1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 FRENCH LAUNDRY PARTNERS, LP Case No. 20-cv-04540-JSC DBA THE FRENCH LAUNDRY, et al., 8 Plaintiffs, ORDER RE: DEFENDANT’S MOTION 9 TO DISMISS v. 10 Re: Dkt. No. 58

HARTFORD FIRE INSURANCE

11 COMPANY, Defendant. 12 13 This is one of many insurance disputes filed in the wake of the COVID-19 pandemic 14 challenging insurance companies’ denial of coverage for economic losses flowing to businesses 15 following regional shelter-in-place orders. Plaintiffs here own and operate the restaurants The 16 French Laundry and Bouchon Bistro in Napa County California. They bring a declaratory 17 judgment action against their insurer Hartford Fire Insurance Company seeking a declaration that 18 the County’s March 18, 2020 shelter-in-place order triggered coverage under Plaintiffs’ insurance 19 policy. Hartford moves to dismiss arguing that the policy provides no coverage for Plaintiffs’ 20 economic losses as a matter of law.1 (Dkt. No. 58.) Having considered the parties’ briefs and the 21 relevant legal authority, the Court determines that oral argument is unnecessary, see N.D. Cal. Civ. 22 L.R. 7-1(b), VACATES the April 29, 2021 hearing, and GRANTS the motion to dismiss. 23 BACKGROUND 24 Plaintiffs’ restaurants in Napa County, California were forced to shut down after the Napa 25 County Health Officer issued an order on March 18, 2020 directing “all individuals living in the 26 county to stay at home except that they may leave to provide or receive certain essential services 27 1 or engage in certain essential activities” (hereafter “the Order”). (First Amended Complaint, Dkt. 2 No. 56 at ¶ 57.) The Order required all non-essential businesses, including restaurants, to cease 3 operations except for delivery and takeout. (Id. at ¶¶ 57, 62.) Access to Plaintiffs’ business was 4 impacted for several months and Plaintiffs had to furlough over 300 employees. (Id. at ¶¶ 63, 66.) 5 Plaintiffs have an insurance contract with Hartford for indemnification for losses, 6 including business income losses. (Id. at ¶ 37.) Plaintiffs’ premiums include additional coverage 7 “under the Property Choice – Specialized Property Insurance Coverages for Restaurants – Deluxe 8 and Property Choice Business Income and Extra Expense Form – Additional Coverages in the 9 event of business closures by viral contamination and order of a Civil Authority” (hereafter the 10 “Deluxe Form”). (Id. at ¶ 43.) The Policy covers “the actual loss of business income sustained 11 and the actual, necessary and reasonable extra expenses incurred when access to the scheduled 12 premises is specifically prohibited by order of civil authority as the direct result of a covered cause 13 of loss to property in the immediate area of plaintiffs’ scheduled premises.” (Id. at ¶ 46.) Further, 14 the “policy’s Property Choice Deluxe Form specifically extends coverage to direct physical loss or 15 damage caused by virus under the viral contamination additional coverage.” (Id. at ¶ 48.) 16 Following Plaintiffs’ restaurants’ shutdown, Plaintiffs filed a claim with Hartford that was 17 denied. Plaintiffs thereafter filed this declaratory judgment action under California Code of Civil 18 Procedure Section 1060 in the Napa County Superior Court. (Dkt. No. 1-2.) Hartford removed the 19 action to this Court based on diversity jurisdiction. The Court thereafter denied Plaintiffs’ motion 20 to remand. Plaintiffs then filed the now operative First Amended Complaint seeking a declaration 21 (1) “that the Order by [the Napa County Health Officer], in her official capacity, constitutes a 22 prohibition of access to plaintiffs’ Insured Premises”; (2) “that the prohibition of access by a Civil 23 Authority is specifically prohibited access as defined in the Policy”; (3) “that the Order triggers 24 coverage because the policy does not include an exclusion for a viral pandemic and extends 25 coverage for loss or damage due to viral contamination”; (4) “that the policy provides coverage to 26 plaintiffs for any current and future civil authority closures of restaurants in Napa County due to 27 physical loss or damage from the Coronavirus under the Civil Authority provision parameters”; 1 of COVID-19, which has caused a physical loss or damage to the insured property and property in 2 || its immediate area”; and (6) “that [Hartford is] estopped from denying viral contamination 3 coverage due to [its] regulatory admissions or providing illusory coverage.” (FAC, Prayer for 4 || Relief 1-6.) This motion to dismiss followed. (Dkt. No. 58.) 5 DISCUSSION 6 Hartford insists that Plaintiffs’ claim fails as a matter of law because the Policy’s Virus 7 || Exclusion bars any coverage for Plaintiffs’ losses and Plaintiffs have not shown that any exception 8 to the exclusion applies. 9 || A. The Policy Bars Coverage 10 The Policy’s Property Choice Business Income and Extra Expense Coverage Form - 11 Additional Coverages extends coverage “to the actual loss of Business Income” sustained “when 12 access to your ‘Scheduled Premises’ is specifically prohibited by order of a civil authority.””

13 (Dkt. No. 8-1 at 94.) “Covered Causes of Loss” is separately defined as “direct physical loss or

14 || direct physical damage that occurs during the Policy Period and in the Coverage Territory unless 15 || the loss or damage is excluded or limited in this policy.” (Ud. at 115.) Plaintiffs allege that their Q 16 || “business property, and that of other property in the immediate area, experienced a physical loss or

17 damage due to the [COVID-19] viruses propensity to adhere to surfaces.” (FAC at § 65.) In

18 addition, “the Orders affecting the plaintiffs were issued in part because of COVID-19’s impact on 19 || property and its presence in Napa County.” (/d. at { 64.) 20 The Policy includes several specified exclusions, among these, a Virus Exclusion, which 21 states in part: 22 Lo 73 B. EXCLUSIONS 1. We will not pay for loss or damage caused 24 directly or indirectly by any of the following. such loss or damage is excluded regardless 25 of any other cause or event that contributes concurrently or in any sequence to the loss or 6 damage: 07 * The Court may consider the Policy’s content under the incorporation by reference doctrine. Biltmore Assocs., LLC v. Twin City Fire Ins. Co., 572 F.3d 663, 665 n.1 (9th Cir. 2009) (“A court 28 may consider documents, such as the insurance policies, that are incorporated by reference into the complaint.”)

1 g. "Fungus", Wet Rot, Dry Rot, Bacteria 2 or Virus Presence, growth, proliferation, spread or 3 any activity of "fungus," wet rot, dry rot, bacteria or virus. 4 But if direct physical loss or direct physical 5 damage to Govered Property by a “Specified Gause of Loss" results, we will 6 pay for the resulting loss or damage caused by that “Specified Gause of Loss". 7 This Exclusion does not apply: (1) When “fungus," wet rot, dry rot, 8 bacteria or virus results from fire or lightning; or ? (2) To the extent that coverage is 10 provided in the Additional Goverage(s) - “Fungus,” Wet Hot, Dry Rot, 1 Bacteria or Virus - Limited Goverage with respect to loss or damage by a 2 cause of loss other than fire or lightning. 13 (Dkt. No. 8-1 at 115-116.) The Court concludes—as a multitude of other courts have—that virus

v 14 || exclusions such as this exclude coverage for business losses related to COVID-19 as alleged here.

15 See Franklin EWC, Inc. v. Hartford Fin. Servs. Grp., Inc., No. 20-CV-04434-JSC, 2020 WL A 16 7342687, at *2 (N.D. Cal. Dec. 14, 2020) (collecting cases). In particular, the FAC alleges that

2 17 || COVID-19 is the direct or indirect cause of Plaintiffs’ economic loss and the Virus Exclusion bars 1 2 15. "FUNGUS", WET ROT, DRY ROT, BACTERIA

AND VIRUS - LIMITED COVERAGE

a. The coverage described below only applies 3 when the "fungus", wet or dry rot, bacteria or virus is the result of one or more of the 4 following causes that occurs during the policy period and only if all reasonable means were 5 used io save and preserve the property from further damage at the time of and after that 6 occurrence. (1) A “specified cause of loss" other than fire 4 or lightning: (2) Equipment Breakdown Accident occurs to Equipment Breakdown Property, if 8 Equipment Breakdown applies to the affected premises; or 9 (3) Flood, if the Causes of Loss Flood endorsement applies to the affected 10 premises. b. We will pay for loss or damage by “fungus”, 11 wet rot, dry rot, bacteria and virus. As used in this Limited Coverage, the term loss or 12 damage means: (1) Direct physical loss of direct physical 13 damage to Covered Property caused by “fungus”, wet rot, dry rot, bacteria or virus, including the cost of removal of the v 14 "fungus", wet rot, dry rot, bacteria or virus; (2) The cost to tear out and replace any part 15 of the building or other property as needed

to gain access to the “fungus”, wet rot, dry 16 rot, bacteria or virus; and (3) The cost of testing performed after 17 removal, repair, replacement or restoration of the damaged property is Z, 18 completed, provided there is a reason to believe that "fungus", wet rot, dry rot, 19 bacteria or virus is present. 20 (Dkt. No. 8-1 at 70.) 21 First, Plaintiffs argue that the “Deluxe form [] extend[s] viral contamination coverage 22 || independent of a specified cause of loss, equipment breakdown, or flood.” (Dkt. No. 62 at 20:18- 23 19.) Plaintiffs insist that a “contrary reading would undermine the purpose for the policy 24 || extension itself” and argue that clause 15(a) must be read independently from clause 15(b). (/d. at 25 || 21:1-7.) Plaintiffs’ reading is unsupported by the policy language itself or the rules of contract 26 || interpretation. Section 15(a) clearly states that “/t/he coverage described below only applies 27 when the ‘fungus’, wet or dry tot, bacteria or virus is the result of one or more of the following 28 || causes that occurs during the policy period...a ‘specified cause of loss’....; Equipment Breakdown

1 Accident….; or [] Flood…” (Dkt. No. 8-1 at 70.) Plaintiffs do not argue that their request for 2 coverage fits within one of these categories; instead, Plaintiffs maintain that these categories are 3 not exclusive. But this interpretation is unsupported by the Policy’s plain language. Waller, 11 4 Cal. 4th at 18. If the coverage “described below” is not clause 15(b) then clause 15(a) has no 5 meaning. 6 Second, Plaintiffs maintain that because Hartford included “state specific endorsements 7 modifying the coverage terms and conditions for different locations through-out the nation” which 8 barred coverage for “loss or damage caused by or resulting from any virus . . .that induces or is 9 capable of inducing physical distress, illness or disease,” but did not use that same language for 10 other states (including California) the Deluxe Form “extends coverage for loss or damage caused 11 by a virus independent of a specified cause of loss.” (Dkt. No. 62 at 21-22.) This argument, as the 12 one above, is illogical and untethered to the Policy’s plain language. 13 Third, Plaintiffs maintain that interpreting the policy to bar coverage here is inconsistent 14 with Hartford’s “prior admissions.” But Plaintiffs have not identified any statements made by 15 Hartford which are inconsistent with its current position. In the FAC, Plaintiffs vaguely allege 16 that “the insurance industry and HARTFORD DEFENDANTS made conflicting statements to the 17 [California Department of Insurance] to avoid a rate decrease for the removal of pandemic risk” 18 and that “HARTFORD DEFENDANTS and the insurance industry intentionally sowed doubts 19 about whether a virus was similar to other ‘contaminants’ to be included within the same risk, 20 thereby dodging a rate decrease and lowering their risk.” (FAC at ¶¶ 24-25.) Plaintiffs, however, 21 have neither identified any specific statements nor any statements made by Hartford as opposed to 22 the “insurance industry.” See ATCM Optical, Inc. v. Twin City Fire Ins. Co., No. CV 20-4238, 23 2021 WL 131282, at *8 (E.D. Pa. Jan. 14, 2021) (rejecting a similar argument because “[e]ven 24 assuming that the ISO’s statements could be imputed to Twin City, Omega has not alleged that 25 Twin City is now contradicting the statements the ISO made to state regulatory bodies because it 26 did not identify any particular statements the ISO made to state regulatory agencies.”). 27 Fourth, Plaintiffs argue that interpreting the Policy so as to bar coverage here renders the 1 result of another specified loss. The Policy defines “Specified Causes of Loss” as “‘Specified 2 Causes of Loss’ means fire; lightning; explosion; windstorm or hail; smoke; aircraft or vehicles; 3 riot or civil commotion; vandalism; ‘Sinkhole Collapse’; ‘Volcanic Action’; falling objects; 4 weight of snow, ice or sleet; water damage, ‘Sprinkler Leakage’; ‘Theft’; or ‘Building Glass’ 5 breakage.” (Dkt. No. 8-1 at 90.) Plaintiffs insist that viruses do not “‘result from’ lightning, 6 explosions, falling objects or water damage.” (Dkt. No. 62 at 23:24.) This Court rejected a 7 similar argument by an insured in Franklin EWC, Inc. v. Hartford Fin. Servs. Grp., Inc., No. 20- 8 CV-04434-JSC, 2020 WL 7342687, at *4 (N.D. Cal. Dec. 14, 2020), relying on Curtis O. Griess 9 & Sons, Inc. v. Farm Bureau Ins. Co. of Nebraska, 247 Neb. 526, 528 N.W.2d 329, 331 (1995), 10 wherein the Supreme Court of Nebraska determined that a tornado carried a pseudorabies virus to 11 the plaintiff's swine “insured by defendant insurance company for physical loss caused directly by 12 an applicable peril,” where windstorms were covered perils under the policy. The same reasoning 13 applies here. Plaintiffs’ attempt to distinguish this Court’s holding in Franklin and its 14 interpretation of Curtis is unavailing. The policy language in Franklin was substantively 15 identical—both offer coverage if the virus is the result of a specified loss which is a separately 16 defined term. 17 An insurance policy provision is only illusory where it results in a “complete lack of any 18 policy coverage.” Secard Pools, Inc. v. Kinsale Ins. Co., 318 F. Supp. 3d 1147, 1153 (C.D. Cal. 19 2017), aff'd sub nom. Secard Pools Inc. v. Kinsale Ins. Co., 732 F. App’x 616 (9th Cir. 2018); see 20 also Young v. Illinois Union Ins. Co., No. C07-05711 SBA, 2008 WL 5234052, at *1 (N.D. Cal. 21 Dec. 15, 2008), aff’d, 366 F. App’x 777 (9th Cir. 2010) (stating that “[i]n order for a policy to be 22 deemed illusory, it must afford no coverage whatsoever” and a disputed policy exclusion “d[id] 23 not render the policy illusory”); Scottsdale Ins. Co. v. Essex Ins. Co., 98 Cal. App. 4th 86, 95, 119 24 Cal.Rptr.2d 62 (2002) (“An agreement is illusory and there is no valid contract when one of the 25 parties assumes no obligation”) (citation omitted) (emphasis added); Medill v. Westport Ins. Corp., 26 143 Cal. App. 4th 819, 836 (2006) (finding that insurance policy’s exclusion did not render 27 coverage illusory where “not every lawsuit that could conceivably be brought against the [insured] 1 enough” to defeat Plaintiffs’ argument that coverage under the Deluxe Form Limited Virus 2 Coverage is illusory, Secard Pools, 318 F. Supp. 3d at 1153 (original emphasis), and here the 3 provision provides “the possibility of some coverage that is not excluded,” Crusader Ins. Co. v. 4 Burlington Ins. Co., No. CV 1905371 PSG (PLAx), 2020 WL 4919387, at *10 (C.D. Cal. June 12, 5 2020). 6 Fifth, Plaintiffs’ argument that Hartford’s “newfound” interpretation of the Deluxe Form 7 renders the Policy language ambiguous is unavailing. A policy provision is ambiguous if it is 8 “capable of two or more constructions, both of which are reasonable.” Waller, 11 Cal. 4th at 18. 9 Plaintiffs have not identified any ambiguities in the Deluxe Form Limited Virus Coverage—it 10 states that coverage is available if it is a result of a specified cause of loss which is separately 11 defined. While regrettable for Plaintiffs here, that the coverage may be narrow is not a basis to 12 find the Policy language ambiguous. See Nat’l Ins. Underwriters v. Carter, 17 Cal. 3d 380, 386 13 (1976) (“an insurance company has the right to limit the coverage of a policy issued by it and 14 when it has done so, the plain language of the limitation must be respected.”) (internal quotations 15 and citation omitted). 16 Accordingly, Plaintiffs have not met their burden of plausibly alleging that their business 17 losses are covered under the Deluxe Form’s Limited Virus Coverage. See Aydin Corp. v. First 18 State Ins. Co., 18 Cal. 4th 1183, 1191 (1998), as modified on denial of reh’g (Oct. 14, 1998). 19 B. Plaintiffs’ Estoppel Arguments Fail 20 Plaintiffs next insist that Hartford is estopped from denying coverage based on 21 representations that it made to the California Department of Insurance. Plaintiffs refer to both the 22 doctrines of regulatory estoppel and judicial estoppel. Neither applies here. 23 California courts reject the regulatory estoppel doctrine. See ACL Techs., Inc. v. 24 Northbrook Prop. & Cas. Ins. Co., 17 Cal. App. 4th 1773, 1797 n.39 (1993), as modified (Sept. 25 21, 1993) (“Some jurisdictions—but not California—allow extrinsic evidence even where contract 26 terms are unambiguous .... [a]nd some jurisdictions have relied on an ‘estoppel’ or regulatory 27 history rationale not necessarily related to any textual ambiguity.”); see also Poublon v. C.H. 1 state appellate court’s decision unless there is “‘persuasive data’ that the California Supreme Court 2 would reach a different conclusion”) (internal citation omitted). ACL has not been overruled as 3 Plaintiffs suggest. In Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 671 (1995), as 4 modified on denial of reh’g (Aug. 31, 1995), the California Supreme Court relied upon drafting 5 history to help determine the meaning of an ambiguous term. Likewise, in MacKinnon v. Truck 6 Ins. Exch., 31 Cal. 4th 635, 641-46 (2003), as modified on denial of reh’g (Sept. 17, 2003), the 7 court looked at the historical background of a pollution exclusion to determine its current 8 meaning. Plaintiffs have identified no case—and this Court is unaware of any—holding that 9 regulatory estoppel applies under California law; rather, the rule in California remains that 10 “[w]hatever else extrinsic evidence may be used for, it may not be used to show that words in 11 contracts mean the exact opposite of their ordinary meaning.” ACL,17 Cal. App. 4th at 1791; see 12 also Boxed Foods Co., LLC v. California Cap. Ins. Co., No. 20-CV-04571-CRB, 2020 WL 13 6271021, at *6 (N.D. Cal. Oct. 26, 2020), as amended (Oct. 27, 2020) (“Even if ISO mispresented 14 the purpose and scope of its Virus Exclusion, Plaintiffs’ theory requires the Court to construe 15 Defendant's plain, unambiguous Virus Exclusion to mean the exact opposite of its ordinary 16 meaning. Neither California law nor federal courts interpreting Virus Exclusions, permit such an 17 outcome.”). 18 Judicial estoppel is likewise inapplicable here. Judicial estoppel “applies when (1) the 19 same party has taken two positions; (2) the positions were taken in judicial or quasi-judicial 20 administrative proceedings; (3) the party was successful in asserting the first position (i.e., the 21 tribunal adopted the position or accepted it as true); (4) the two positions are totally inconsistent; 22 and (5) the first position was not taken as a result of ignorance, fraud, or mistake.” In re Marriage 23 of Taschen, 134 Cal. App. 4th 681, 689–90 (2005) (internal citation and quotation marks omitted). 24 Plaintiffs do not argue—because they cannot—that the regulatory proceedings before the 25 California Department of Insurance were quasi-judicial. See Wood v. Pub. Utilities Comm'n, 4 Cal. 26 3d 288, 292 (1971) (“In adopting rules governing service and in fixing rates, a regulatory 27 commission exercises legislative functions delegated to it and does not, in so doing, adjudicate 1 ratepayers.”). 2 C. Plaintiffs’ Other Arguments 3 Plaintiffs make two final arguments. First, that dismissal at this stage would be premature 4 and that the Court should allow discovery. In particular, Plaintiffs allege that “discovery is 5 expected to produce other versions of the viral coverage provision that uses more restrictive 6 language showing, by contrast, that the Deluxe form in this case afforded broader coverage than 7 Hartford contends today and previously admitted to the CA DOI” and that in 2006 Hartford 8 recognized “the risks of pandemic to its property and casualty insurance claims.” (Dkt. No. 62 at 9 26:12-16.) 10 California courts consider extrinsic evidence even of unambiguous contracts when the 11 evidence “is relevant to prove a meaning to which the language of the instrument is reasonably 12 susceptible.” Pac. Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33, 37 13 (1968). However, an insurer moving to dismiss based on policy language may “establish 14 conclusively that this language unambiguously negates beyond reasonable controversy the 15 construction alleged in the body of the complaint.” Palacin v. Allstate Ins. Co., 119 Cal. App. 4th 16 855, 862 (2004). The Court must conditionally consider extrinsic evidence “alleged in the 17 complaint, to determine if it would be relevant to prove a meaning to which the language of the 18 instrument is reasonably susceptible.” George v. Auto. Club of S. Cal., 201 Cal. App. 4th 1112, 19 1122 (2011). Even if discovery were to turn up earlier more restrictive versions of the virus 20 coverage provision or evidence that Hartford recognized the risks of a viral pandemic, it would not 21 alter the Court’s conclusion that the agreement between the parties here unambiguously precludes 22 coverage for Plaintiffs’ economic losses. 23 Second, Plaintiffs note that the Court is required to follow California law and urge the 24 Court to follow the California trial court’s decision in Goodwill Ind. of Orange County, California 25 v. Phil Indem. Ins. Co., No. 30-2020-01169032-CU-IC-CXC. (Dkt. No. 63-1.) Plaintiffs are 26 correct that this Court is bound by California law and must “attempt to determine how the 27 California Supreme Court might decide the issue.” Ileto v. Glock Inc., 349 F.3d 1191, 1200 (9th 1 COVID-19 could cause a “direct physical loss” to property—not, as here—whether a Virus 2 || Exclusion applied to bar coverage. Thus, the Court has applied the relevant California law 3 || regarding interpreting unambiguous insurance contracts. 4 CONCLUSION 5 For the reasons stated above, Defendants’ motion to dismiss is GRANTED. While the 6 || Court acknowledges the havoc that the COVID-19 pandemic and consequent shelter-in-place 7 orders have caused businesses throughout this country and the world, the Court cannot read an 8 || ambiguity into an insurance contract where none exists. Because Plaintiff previously filed an 9 || amended complaint, and because the Virus Exclusion bars coverage here as a matter of law, leave 10 to amend would be futile. See Hartmann vy. Cal. Dep't of Corr. & Rehab., 707 F.3d 1114, 1130 11 (9th Cir. 2013). Judgment will be entered by separate order. 12 This Order disposes of Docket No. 58.

IT IS SO ORDERED.

15 || Dated: April 27, 2021 1 Ste

CQUELINE SCOTT CORL

Z 18 United States Magistrate Judge 19 20 21 22 23 24 25 26 27 28