By Jeff Sistrunk

Law360 (January 8, 2021, 6:56 PM EST) -- A San Francisco retailer on Thursday urged the Ninth Circuit to seek the California high court's input to resolve its appeal of a federal judge's decision that Travelers is not obligated to cover its financial losses due to COVID-19 shutdown orders, arguing that the case involves a novel question under the Golden State's law.

Children's clothing and toy boutique Mudpie Inc. is aiming to upend U.S. District Judge Jon S. Tigar's September ruling dismissing its putative class action complaint, which accused Travelers Casualty Insurance Co. of America of wrongfully denying its claim for pandemic-related business interruption losses, as well as those of other policyholders.

In an opening appellate brief, Mudpie encouraged the Ninth Circuit to enlist the California Supreme Court's help to determine the core question in its appeal: whether business interruption coverage dependent on the existence of "direct physical loss of or damage" to a policyholder's property can be "reasonably construed to insure against the loss of business property to generate income as a direct result of state and local orders suspending, or severely curtailing, operations of non-essential businesses amid the COVID-19 pandemic."

According to Mudpie, a decision from the California justices would help facilitate the "speedy resolution" of its case and others like it, given that there is not yet any binding precedent addressing the availability of business interruption coverage for losses stemming from COVID-19 stay-at-home orders.

"As this question has newly arisen during the pandemic, neither the California Supreme Court nor the California Courts of Appeal have issued any decision on it, resulting in a total absence of controlling precedent," Mudpie contended.

In its May complaint, Mudpie said that thousands of retailers across the Golden State have been forced to close their doors due to shutdown orders through no fault of their own, yet Travelers and others are categorically denying them coverage despite the premiums they paid for their "all risk" property insurance policies. The suit alleged these denials were based on "crabbed" interpretation of the policies and overly broad exclusions that are being made with little or no investigation.

Travelers swiftly moved to dismiss Mudpie's complaint, asserting that the retailer's losses did not meet the threshold requirement of direct physical loss of or damage to property because they were tied solely to the local and state governments' preventative COVID-19 stay-at-home orders.

Judge Tigar sided with Travelers in mid-September, concluding that, because the retailer hadn't alleged that COVID-19 was present on its premises or directly caused its losses, there was no physical force that led it to lose business. Instead, Mudpie's complaint rests entirely on the allegations that government stay-at-home orders caused it to lose business, which Judge Tigar said isn't enough.

While the judge rejected Travelers' argument that the phrase "physical loss or damage" only refers to a tangible physical alteration of the property, he found that the shutdown orders still didn't cause any such loss or damage. While Mudpie leaned on other cases that found that physical alteration to a property isn't necessary to constitute a physical loss, Judge Tigar wrote that Mudpie is suffering no permanent loss of its property, so once the government orders are lifted, the retailer will get its property back without any need to repair, replace or even disinfect the site.

Without some intervening physical force prompting the shutdown orders or Mudpie's closure — and with no permanent loss of Mudpie's property — the retailer's claims for breach of contract and breach of covenant of good faith fail, the judge added.

In Thursday's appellate brief, Mudpie argued that Judge Tigar correctly rejected Travelers' assertion that "direct physical loss or damage" only includes tangible physical changes, but then erred by imposing additional requirements — that covered loss or damage be permanent or result from an intervening physical force — that are absent from the policy.

"The policy does not expressly include those qualifiers, and a policyholder would not reasonably believe them to be required for 'loss or damage' to occur," Mudpie contended. "The district court thus had no basis in the policy or principles of insurance policy interpretation to engraft such limitations on coverage."

Mudpie said that, if the Ninth Circuit opts to not seek the California Supreme Court's review of the case, it can decide the appeal itself and reverse Judge Tigar's decision.

Mudpie is the second business to request the state high court's immediate input on COVID-19 coverage issues. In December, the California justices declined hotel operator Inns by the Sea's invitation to bypass an intermediate state appeals court and directly consider Inns' appeal of a trial court decision rejecting its bid for pandemic-related coverage. That appeal — believed to be the first of its kind under California law — will instead proceed before the midlevel appellate court. The hotel operator filed its opening brief on Dec. 23.

An attorney for Mudpie and a Travelers spokesman did not immediately respond to requests for comment Friday.

Mudpie is represented by Eric H. Gibbs, Andre M. Mura and Amanda M. Karl of Gibbs Law Group and Victoria S. Nugent and Geoffrey Graber of Cohen Milstein Sellers and Toll PLLC.

Travelers is represented by Stephen E. Goldman and Wystan M. Ackerman of Robinson & Cole LLP and Andrew B. Downs and Linda B. Oliver of Bullivant Houser Bailey PC.

The case is Mudpie Inc. v. Travelers Casualty Insurance Co. of America, case number 20-16858, in the U.S. Court of Appeals for the Ninth Circuit.

--Additional reporting by Mike Curley. Editing by Michael Watanabe.

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