Mortar and Pestle Corp. v. Atain Specialty Insurance Company

Background

Mortar and Pestle Corp., doing business as Olea Restaurant, alleged that it stopped its regular operations on March 16, 2020, because of the COVID-19 pandemic and state and local orders requiring certain businesses to close. It submitted a business-loss claim under an insurance policy issued by Atain Specialty Insurance Company. Mortar and Pestle alleged that Atain sent a reservation-of-rights letter indicating that it might reject the business-loss and business-interruption claims, including because Mortar and Pestle had not suffered direct physical damage.

The first amended complaint asserted one claim for declaratory relief. The policy included property, business-income, extra-expense, and civil-authority coverage. Each of those provisions required direct physical loss of or damage to property. The policy also excluded claims or losses resulting directly or indirectly from viruses.

Court’s Analysis

The court applied California law and treated insurance-policy interpretation as a legal question. It held that “direct physical loss” requires a distinct, demonstrable physical alteration of property or a physical change in the property’s condition. Loss of use or economic harm without such a physical alteration was not enough. The court also noted that the policy expressly stated that loss of use was not covered.

The court found that Mortar and Pestle had not plausibly alleged that COVID-19 caused a physical alteration or physical change to the restaurant. Allegations that COVID-19 had “intruded upon” or “damaged” the property were conclusory. Other allegations indicated that Mortar and Pestle was seeking coverage based on the risk of contamination and the resulting inability to use the property. The court further stated that even the presence of the virus or infected individuals at the restaurant would not constitute direct physical loss or damage under the circumstances alleged, particularly because contaminated surfaces could be cleaned and disinfected.

The court reached the same conclusion regarding the civil-authority coverage. That provision required direct physical loss of or damage to property other than the restaurant. Mortar and Pestle had not plausibly alleged such damage to other property. The court also found that the cited government orders were issued to protect public health and limit the spread of COVID-19, not because of physical loss of or damage to property.

Finally, the court held that the virus exclusion plainly covered losses caused directly or indirectly by COVID-19. The exclusion listed viruses as an independent basis for excluding coverage. The court denied Mortar and Pestle’s request for discovery concerning statements allegedly made to insurance regulators because Mortar and Pestle had not shown that the proposed discovery was relevant or anything more than speculative.

Disposition

The court had previously dismissed the initial complaint for failure to plausibly allege a covered loss and had allowed Mortar and Pestle to amend. Because the first amended complaint still failed to plausibly allege coverage and the previously identified deficiencies had not been cured, Judge Maxine M. Chesney granted Atain’s motion to dismiss and dismissed the action with prejudice. Because this was a Rule 12(b)(6) dismissal for failure to state a plausible claim, this summary classifies the order as procedural rather than as a merits judgment.