Barbizon School of San Francisco, Inc. INC. v. Sentinel Insurance Company Ltd

Background

Barbizon School of San Francisco, Inc. and Barbizon School of Modeling of Manhattan, Inc. sued their insurer, Sentinel Insurance Company Ltd., seeking coverage for economic losses connected to COVID-19. Barbizon-West operated under a policy containing a limited fungi, bacteria, or virus endorsement. Barbizon-NY operated under a policy without that virus endorsement but with business-income, extended-business-income, and civil-authority coverage.

The plaintiffs alleged that the presence of SARS-CoV-2 made their property dangerous and less valuable and prevented Barbizon-NY from using its property. They asserted breach of contract, breach of the duty of good faith and fair dealing, and violations of California’s unfair competition law. Barbizon-West asserted only an unfair-competition claim, alleging that Sentinel’s sale and marketing of limited virus coverage was false, unfair, fraudulent, or deceptive. Sentinel denied the insurance claims and moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

Physical Loss or Damage

The policies provided coverage for direct physical loss of or physical damage to covered property. Applying California law, the court explained that direct physical loss generally requires a distinct, demonstrable physical alteration or a physical change in the property’s condition. Economic harm or temporary loss of use, without such a physical alteration, is not enough where the policy requires physical loss or damage.

The court noted that the plaintiffs conceded their property had not suffered physical damage or alteration. It held that their allegations concerning COVID-19 and the related government orders therefore did not constitute direct physical loss or damage as a matter of law. The court also noted that the virus could be disinfected and cleaned from surfaces. Because the plaintiffs had not plausibly alleged the basic coverage requirement, the court did not decide the scope of the West Coast policy’s virus exclusion.

Civil-Authority Coverage

The court separately rejected Barbizon-NY’s civil-authority theory. That coverage required an order that specifically prohibited access to the scheduled premises, resulted directly from a covered cause of loss to property in the immediate area, and met the policy’s other requirements.

The court found that the plaintiffs alleged they were prevented from using the property, but did not allege that they were specifically prevented from accessing it. The government orders reduced the in-person workforce rather than denying access to the property. The court also found that the orders were issued to prevent the spread of COVID-19, not because of property damage, and that the plaintiffs failed to identify nearby property that had suffered direct physical loss.

Other Claims and Disposition

The court concluded that the plaintiffs could not maintain the breach-of-contract claims without coverage. It likewise held that the claims for breach of the duty of good faith and fair dealing and the unfair-competition claims that depended on coverage could not proceed. The plaintiffs’ additional unfair-competition theories—that Sentinel marketed worthless virus coverage and failed to disclose its position regarding virus coverage under the New York policy—were described as too thinly supported to meet the plausibility requirement.

The court granted Sentinel’s motion to dismiss with leave to amend. The amended complaint was due by April 21, 2021. The court also denied the parties’ requests for judicial notice as moot. The order was signed by Thomas S. Hixson, United States Magistrate Judge.