Baker v. Oregon Mutual Insurance Company

Background

Steven Baker and Melania Kang, doing business as Chloe’s Café, sued Oregon Mutual Insurance Company individually and on behalf of a proposed nationwide class. The plaintiffs alleged that San Francisco’s COVID-19 orders prohibiting indoor dining caused them to lose business income. They submitted a claim to Oregon Mutual, which denied coverage because the policy covered business losses resulting from “direct physical loss of or damage to” insured property.

The plaintiffs sought a declaratory judgment concerning coverage. Oregon Mutual 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 for relief.

Insurance policy and arguments

The policy’s Business Income coverage required a necessary suspension of operations during a “period of restoration” caused by direct physical loss of or damage to the insured property. The policy also provided Extra Expense coverage and coverage for losses caused by a civil authority that prohibited access to the insured property, but those provisions likewise required direct physical loss of or damage to property caused by a covered cause of loss.

Oregon Mutual argued that the plaintiffs’ losses resulted from San Francisco’s orders suspending indoor dining, not from covered physical loss or damage. The plaintiffs argued that the virus caused physical loss or damage, relying on statements by the mayors of San Francisco and Los Angeles that the virus could attach to surfaces for prolonged periods.

Court’s analysis

The court followed what it described as the majority view, including decisions from the Northern District of California, that provisions requiring direct physical loss do not cover lost business income or expenses resulting from government closure orders alone. The plaintiffs alleged only that their losses resulted from the closure orders. They did not allege, for example, that infection caused a loss of functionality at their property.

The court also explained that covered property damage required a physical, tangible injury, such as total deprivation of property, or a physical alteration or active presence of a contaminant. A detrimental economic impact from being unable to host indoor dining was not enough. The policy’s definition of the restoration period—ending when property was repaired, rebuilt, or replaced, or when the business resumed at a new location—also indicated that the relevant loss or damage had to be physical.

Disposition

The court granted Oregon Mutual’s motion to dismiss and gave the plaintiffs leave to file an amended complaint within 30 days. The order states that this disposed of ECF No. 10. It does not state that the dismissal was with or without prejudice.