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

Background

Franklin EWC, Inc. and Kathy Franklin sued Sentinel Insurance Company, Ltd. and Hartford Services Financial Group over business losses connected to the COVID-19 pandemic and government closure orders. The dispute concerned a Spectrum Business Owner’s Policy that Franklin EWC had entered into with Sentinel. The plaintiffs alleged that the coronavirus caused direct physical damage or loss at commercial premises and triggered coverage for their economic losses.

The defendants filed motions to dismiss the amended complaint. Sentinel argued that the policy’s virus exclusion barred coverage and that the plaintiffs had not otherwise stated plausible claims for relief. The court considered the amended complaint, the parties’ written arguments, developments in COVID-19 business-interruption coverage law, and oral argument held on December 10, 2020.

Virus exclusion

The policy covered direct physical loss or physical damage to covered property caused by a covered cause of loss. The policy excluded loss or damage caused directly or indirectly by the presence, growth, proliferation, spread, or activity of fungi, wet rot, dry rot, bacteria, or a virus.

The court found that the exclusion’s language was plain and unambiguous. The amended complaint alleged that the coronavirus was physically present and proliferated onto the premises, and repeatedly alleged that the coronavirus caused the direct risk of physical loss required for coverage. Drawing reasonable inferences in the plaintiffs’ favor, the court concluded that the complaint alleged that the coronavirus was the direct or indirect cause of the economic losses. The virus exclusion therefore barred coverage as a matter of law.

The court rejected the plaintiffs’ argument that the exclusion applied only to contamination originating on the insured premises and did not cover pandemic-related losses. It also rejected the argument that the policy needed to refer expressly to pandemics. The court concluded that COVID-19 remained a virus and could be an indirect cause of losses resulting from closure orders and business interruptions.

Regulatory estoppel

The plaintiffs alleged that two insurance-industry trade groups made false representations to state regulators in 2006 when seeking approval for the virus exclusion, and that Hartford Services Financial Group represented itself and Sentinel in that effort. They argued that these alleged misrepresentations prevented enforcement of the exclusion.

The court held that California courts do not recognize the regulatory-estoppel doctrine. It also declined to use alleged regulatory conduct to give the policy’s clear exclusion a meaning opposite to its ordinary meaning. Because the exclusion was unambiguous, the court stated that outside evidence could not be used to create an ambiguity that the policy’s text did not contain.

Limited virus coverage

The plaintiffs argued in the alternative that a limited virus-coverage provision supplied coverage of up to $50,000. That provision applied when a virus resulted from one or more specified causes of loss, including fire, lightning, explosion, windstorm or hail, smoke, vehicles, vandalism, and water damage.

The court found that the plaintiffs had not alleged that their losses resulted from any specified cause of loss. However, it rejected their argument that the provision was illusory, meaning that it provided no possible coverage. The court reasoned that the plaintiffs had not shown that none of the specified causes could transmit a virus, and that the provision could apply in at least some circumstances. The court also rejected the plaintiffs’ reasonable-expectations argument because the provision was clear and unambiguous and its limits had to be enforced as written.

Contract, insurance, and unfair-competition claims

The court dismissed the plaintiffs’ claims for breach of contract, breach of the covenant of good faith and fair dealing, and bad-faith denial of an insurance claim as to both defendants. It also dismissed the plaintiffs’ claims under California’s unfair-competition law because those claims depended on the policy. The court dismissed the claim for declaratory relief with prejudice because the unambiguous virus exclusion applied.

Fraud-based claims

The amended complaint also asserted fraudulent misrepresentation and constructive fraud. Federal Rule of Civil Procedure 9(b) requires fraud claims to identify, among other things, who made the alleged misrepresentation, what was said, and when, where, and how it was made.

The court found that the amended complaint did not provide those details. The plaintiffs alleged misrepresentations about the policy’s coverage, the limited virus provision, and the regulatory-estoppel theory, but did not clearly identify where, when, or how the statements were made or who made them. At oral argument, the plaintiffs acknowledged that they had no proof of when, where, or how specific fraudulent representations were made to Kathy Franklin. The court concluded that the fraud-based claims failed the heightened pleading requirement and dismissed them with prejudice.

Disposition

The court granted Sentinel’s and Hartford Services Financial Group’s motions to dismiss. It dismissed with prejudice the claims for breach of contract, breach of the covenant of good faith and fair dealing, bad-faith denial of an insurance claim, violations of California’s unfair-competition law, declaratory relief, fraudulent misrepresentation, and constructive fraud. The court stated that leave to amend would be futile, ordered judgment in favor of the defendants, and disposed of docket entries 32 and 33.