Insurers and their counsel have become fond of trumpeting their latest wins in the coverage battles over COVID-19. They typically point to the number of decisions in their favor thus far, somewhere around 13-5. Yes, the numbers currently are on their side, but what do we really know from a dozen or so decisions, particularly when nearly 1,200 COVID-19 coverage cases are pending in the United States alone?

One of the latest decisions cited by insurers and their counsel is Mudpie, Inc. v. Travelers Casualty Ins. Co. of America, 2020 WL 5525171 (N.D. Cal. Sept. 14, 2020). Mudpie is a San Francisco retail store. It filed a purported class action on behalf of itself and other California retailers who purchased comprehensive business insurance from Travelers. Travelers contended that there was no coverage because Mudpie did not suffer a “direct physical loss or damage” to property and that Mudpie was not entitled to civil authority coverage because the orders that affected its business were not issued because of “direct physical loss or damage to property.” The court granted Travelers’ motion to dismiss Mudpie’s lawsuit (without needing to address Travelers’ remaining coverage defense, a virus exclusion). Thus, so far, so good, for Travelers. But, much like the Wizard of Oz, when you look behind the curtain a different truth is revealed.

Yes, Travelers won this round. But the court granted Mudpie leave to file an amended complaint modifying its allegations to plead into coverage. Thus, while round one may be over, there may be future rounds with outcomes to be determined.

Additionally, what is on its surface a win for an insurer is not actually a win for insurers—at least not when one analyzes the substance of the decision. Indeed, the reasoning of the decision perhaps may be more accurately characterized as a win for insureds and a road map to coverage. This is so for six reasons.

First, and foremost, the court rejected the key argument that most insurers make in opposing coverage for losses associated with COVID-19—the argument that there must be “‘a distinct, demonstrable, physical alteration of the property’ or ‘a physical change in the condition of the property, i.e., it must have been “damaged” within the common understanding of that term.’” Id. at *3. The court disagreed with “Travelers’s broad conception of the language ‘direct physical loss of’ property.” Id. Instead, the court found that “the language of this provision, alone, does not require a ‘physical alteration of the property’ or ‘a physical change in the condition of the property.’” Id. The court did note, however, that Mudpie had not suffered a “permanent dispossession” of its property.

Second, the court pointed to Mudpie’s admission that “there is nothing to fix, replace, or even disinfect for Mudpie to regain occupancy of its property.” Id. at *4. Such an admission likely will not happen in most of the disputes.

Third, the court addressed Mudpie’s reliance on other court decisions supporting its argument that coverage should exist if there were a “loss of functionality of, or access to, a property.” The court distinguished those cases on the ground that each involved “an intervening physical force which ‘made the premises uninhabitable or entirely unusable.’” Id. In doing so, it noted that Mudpie cited an unpublished California case in support of its argument. However, the court did not address a published California case (whether because Mudpie did not cite it or for some other reason). In Hughes v. Potomac Insurance Co., 199 Cal. App. 2d 239 (1962), the court held:

Despite the fact that a ‘dwelling building’ might be rendered completely useless to its owners, [the insurer] would deny that any loss or damage had occurred unless some tangible injury to the physical structure itself could be detected. Common sense requires that a policy should not be so interpreted in the absence of a provision specifically limiting coverage in this manner. [The insureds] correctly point out that a ‘dwelling’ or ‘dwelling building’ connotes a place fit for occupancy, a safe place in which to dwell or live. It goes without question that [the insureds’] ‘dwelling building’ suffered real and severe damage when the soil beneath it slid away and left it overhanging a 30-foot cliff. Until such damage was repaired and the land beneath the building stabilized, the structure could scarcely be considered a dwelling building in the sense that rational persons would be content to reside there.

Id. at 248-49.

Fourth, the court focused on the fact that Mudpie “does not allege that ‘Covid-19 entered the [property] through any employee or customer.’” 2020 WL 5525171 at *5. Therefore, the court held:

Because Mudpie’s complaint contains no allegations of a physical force which ‘induced a detrimental change in the property’s capabilities,’ the Court finds that Mudpie has failed to establish a ‘direct physical loss of property’ under its insurance policy.”

Mudpie, 2020 WL 5525171 at *5. In so holding, the court emphasized a key point:

Had Mudpie alleged the presence of COVID-19 in its store, the court’s conclusion about an intervening physical force would be different. SARS-CoV-2—the coronavirus responsible for the COVID-19 pandemic, which is transmitted either through respiratory droplets or through aerosols which can remain suspended in the air for prolonged periods of time—is no less a ‘physical force’ than the ‘accumulation of gasoline’ in Western Fire or the ‘ammonia release [which] ‘physically transformed the air’ in Gregory Packaging. See [Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52, 55 (Colo. 1968); Gregory Packaging Inc. v. Travelers Prop. Cas. Co., 2014 WL 6675934, at *6 (D.N.J. Nov. 25, 2014)].

Id. at *5 n.7.

Fifth, the court addressed the pro-coverage decision in Studio 417, Inc. v. Cincinnati Insurance Co., 2020 WL 4692385 (W.D. Mo. Aug. 12, 2020). The court noted that like Mudpie, the plaintiffs in Studio 417 were businesses that sought coverage for losses incurred when they were impacted by the pandemic. The court pointed out that the Studio 417 plaintiffs alleged that business closure orders issued by civil authorities required them to cease or reduce their business operations.”  Id. The court then pointed out that there were certain failings in Mudpie’s allegations that warranted a different conclusion—that is, that Mudpie had not sufficiently alleged a basis for coverage for its losses:

Unlike Mudpie, however, [the Studio 417] plaintiffs also claimed the presence of the COVID-19 virus inside their establishments made them unusable . . . Mudpie makes no similar allegation here. It does not allege, for example, that the presence of the COVID-19 virus in its store created a physical loss. Rather, its sole focus is on the shelter-in-place orders that have prevented it from opening, a distinctly less physical phenomenon.

Id. at *5.

Sixth, and finally, the court addressed a definition of “property damage” proffered by Mudpie as including “[l]oss of use of tangible property that is not physically injured.” The court pointed out that, as “Mudpie itself acknowledges,” this definition was “‘not in the business owners coverage part’” at issue before the court. Id. at *6 n.8. It rejected Mudpie’s attempt to borrow a provision from a different coverage.

Thus, as noted, the insurer did win a preliminary round in this coverage action. However, the teachings of the court’s decision bode well for insureds in many other coverage actions. Simply put, Mudpie should not be touted as a “win” by insurers when it may prove to be quite the contrary.