Insurance Coverage & Bad Faith - Summer 2022

Musso & Frank Grill Co., Inc. v. Mitsui Sumitomo Insurance USA, Inc.

(Government Orders Requiring Shutdown of Restaurant Did Not Constitute Physical Loss of or Damage to Property at Insured Premises)

(July 2022) - In Musso & Frank Grill Co., Inc. v. Mitsui Sumitomo Ins. USA, Inc., 77 Cal.App.5th 753 (April 21, 2022), the California Second District Court of Appeal, Division One, affirmed the trial court’s order sustaining the demurrer of Mitsui Sumitomo Insurance, USA, Inc. (“MSI”) to a complaint for breach of contract and bad faith filed by Musso & Frank Grill Co, Inc. (“Musso & Frank”). The dispute arose out of Musso & Frank’s tender of a business interruption claim arising out of government orders requiring it to shut down its restaurant due to the health emergency created by the COVID-19 virus. Musso & Frank contended that the shutdown caused it to lose the use of the premises. MSI disagreed and denied coverage of the claim based on the absence of physical loss or damage to property at the restaurant as required by the insuring agreement in the MSI policy. In addition, MSI denied coverage of the claim based on the virus and governmental action exclusions in its policy. Subsequently, Musso & Frank filed a complaint for breach of contract and bad faith against MSI. In response, MSI filed a demurrer to the complaint and the trial court issued an order sustaining the demurrer without leave to amend, resulting in a dismissal of Musso & Frank’s action.

In affirming the trial court’s order, the Court of Appeal adopted the reasoning of the U.S. Ninth Circuit Court of Appeals decision in Mudpie, Inc. v. Travelers Casualty Ins. Co. (9th Cir. 2021) 15 F.4th 885, and the California Court of Appeal decision in Inns-by-the Sea v. California Mutual Ins. Co. (2021) 71 Cal.App.5th 688, and held as follows:

The Ninth Circuit affirmed on the basis of California law, explaining that Travelers had insured for the loss of business income during a suspension of operations “during the ‘period of restoration”‘-and that the “‘suspension’ [had to] be caused by direct physical loss of or damage to property.” (Mudpie, supra, 15 F.4th at pp. 889-890, italics omitted.)

Mudpie explained that, under California law, the burden is on the insured to establish that a claimed loss is within the basic scope of coverage. Once the insured makes that showing, the burden is on the insurer to prove the claim is specifically excluded. “Where, as here, a policy covers ‘direct physical loss of or damage to’ property, the ‘direct physical loss requirement is part of the policy’s insuring clause and accordingly falls within [the insured’s] burden of proof.”‘ (Mudpie, supra, 15 F.4th at p. 890, citing MRI Healthcare Center of Glendale. Inc. v. State Farm General Ins. Co. (2010) 187 Cal.App.4th 766, 778-780 [115 Cal. Rptr. 3d 277.) Mudpie explains that California’s courts compel an interpretation of an insurance policy “according to the ‘clear and explicit’ meaning of the terms . . . used in their ‘ordinary and popular sense.”‘ (Mudpie, at p. 890; see AIU, supra. 51 Cal.3d at pp. 843-844.)

California addressed the issue in 2021, in Inns-bv-the­Sea v. California Mutual Ins. Co. (2021) 71 Cal.App.5th 688 [286 Cal. Rptr. 3d 576] (review denied, Mar. 9, 2022, S272450), where the Fourth District reached the same result as Oral Surgeons and Mudpie. Inns-by-the­Sea holds, without equivocation, that a policy requiring physical loss or damage does not cover losses incurred by reason of the pandemic. (Inns-by-the-Sea, supra. at pp. 700-701.) Mudpie and Oral Surgeons are cited (Inns-by-the-Sea, supra, at pp. 692, fn. 1, 712) but neither is discussed. (See also Sanzo Enterprises, LLC v. Erie Ins. Exchange (Ohio Ct.App. 2021) 2021-Ohio-4268 [182 N.E.3d 3937.)

At this point, there is no real dispute. Under California law, a business interruption policy that covers physical loss and damages does not provide coverage for losses incurred by reason of the COVID-19 pandemic.

The Court of Appeal also found that the virus exclusion in the MSI policy barred coverage of Musso & Frank’s claim.

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