O'Brien Sales and Marketing, Inc. v. Transportation Insurance Company

Background

O'Brien Sales and Marketing, Inc. alleged that safety concerns about COVID-19 and state orders caused it to stop using its business offices to host clients and vendors and, at times, prevented access to its premises. It submitted a claim under an insurance policy issued by Transportation Insurance Company, which O'Brien said covered lost business income and expenses caused by the disruption. The insurer denied the claim.

O'Brien brought three claims seeking declarations about coverage for business income, extra expenses, and losses caused by civil-authority orders. It also brought a breach-of-contract claim. The claims were asserted for O'Brien and, for the coverage claims, proposed groups of similarly situated policyholders.

The policy's business-income and extra-expense provisions required a suspension of operations caused by direct physical loss of or damage to property at the insured premises. The policy's civil-authority provision required an order prohibiting access to the insured premises because of direct physical loss of or damage to property at other locations. The court granted Transportation Insurance Company's unopposed request for judicial notice of the policy and a cited executive order.

Legal standard

The court applied California law. It evaluated the motion under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally recognized claim or does not allege enough facts to make the claim plausible. At this stage, the court was required to accept well-pleaded factual allegations as true and view them in O'Brien's favor, but it was not required to accept legal conclusions presented as facts.

Business-income and extra-expense coverage

The court rejected O'Brien's proposed interpretation that property suffers physical loss whenever it can no longer be used for its intended purpose. Relying on California authority, the court said “direct physical loss” requires a distinct, demonstrable physical alteration or a physical change in the property's condition. Economic harm or loss of use without such a physical alteration was insufficient. The court also noted that the policy expressly excluded loss of use.

The court found that O'Brien had not alleged facts showing COVID-19 caused a physical alteration or physical change in the condition of its premises. Allegations that people working at the office building and two O'Brien employees tested positive did not allege that COVID-19 was present at the covered premises. The court further stated that, even if the virus had been physically present, its presence or the presence of infected people would not constitute direct physical loss of or damage to property under the policy. It therefore held that O'Brien had not plausibly alleged coverage under the business-income and extra-expense provisions.

Civil-authority coverage

The court also held that O'Brien had not plausibly alleged coverage under the civil-authority provision. The provision required direct physical loss of or damage to property at locations other than O'Brien's premises. O'Brien had relied on California executive orders limiting or reducing business operations and argued that the orders were based on the virus's physical presence near its property. The court found no plausible allegation of the required physical loss or damage to other property.

The court additionally observed that the cited orders were issued to protect public health and stop the spread of COVID-19, rather than because of direct physical loss of or damage to property. It concluded that O'Brien had failed to plausibly allege civil-authority coverage.

Disposition

The court said O'Brien had failed to cure deficiencies previously identified when it dismissed the first amended complaint and therefore dismissed the second amended complaint without allowing another amendment. The conclusion states: “the Motion to Dismiss is hereby GRANTED, and the instant action is hereby DISMISSED with prejudice.” The court also vacated the January 15, 2021 hearing.