Happy Valley Road LLC v. Amguard Insurance Company

Background

Happy Valley Road LLC owned and rented residential properties in Orinda, California, through short-term leases. It alleged that the COVID-19 pandemic disrupted that rental business and caused financial losses. The plaintiff submitted an insurance claim to Amguard Insurance Company, asserting that the actual, potential, or suspected presence of the virus and resulting government orders caused “loss of use” and “direct physical loss to property.” Amguard denied the claim.

The plaintiff sued for declaratory relief, breach of contract, and breach of the implied covenant of good faith and fair dealing. It relied on the policy’s Dwelling, Dwelling Rental, Broadened Home-Sharing Host Activities, and Civil Authority Prohibits Use coverages. The first three required direct physical loss to the plaintiff’s property; the civil-authority coverage required direct physical loss to neighboring premises. The policy did not contain a virus exclusion.

Rule 12(b)(6) motion

Amguard moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court held that the plaintiff had not alleged that its property was physically altered. Under the authorities the court followed, loss of use caused by the pandemic or government closure orders, without a physical impact on the property, did not establish direct physical loss or damage under California law.

The court distinguished a California Court of Appeal decision that had allowed similar claims to proceed because the policy expressly addressed communicable-disease coverage and the insureds alleged that they had to dispose of property damaged by COVID-19. Happy Valley Road LLC did not allege similar facts, and its policy covered direct physical loss without an express communicable-disease provision.

The court also held that the complaint did not allege other requirements for coverage. For the Dwelling Rental and Broadened Home-Sharing Host Activities coverages, the plaintiff did not allege the existence of a contract or that the rented property was rendered unfit for habitation by direct physical loss. For the Civil Authority Prohibits Use coverage, it did not allege facts showing that a civil-authority order prohibited its use of the property, that the order resulted from damage to neighboring property, or that the neighboring damage was caused by direct physical loss. The plaintiff did not address some of these arguments in its opposition.

Good-faith-and-fair-dealing claim

The plaintiff also alleged that Amguard acted in bad faith by denying coverage. The court explained that a claim for breach of the implied covenant of good faith and fair dealing requires benefits to have been withheld and the withholding to have been unreasonable or without probable cause. The complaint did not plausibly allege that Amguard withheld benefits unreasonably. The court therefore dismissed that claim as well.

Stay and disposition

The plaintiff asked the court to stay the case because the Ninth Circuit had asked the California Supreme Court to decide whether the actual or potential presence of COVID-19 can constitute direct physical loss or damage to property. The court deferred deciding whether to stay the case and ordered further briefing. It noted that the California Supreme Court had not yet accepted the certified question and that the parties’ arguments about a stay were limited.

The court dismissed the claims with leave to amend. The breach-of-contract and declaratory-relief claims based on direct loss were dismissed without prejudice to refiling after any California Supreme Court decision addressing the certified question. Otherwise, the dismissal was with leave to amend. The plaintiff was ordered to file an amended complaint or a motion to stay within 28 days and to attach a comparison showing changes from the current complaint.