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  • October 2020


    Another California court has held that an insurer is not obligated to cover business interruption losses for a policyholder that closed its operations due to the government-ordered shutdown in response to COVID-19.  In Mudpie Inc. v. Travelers Casualty Insurance Co. of America (“Mudpie, Inc.”), the U.S. District Court for the Northern District of California held that Travelers Casualty Insurance Co. (“Travelers”) was not obligated to pay a lost income claim by Mudpie Inc. (“Mudpie”), a retail store in San Francisco, because Mudpie failed to establish a “direct physical loss of property.”

    As a result of the government-mandated business closures, Mudpie, who had purchased comprehensive commercial liability and property insurance, filed a business interruption claim alleging that it suffered a substantial loss in income due to the government-mandated business closures.  However, Travelers denied Mudpie’s claim, asserting that Mudpie was not entitled to Business Income and Extra Expense coverage or Civil Authority coverage due to the fact that Mudpie did not suffer “direct physical loss or damage to property.”  On May 11, 2020, Mudpie brought a putative class action on behalf itself and other California retailers against Travelers for business interruption coverage.

    1. Business Income and Extra Expense Coverage

    In determining whether Mudpie was entitled to Business Income and Extra Expense coverage, the Court examined whether a physical alteration and/or an intervening physical force were necessary to establish a claim.  The Court rejected Traveler’s argument that physical damage or a physical alteration to the property were required to establish a “direct physical loss of property.”  However, the Court explained that Mudpie’s inability to occupy its storefront was not permanent as the property was not misplaced or unrecoverable, indicating that Mudpie’s claim did not amount to a “direct physical loss of property.”

    In its opinion, the Court wrote that Mudpie would not have to “fix, replace, or even disinfect” anything to receive their property back after the government shutdown order is lifted.  Furthermore, the Court explained that the surrounding provisions of the policy, using language such as “fix”, “repair”, and “replace”, suggested Mudpie’s temporary dispossession of its storefront did not amount to a “direct physical loss of property.”  The Court also noted the provision in the policy which provided that the insurer would “ not pay for loss or damage caused by or resulting from … loss of use or loss of market.”

    On the issue of an intervening physical force, the Court held that a policyholder must show that an intervening physical force induced the loss of the property to establish a “direct physical loss of property.”  The Court explained that a loss of business due to a COVID-19 government shutdown order is insufficient to prove a “direct physical loss of property” as the government order is not a physical force.  Conversely, the Court clarified that the presence of COVID-19 itself in a store is sufficient to establish an intervening physical force as COVID-19 is a physical substance that lives on surfaces.

    As Mudpie only alleged that the government shutdown itself caused the loss of income, rather than the physical presence of COVID-19 in the store, the Court ruled there was no intervening physical force.  Therefore, the Court held that Mudpie failed to establish a “direct physical loss of property” and was not entitled to coverage under its insurance policy.

    1. Civil Authority Coverage

    In addition to Business Income and Extra Expense coverage, Mudpie’s policy included Civil Authority coverage, which allows recovery when the action of a civil authority prohibited access to the policy holder’s premises.  Here, the Court observed that for a successful Civil Authority claim, a plaintiff must establish a causal link between damage to adjacent property and denial of access to a storefront.  The Court further specified that if the denial of access to the store is preventative, rather than due to prior damage, then the plaintiff is not entitled to Civil Authority coverage.

    As the government shutdown orders were preventative, attempting to stop the spread of COVID-19, the Court ruled that Mudpie failed to prove a link between prior damage and the government lockdown order. Therefore, the Court held that Mudpie was not entitled to Civil Authority coverage.

    1. Leave To Amend

    The Court recognized that the laws surrounding COVID-19 and business interruption coverage are presently evolving, and therefore dismissed the complaint without prejudice and granted plaintiffs leave to amend.


    Mudpie, Inc. represents another blow to companies filing insurance claims for business interruption losses due to the pandemic.  The case illustrates that absent physical damage or permanent loss of property, coverage for loss of business income due to government shutdown orders will likely not trigger insurance coverage.  On the other hand, the case highlights that if your business is shut down due to the actual presence of COVID-19, coverage will likely be triggered.  Furthermore, Mudpie Inc. shows the evolving legal landscape on the issue of COVID-19, as the court granted the plaintiffs leave to amend and dismissed the complaint without prejudice.

    For more information contact:

    R. Sterling Henderson

    (310) 734-3316

    R. Sterling Henderson is a partner practicing in the Los Angeles office and licensed in the states of Alaska and Washington. He represents a variety of corporate and individual clients, including business and property owners, general contractors, subcontractors, and material suppliers, in a wide range of complex business, commercial, and construction negotiations and disputes. 

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