brought an insurance action against State Farm based on State Farm’s denial of HealthNOW’s claim for business-income-loss coverage under a business insurance policy. HealthNOW alleged that its medical clinic was shut down or operated at greatly reduced capacity because of stay-at-home orders in Santa Clara County during the COVID-19 pandemic. It also alleged that State Farm failed to fairly evaluate and investigate the claim before denying it.

The policy contained a virus exclusion that barred coverage for losses caused by a virus, bacterium, or other microorganism capable of causing physical distress, illness, or disease. HealthNOW acknowledged the exclusion but argued that its claim was based on the physical presence and effects of human respiratory droplets, which it treated as distinct from the virus itself. The complaint asserted claims concerning coverage, the duty to deal fairly and honestly, bad-faith denial, declaratory relief, unjust enrichment, and California’s Unfair Competition Law.

Court’s analysis

State Farm moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim. The court considered whether the complaint alleged a plausible basis for coverage under the policy.

The court concluded that the virus exclusion applied. It reasoned that the stay-at-home orders plainly sought to prevent COVID-19, and that respiratory droplets were merely one mechanism by which the virus could spread. The court found that treating droplets that might contain the virus as legally distinct from the virus itself would make no meaningful sense under the orders or the policy and would conflict with HealthNOW’s own allegations about the purpose of the orders.

Because every claim against State Farm depended on the existence of coverage under the policy, the court dismissed all of HealthNOW’s claims.

Disposition

Judge Haywood S. Gilliam, Jr. granted State Farm’s motion to dismiss. The court expressed skepticism that HealthNOW could amend the complaint to address the identified deficiencies, but it allowed HealthNOW an opportunity to amend if it could do so consistently with its obligations under Rule 11. Any amended complaint had to be filed within 21 days of the order.