Judge: Stephen P. Pfahler, Case: 22CHCV01332, Date: 2023-10-25 Tentative Ruling


Case Number: 22CHCV01332    Hearing Date: November 20, 2023    Dept: F49

DEMURRER

 

MOVING PARTY:                Defendant, Nonprofits Insurance Alliance of California

RESPONDING PARTY:       Plaintiff, Homenetmen Western Region

 

RELIEF REQUESTED

Demurrer to the First Amended Complaint

·         1st Cause of Action: Breach of Contract

·         2nd Cause of Action: Breach of Covenant of Good Faith and Fair Dealing

·         3rd Cause of Action: Negligent Misrepresentation

·         4th Cause of Action: Declaratory Relief

 

SUMMARY OF ACTION

Plaintiff Homenetmen Western Region contends defendant Nonprofits Insurance Alliance of California wrongfully denied a claim related to business interruptions caused by the Covid-19 pandemic and subsequent government orders from various government agencies, including the City of Los Angeles and State of California.

 

On December 18, 2022, Plaintiff filed a complaint for Breach of Contract, Breach of Covenant of Good Faith and Fair Dealing, Unfair Business Practices Business and Professions Code 17200, Unjust Enrichment, Negligent Misrepresentation, and Declaratory Relief. On April 25, 2023, the court sustained the demurrer to the complaint with 30 days leave to amend. On May 26, 2023, Plaintiff filed a first amended complaint for Breach of Contract, Breach of Covenant of Good Faith and Fair Dealing, Negligent Misrepresentation, and Declaratory Relief.

 

RULING: Sustained with Leave to Amend.

Request for Judicial Notice: Granted.

The court takes judicial notice of its prior order sustaining the demurrer to the complaint with 30 days leave to amend.

 

Defendant Nonprofits Insurance Alliance of California submits a demurrer to the entire

complaint on grounds of insufficient facts establishing coverage, and therefore failure to state a claim. Plaintiff in opposition maintains all causes of action are well pled. Plaintiff specifically focuses on the “physical loss” section on the policy as the basis for establishing coverage. Defendant in reply reiterates the arguments in the demurrer, including the viral and bacterial exclusion language, and the impact on all individual causes of action. Defendant additionally states the opposition fails to respond to virus exclusion argument raised in the demurrer, thereby constituting a complete defense to the breach of contract, bad faith, and declaratory relief causes of action. Defendant reiterates the lack of a valid negligent misrepresentation claim.

 

A demurrer is an objection to a pleading, the grounds for which are apparent from either the face of the complaint or a matter of which the court may take judicial notice. (Code Civ. Proc., § 430.30, subd. (a); see also Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The purpose of a demurrer is to challenge the sufficiency of a pleading “by raising questions of law.” (Postley v. Harvey (1984) 153 Cal.App.3d 280, 286.) “In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.” (Code Civ. Proc., § 452.) The court “ ‘ “treat[s] the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law . . . .” ’ ” (Berkley v. Dowds (2007) 152 Cal.App.4th 518, 525.) In applying these standards, the court liberally construes the complaint to determine whether a cause of action has been stated.  (Picton v. Anderson Union High School Dist. (1996) 50 Cal.App.4th 726, 733.)

 

“A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.” (Khoury v. Maly's of California, Inc. (1993) 14 Cal.App.4th 612, 616; Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139 [“[U]nder our liberal pleading rules, where the complaint contains substantive factual allegations sufficiently apprising defendant of the issues it is being asked to meet, a demurrer for uncertainty should be overruled or plaintiff given leave to amend.]

 

1st Cause of Action: Breach of Contract

Plaintiff seeks to allege breach of contract based on the withholding of insurance benefits under the business interruption clause of the policy. Plaintiff acknowledges the Covid-19 pandemic outbreak during the relevant time frame, but characterizes the interruption as a result of the government orders, rather than the Covid-19 virus itself. [First Amend. Comp., ¶¶ 3-4, 10-18.] Plaintiff depends on a description of the outbreak as a “physical loss or damage,” in that the contagion can remain on physical premises, thereby rendering the premises unusable and the interruption as part of the insurance policy terms. [First Amend. Comp., ¶¶ 19-45.] As for the wrongful denial of the claim and withholding of benefits, the operative complaint articulates a number of reasons, including presentation of an adhesion policy effectively preventing Plaintiff from the required coverage; failure to disclose viral exclusions; denial of any physical damage or government shut down impacts by the insurer which constitute a basis of coverage; and, cursory denial of the claim without sufficient investigation into the claim. [First Amend. Comp., ¶¶ 46-70.] Plaintiff also cites to courts in England and France as a basis of public policy support articulating the wrongful denial claim. [First Amend. Comp., ¶¶ 71-73.]

 

The operative complaint incorporates a copy of the insurance policy. The court therefore references the incorporated exhibit. Defendant directly cites to the “physical loss of or damage” section, which specifically includes coverage for business income interruption caused by a civil authority action leading to a prohibition of access to the property, as well as a specific exclusion for interruptions caused by viral or bacterial outbreaks.

 

Defendant in support of the demurrer cites to the allegations of improperly denied coverage due to the lack of actual physical loss or damage to the premises, and the viral exclusion. [First Amend. Comp., ¶¶ 55, 67.] As to the civil authority exclusion from property claims, Defendant provides no substantive interpretive language argument for the acknowledged policy term and denial. [First Amend. Comp., ¶¶ 67-68.]

 

“‘While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply.’ (Citation.) ‘The principles governing the interpretation of insurance policies in California are well settled. “Our goal in construing insurance contracts, as with contracts generally, is to give effect to the parties' mutual intentions.”’ (Citation.) “‘Such intent is to be inferred, if possible, solely from the written provisions of the contract. (Citation.) The “clear and explicit” meaning of these provisions, interpreted in their “ordinary and popular sense,’ unless ‘used by the parties in a technical sense or a special meaning is given to them by usage’ (Citation), controls judicial interpretation. (Citation.)’” (Citation) “‘If contractual language is clear and explicit, it governs.’”

 

“‘If the terms are ambiguous [i.e., susceptible of more than one reasonable interpretation], we interpret them to protect “‘the objectively reasonable expectations of the insured.’” (Citation.) This rule stems from the principle that “‘[i]f the terms of a promise are in any respect ambiguous or uncertain, it must be interpreted in the sense in which the promisor believed, at the time of making it, that the promisee understood it.’” (Citation.) “‘Only if these rules do not resolve a claimed ambiguity do we resort to the rule that ambiguities are to be resolved against the insurer....’ The ‘tie-breaker’ rule of construction against the insurer stems from the recognition that the insurer generally drafted the policy and received premiums to provide the agreed protection.” (Citation.) “[L]anguage in a contract must be interpreted as a whole, and in the circumstances of the case, and cannot be found to be ambiguous in the abstract.... Courts will not strain to create an ambiguity where none exists.”

 

“‘The insured has the burden of establishing that a claim, unless specifically excluded, is within basic coverage, while the insurer has the burden of establishing that a specific exclusion applies.’ (Citation.) The principles of contractual interpretation, as applied to insurance policies ‘do not include using public policy to redefine the scope of coverage.’”

 

(Inns-by-the-Sea v. California Mutual Ins. Co. (2021) 71 Cal.App.5th 688, 697–698.)

 

The existence of the viral bacterial exclusion remains undisputed. Defendant specifically relies on recent cases regarding interpretation of a viral or bacterial exclusion in support of the demurrer with similar terms. “The virus exclusion expressly bars coverage for all loss or damage caused by or resulting from ‘any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease.’ Musso & Frank's allegation that its losses were caused by the public health orders does not change the fact that those orders were a response to the COVID-19 virus. (Citation.) The Ninth Circuit agrees, observing that the complaint in that case did not allege an attenuated causal chain between the virus and the insured's losses, and the insured did not dispute the fact that the closure orders were due to COVID-19. (Citation.)” (Musso & Frank Grill Co., Inc. v. Mitsui Sumitomo Ins. USA Inc. (2022) 77 Cal.App.5th 753, 761.)

 

“[T]he policy does not cover ‘loss or damage caused directly or indirectly by’ ‘[a]ny virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.’ As the FAC acknowledges, COVID-19, a coronavirus, is a ‘virus.’ It is undisputed that COVID-19 ‘induces or is capable of inducing physical distress or illness.’ In addition, the governmental orders at issue specifically state that they were promulgated ‘to protect and preserve the public health from, and prevent, the increasing transmission of COVID-19 in California, and the significant risk of widespread introduction and transmission of COVID-19 into the County.’ Thus, at a minimum, COVID-19 triggered the governmental orders and it ‘indirectly’ caused appellant's business income loss. The virus exclusion thus applies here.” (Coast Restaurant Group, Inc. v. Amguard Ins. Co. (2023) 90 Cal.App.5th 332, 344–345.)

 

Plaintiff counters with an argument analogizing Covid-19 as a means of causing physical loss or damage, in that the outbreak rendered the property uninhabitable or unusable. Plaintiff cites to a case whereby the court found property damages and therefore a basis for business disruption insurance “where a potentially injurious material in a product causes loss to other products with which it is incorporated.” (Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 865; Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th 1, 90 [“contamination of buildings and their contents from released fibers constitutes a physical injury and, hence, property damage covered under the terms of the insurance policies”].) The cases cited by Plaintiff originate from asbestos “contamination” whereby fibers rendered the premises as either diminished in value or in need of remediation, thereby constituting physical damage. Plaintiff also analogizes the pandemic as a form of trespass, in that the “invasion” of microscopic viral particles caused a physical disruption to premises use and occupation. (Elton v. Anheuser-Busch Beverage Group, Inc. (1996) 50 Cal.App.4th 1301, 1305; Civic Western Corp. v. Zila Industries, Inc. (1977) 66 Cal.App.3d 1, 16.)

 

The court finds the analogy linking a viral invasion as a form of “physical invasion” in that it renders the property either unusable or lower in value, valid. Still, Defendant in reply properly reiterates the actual coverage exclusion for viral agents. The court finds the plain language of the exclusion, and judicial approval of the exclusion definitively renders the exclusion valid. The rules on insurance contract interpretation and plain language of the exclusion render the provision enforceable.

 

Plaintiff follows up with argument for Civil Authority coverage. [First Amend. Comp., ¶¶ 63-69.] The operative complaint alleges the Civil Authority Orders limiting or barring use of the property constitutes a basis of coverage. Plaintiff in opposition appears to rely on the analogized physical invasion argument as part of the support, without otherwise citing to any specific provision in the insurance policy. To the extent the argument depends on the physical invasion rule and viral exclusion, the court finds any Civil Authority Order ancillary to the root basis.

 

Furthermore, the exclusions themselves specifically identify and include this scenario: “Ordinance Or Law (1) The enforcement of or compliance with any ordinance or law: (a) Regulating the construction, use or repair of any property; or (b) Requiring the tearing down of any property, including the cost of removing its debris. (2) This exclusion, Ordinance Or Law, applies whether the loss results from: (a) An ordinance or law that is enforced even if the property has not been damaged; or (b) The increased costs incurred to comply with an ordinance or law in the course of construction, repair, renovation, remodeling or demolition of property or removal of its debris, following a physical loss to that property.”

 

The court additionally finds the circumstances lack support for the finding of coverage under the terms of the policy. The Coast Restaurant Group case addressed efficient proximate cause doctrine.

 

“Appellant argues that even if the virus exception applies, the efficient proximate cause doctrine would apply to provide coverage. Under the efficient proximate cause doctrine, ‘[w]hen a loss is caused by a combination of a covered and specifically excluded risks, the loss is covered if the covered risk was the efficient proximate cause of the loss,’ but “the loss is not covered if the covered risk was only a remote cause of the loss, or the excluded risk was the efficient proximate, or predominate cause.”

 

“The efficient proximate cause doctrine does not apply because the doctrine requires a combination of covered and specifically excluded risks. Both the virus and the governmental orders here are specifically excluded. Additionally, the two possible causes of appellant's business income loss are not conceptually distinct perils. ... In other words, the perils must be such that ‘they could each, under some circumstances, have occurred independently of the other and caused damage.’ (Citation.) Here, COVID-19 and the governmental orders are inextricably intertwined. The governmental orders could not under any circumstance have occurred independent of COVID-19. Thus, the governmental orders are not a conceptually distinct peril, and the efficient proximate cause doctrine does not apply.” (Coast Restaurant Group, Inc. v. Amguard Ins. Co., supra, 90 Cal.App.5th at p. 345.)

 

The Ninth Circuit also considering California law determined that government restrictions on business operations caused by the pandemic constituted a “remote” in relation to a business loss claim, thereby rendering any claim under efficient proximate cause inapplicable. Covid-19 related restrictions limited operations to purposes “deemed essential,” but by no means demonstrated a causal, physical displacement of all business. (Mudpie, Inc. v. Travelers Casualty Insurance Company of America (9th Cir. 2021) 15 F.4th 885, 894.) Under this standard, and regardless of the attribution describing the virus as a “physical” invader, the court finds no basis of a valid, covered claim for business disruption around the viral bacterial exclusion.

 

The court therefore finds Plaintiff fails to establish a viable basis for breach of contract, as alleged. Again, as discussed in the standard, it remains Plaintiff’s burden to establish application of the terms. The demurrer is sustained.

 

2nd Cause of Action: Breach of Covenant of Good Faith and Fair Dealing

Given the lack of a valid contract claim, the court also finds an invalid cause of action for bad faith. (McMillin Scripps North Partnership v. Royal Ins. Co. (1993) 19 Cal.App.4th 1215, 1222;  Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1395; Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1153.) The demurrer is sustained.

 

3rd Cause of Action: Negligent Misrepresentation

Defendant challenges the subject claim on grounds of insufficient facts. The claim itself seeks to articulate liability based on the failure to communicate the exclusions and/or mislead Plaintiff into relying on coverage to cover the potential pandemic situation via the lost business income coverage.

 

“Negligent misrepresentation is a separate and distinct tort, a species of the tort of deceit. ‘Where the defendant makes false statements, honestly believing that they are true, but without reasonable ground for such belief, he may be liable for negligent misrepresentation, a form of deceit.’” (Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 407.) “The tort of negligent misrepresentation does not require scienter or intent to defraud. (Citation.) It encompasses ‘[t]he assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true’ (Citation), and ‘[t]he positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true’ (Citation)…’” (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 173–174.) Misrepresentations must be made about past or existing fact. (Neu-Visions Sports, Inc. v. Soren/McAdam/Bartells (2000) 86 Cal.App.4th 303, 309–310; Agricultural Ins. Co. v. Superior Court (1999) 70 Cal.App.4th 385, 390.)

 

The subject cause of action is separate and distinct from the terms of the coverage dispute. The claim as currently pled lacks sufficient facts regarding the responsibility for the alleged misrepresentations, such as the insurance agents, and only presents the elements for the claim without adhering to the heightened pleading standards. [First Amend. Comp., ¶¶ 102-107.] The demurrer is sustained.

 

4th Cause of Action: Declaratory Relief

Declaratory relief arises under Code of Civil Procedure section 1060, which states in part:

 

“Any person interested under a contract, or who desires a declaration of his or her rights or duties with respect to another, or in respect to, in, over or upon property … may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action or cross-complaint in the superior court for a declaration of his or her rights and duties in the premises, including a determination of any question of construction or validity arising under the instrument or contract. He or she may ask for a declaration of rights or duties, either alone or with other relief; and the court may make a binding declaration of these rights or duties, whether or not further relief is or could be claimed at the time. The declaration may be either affirmative or negative in form and effect, and the declaration shall have the force of a final judgment. The declaration may be had before there has been any breach of the obligation in respect to which said declaration is sought.”

 

“‘[S]ection 1060 does not require a breach of contract in order to obtain declaratory relief, only an ‘actual controversy.’ Declaratory relief pursuant to this section has frequently been used as a means of settling controversies between parties to a contract regarding the nature of their contractual rights and obligations.’” (Osseous Technologies of America, Inc. v. DiscoveryOrtho Partners LLC (2010) 191 Cal.App.4th 357, 365.) Declaratory relief operates prospectively. (Id. at p. 366.)

 

“[U]nder California rules, an actual controversy that is currently active is required for such relief to be issued, and both standing and ripeness are appropriate criteria in that determination. (Citation.) One cannot analyze requested declaratory relief without evaluating the nature of the rights and duties that plaintiff is asserting, which must follow some recognized or cognizable legal theories, that are related to subjects and requests for relief that are properly before the court.” (Otay Land Co.v. Royal Indemn. Co. (2008) 169 Cal.App.4th 556, 563.)

 

To the extent the operative complaint relies on the terms of the policy for all claims of declaratory relief, the court finds no basis of support. The demurrer is sustained.

 

The demurrer is sustained with 20 days leave to amend. Plaintiffs may not add any new or different causes of action, and may only add facts within the scope of the existing insurance coverage dispute. (Harris v. Wachovia Mortgage, FSB (2010) 185 Cal.App.4th 1018, 1023.) Any new causes of action added without leave from court are subject to a motion to strike.

 

The subject action commenced on December 18, 2022, and still remains in the pleading stage. The court has now twice considered challenges to the complaint and first amended, with requests for leave to amend both times. “In response to a demurrer and prior to the case being at issue, a complaint or cross-complaint shall not be amended more than three times, absent an offer to the trial court as to such additional facts to be pleaded that there is a reasonable possibility the defect can be cured to state a cause of action. The three-amendment limit shall not include an amendment made without leave of the court pursuant to Section 472, provided the amendment is made before a demurrer to the original complaint or cross-complaint is filed.” (Code Civ. Proc., § 430.41, subd. (e)(1).)

 

Should a demurrer to the second amended complaint be filed, the court will consider the applicable standard in determining whether Plaintiff can properly allege the challenged claim(s). In other words, the court will review any potential challenges to the second amended complaint with the intention of determining whether Plaintiffs can state any valid claim. Any further requests for leave to amend will constitute a concession to the inability to bring the claim.

 

Defendant to give notice.