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 restaurant lost income after San Francisco prohibited indoor dining in response to the COVID-19 pandemic. The plaintiffs submitted an insurance claim for their business losses, but Oregon Mutual denied coverage.

The policy’s Business Loss provision covered lost business income and extra expenses caused by a necessary suspension of operations during a restoration period resulting from “direct physical loss of or damage to” the insured property. The policy also included Civil Authority coverage for business losses caused by an order prohibiting access to the insured property because of direct physical loss of or damage to other property caused by a covered cause of loss.

The court had previously dismissed the original complaint because it did not plausibly allege direct physical loss of or damage to the property. The amended complaint added allegations that hazardous human respiratory droplets damaged the restaurant and posed an immediate danger to people present there.

Parties’ Arguments

The plaintiffs argued that the presence of COVID-19 at the restaurant constituted direct physical damage. They also argued that the pandemic, the virus’s physical presence, and the closure orders caused them to lose the use of the property, creating a factual issue about physical loss or damage. Separately, they argued that the Civil Authority provision covered their losses.

Oregon Mutual moved to dismiss, arguing that the policy required direct physical loss of or damage to property and that the virus did not satisfy that requirement. Oregon Mutual also identified policy exclusions in its reply, but the court said it did not need to consider those exclusions because the complaint did not adequately allege covered physical loss or damage.

Legal Standard

On a motion to dismiss under Rule 12(b)(6), the court accepts well-pleaded factual allegations as true but requires enough facts to make entitlement to relief plausible rather than merely possible. A complaint generally should be allowed to be amended if its defects might be cured by additional facts.

Analysis

The court held that “direct physical loss” requires an external force to cause a physical change in the insured property—something that would, for example, require repairs covered by the policy. The closure orders were issued because of health risks to people, not because COVID-19 caused property damage. The complaint did not allege that an external force physically changed the restaurant or that repairs were required.

The court rejected the amended complaint’s respiratory-droplet theory. Alleging that droplets created a danger to people and made it impracticable to operate the restaurant did not plausibly allege a physical loss or physical damage to the property. The court followed what it described as the weight of authority, including decisions from the Northern District of California, holding that COVID-19-related closure losses were not covered under policies requiring direct physical loss of or damage to property.

The court also rejected the plaintiffs’ loss-of-use and functionality theories. The alleged losses resulted from the closure orders and the risk of contagion, rather than from a physical loss of or damage to the restaurant. The court similarly found no plausible coverage under the Civil Authority provision because that provision required direct physical loss of or damage to property other than the restaurant, and the plaintiffs did not adequately allege that such damage occurred. The shutdown orders were issued to stop the spread of COVID-19, not because of damage to other property.

Disposition

The court granted Oregon Mutual’s motion to dismiss the amended complaint. Because the earlier dismissal had allowed amendment and the plaintiffs did not cure the defects, the court dismissed the complaint without leave to amend. The order states that this disposed of ECF No. 48.