Trinh, DDS v. State Farm General Insurance Company

Background

Karen Trinh, DDS, Inc. operated a dental practice and held a business insurance policy issued by State Farm General Insurance Company. The policy covered loss of income and extra expenses caused by “accidental direct physical loss” to covered property, subject to limitations including a virus exclusion.

During the COVID-19 pandemic, California and local governments issued public-health orders limiting business operations. The dental practice continued operating as an essential business but was limited to urgent and emergency visits, which allegedly caused substantial revenue reductions. After the practice submitted an insurance claim for its lost income, State Farm denied the claim, citing the policy’s virus exclusion.

The practice asserted seven claims: breach of contract; breach of the implied promise of good faith and fair dealing; bad-faith denial of the insurance claim; declaratory relief; unjust enrichment; unfair competition under California Business and Professions Code section 17200; and injunctive relief under that statute. State Farm moved to dismiss the Second Amended Complaint for failure to state a claim.

Court’s Analysis

A motion under Federal Rule of Civil Procedure 12(b)(6) tests whether the complaint alleges enough facts to support a legally plausible claim. The court generally accepts well-pleaded factual allegations as true and views them favorably to the party who filed the complaint.

Insurance coverage and breach of contract

The court held that the virus exclusion was plain and unambiguous. It excluded losses caused by a virus capable of causing physical distress, illness, or disease, including COVID-19. The court concluded that the alleged revenue losses were caused by COVID-19 because the public-health orders were issued to slow the virus’s spread. The court rejected the practice’s argument that respiratory droplets, rather than the virus, were the true cause of the loss, reasoning that the droplets were a way the virus spread.

The court also held that the complaint did not allege “accidental direct physical loss” to covered property. It found no allegation of a distinct, demonstrable physical alteration of the dental practice’s property and no allegation that the practice was permanently dispossessed of property. The court stated that economic harm and loss of use, without the required physical loss or damage, were insufficient under the policy.

The court separately found that the civil-authority coverage provision was not adequately pleaded. That provision required, among other things, a covered cause of loss, damage to property other than the insured premises, and an order prohibiting access to the premises under specified conditions. Because the virus exclusion applied and the complaint did not allege the required physical loss or damage, the court found no coverage under that provision.

The court likewise found that the policy’s loss-of-income, extended-loss-of-income, and extra-expense provisions required a covered cause of loss and accidental direct physical loss during a period of restoration. The complaint did not allege those requirements. Because these findings resolved the coverage issue, the court did not decide State Farm’s alternative arguments based on the ordinance-or-law, acts-or-decisions, and consequential-loss exclusions.

Other claims

The court concluded that the claims for breach of the implied covenant of good faith and fair dealing, bad-faith denial, and declaratory relief depended on coverage under the policy. Because the alleged loss was not covered, the court held that these claims also failed.

For unjust enrichment, the practice alleged that State Farm had been unjustly enriched by policy payments made from 2019 to 2020. The practice conceded that unjust enrichment could not be pursued because an express insurance agreement defined the parties’ rights and obligations and withdrew the claim.

The court found that the unfair-competition and injunctive-relief claims were based on the alleged wrongful denial of insurance coverage. Because the complaint did not adequately allege a breach of the policy, it also did not adequately allege unlawful, unfair, or fraudulent conduct under California’s Unfair Competition Law. The court also stated that the requested injunction depended on a viable unfair-business-practices claim. It allowed the practice to amend those claims, including by alleging facts showing unfair business practices and the absence of an adequate legal remedy.

Disposition

The court granted State Farm’s motion to dismiss with leave to amend as to Claims One through Four and Claims Six and Seven: breach of contract, breach of the implied covenant of good faith and fair dealing, bad-faith denial, declaratory relief, unfair competition, and injunctive relief. The court granted the motion with prejudice as to Claim Five for unjust enrichment. The practice was ordered to file an amended complaint within 30 days after the order was filed.

Judge Beth Labson Freeman did not enter a final merits judgment on every claim; the order resolved a failure-to-state-a-claim motion and allowed amendment of most claims.