Nari Suda LLC et al v. Oregon Mutual Insurance Company
OPINION & ORDER: The Court GRANTS Defendant's Motion to Dismiss 24 . Plaintiffs' Complaint is dismissed with prejudice. Signed on 9/6/2021 by Judge Marco A. Hernandez. (jp)
Page 1 of 31
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
NARI SUDA LLC, a Delaware
corporation, dba Nari; and Pakin
Corporation, a California corporation, dba
Kin Khao, on behalf themselves and all
others similarly situated,
OREGON MUTUAL INSURANCE
COMPANY, an Oregon corporation,
Steve D. Larson
Elizabeth K. Bailey
Stoll Stoll Berne Lokting & Schlachter P.C.
209 SW Oak Street, Suite 500
Portland, OR 97204
Robert J. Nelson
Fabrice N. Vincent
Jacob H. Polin
Lieff Cabraser Heimann & Bernstein, LLP
275 Battery Street, 29th Floor
San Francisco, CA 94111-3339
1 – OPINION & ORDER
OPINION & ORDER
Page 2 of 31
Alexandra L. Foote
Law Office of Alexandra L. Foote, P.C.
275 Battery Street, 29th Floor
San Francisco, CA 94111-3339
Attorneys for Plaintiffs
R. Lind Stapley
SOHA & LANG P.S.
1325 Fourth Avenue, Suite 2000
Seattle, WA 98101-2750
Clarke Benbow Holland
Pacific Law Partners, LLP
2000 Powell Street, Suite 950
Emeryville, CA 94608
Attorneys for Defendant
HERNÁNDEZ, District Judge:
Plaintiffs, Nari Suda LLC dba Nari (“Nari”), and Pakin Corporation dba Kin Khao (“Kin
Khao”), are California restaurants insured by Defendant, Oregon Mutual Insurance Company.
Plaintiffs bring class action claims for breach of contract, breach of the implied covenant of good
faith and fair dealing, and declaratory relief based on Defendant’s denial of their claims for
insurance coverage for financial losses stemming from state and local government closure orders
issued in response to the COVID-19 pandemic. Plaintiffs also bring a claim for violation of
California’s unfair competition law. Defendant moves to dismiss.
Many businesses suffered extreme hardship and financial loss as a result of the
government shutdown orders that state and local governments nationwide issued to curb the
spread of COVID-19 infections throughout the country. People across the world have lost their
lives and livelihood as a result of the pandemic. The Court sympathizes with the plight of
businessowners who suffered significant and even catastrophic financial losses as a result of the
2 – OPINION & ORDER
Page 3 of 31
government closure orders. Plaintiffs’ business insurance policy, however, does not cover its loss
of business income. The Court grants Defendant’s motion to dismiss.
Plaintiffs operate dine-in Thai influenced restaurants located in San Francisco, California.
Compl. ¶ 1, ECF 1. Plaintiffs allege that in March 2020, the state of California and the San
Francisco Department of Public Health issued orders in response to the COVID-19 pandemic
that forced Plaintiffs to temporarily close their restaurants, close their dining rooms, and “create
new business models” to serve take out. Id. ¶¶ 2, 108. The orders imposed social distancing
guidelines, restricted nonessential business operations, and restricted all restaurants to providing
only takeout and delivery services. Id. ¶¶ 27–31. Plaintiffs filed an insurance claim seeking
coverage for financial losses stemming from their reduced business operations. Id. ¶ 76, 79.
Plaintiffs allege that several provisions of their business insurance policies cover their financial
losses. Id. ¶¶ 62, 64. Defendant denied coverage. Id. ¶¶ 77, 79, 88.
Section I of the Policy, which provides property coverage, states: “We will pay for direct
physical loss of or damage to Covered Property at the premises described in the Declarations
caused by or resulting from any Covered Cause of Loss.” Compl. Ex. 9 (Nari Suda Policy) at 9,
ECF 1-9; Compl. Ex. 10 (Pakin Policy) at 10. The capitalized phrases in that sentence are
defined terms. The phrase “direct physical loss of or damage to” is not defined in the policy.
“Covered Property” includes Buildings, Business Personal Property, or both, unless it is a kind
of Property Not Covered. Policy 9.1 A “Covered Cause of Loss” is a risk of “direct physical loss”
unless the loss is excluded or limited by other provisions in Section I. Id. at 10.
Because the relevant provisions of Pakin Corporation’s policy and Nari Suda’s policy are
identical, the Court refers to both policies collectively as the “Policy” and cites only to Nari
Suda’s policy, Compl. Ex. 9, throughout the remainder of this Opinion.
3 – OPINION & ORDER
Page 4 of 31
The Policy provides “Additional Coverages” that include “Business Income,” “Extended
Business Income,” “Extra Expense,” and “Civil Authority” coverages. Id. at 13–15. The
Business Income coverage provision states, in part:
We will pay for the actual loss of Business Income you sustain due to the necessary
suspension of your “operations” during the “period of restoration.” The suspension
must be caused by direct physical loss of or damage to property at the described
premises. The loss or damage must be caused by or result from a Covered Cause of
Id. at 13. The Extended Business Income coverage provides, in part:
If the necessary suspension of your “operations” produces a Business Income loss
payable under this policy, we will pay for the actual loss of Business Income you
incur[.] . . . Loss of Business Income must be caused by direct physical loss or
damage at the described premises caused by or resulting from any covered cause
Id. at 13–14. The word “suspension” means “[t]he partial slowdown or complete cessation of
your business activities” and “[t]hat a part or all of the described premises is rendered
untenantable, if coverage for Business Income applies.” Id. at 13.
Id. at 14. The Civil Authority coverage states, in part:
We will pay for the actual loss of Business Income you sustain and necessary Extra
Expense caused by action of civil authority that prohibits access to the described
premises due to direct physical loss of or damage to property, other than at the
described premises, caused by or resulting from any Covered Cause of Loss.
Id. at 15.
The Policy also includes several exclusions. One of those exclusions relates to the
enforcement of an ordinance or law (“Ordinance or Law Exclusion”):
We will not pay for loss or damage caused directly or indirectly by any of the
following. Such loss or damage is excluded regardless of any other cause or event
that contributes concurrently or in any sequence to the loss. These exclusions apply
whether or not the loss event results in widespread damage or affects a substantial
a. Ordinance Or Law
(1) The enforcement of any ordinance or law:
4 – OPINION & ORDER
Page 5 of 31
(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
(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
Id. at 19.
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the sufficiency
of the claims. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). When evaluating the
sufficiency of a complaint’s factual allegations, the court must accept all material facts alleged in
the complaint as true and construe them in the light most favorable to the non-moving party.
Wilson v. Hewlett-Packard Co., 668 F.3d 1136, 1140 (9th Cir. 2012). A motion to dismiss under
Rule 12(b)(6) will be granted if a plaintiff alleges the “grounds” of his “entitlement to relief”
with nothing “more than labels and conclusions, and a formulaic recitation of the elements of a
cause of action[.]” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). “Factual allegations
must be enough to raise a right to relief above the speculative level on the assumption that all the
allegations in the complaint are true (even if doubtful in fact)[.]” Id. (citations and footnote
To survive a motion to dismiss, a complaint “must contain sufficient factual matter,
accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009) (internal quotation marks omitted). A plaintiff must “plead factual content that
allows the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.” Id. In other words, a complaint must state a plausible claim for relief and contain “well-
5 – OPINION & ORDER
Page 6 of 31
pleaded facts” that “permit the court to infer more than the mere possibility of misconduct[.]” Id.
Defendant moves to dismiss Plaintiffs’ complaint because no “direct physical loss of or
damage to” property occurred to invoke coverage under the Business Income and Civil Authority
coverages, and no “direct physical loss or damage to” property occurred that would provide
coverage under the Extra Expense coverage. Defendant also argues that the Ordinance or Law
Exclusion excludes coverage for Plaintiffs’ losses.
Plaintiffs argue that the Policy’s undefined terms “loss of,” “damage to” and “direct
physical loss” cover Plaintiffs’ loss of the functionality and use of its covered property for dinein services due to the closure orders. The Court disagrees.
The parties assert that California law applies to the interpretation of the Policy. Def. Mot.
Dismiss (Def. Mot.) 15, ECF 24; Pl. Resp. Mot. Dismiss (Pl. Opp’n) 4, ECF 25. The Court finds
that Oregon law applies to the resolution of Defendant’s motion to dismiss.
A federal court sitting in diversity applies the forum state’s choice of law rules to
determine what law applies. Alaska Rent-A-Car, Inc. v. Avis Budget Grp., Inc., 738 F.3d 960,
975 (9th Cir. 2013). Thus, Oregon’s choice of law rules will determine whether the Court should
apply Oregon or California law to construe the terms of the Policy. Id.
Generally, when parties to a contract clearly express in the contract the law that applies,
“the contractual rights and duties of the parties are governed by the law or laws that the parties
have chosen.” Or. Rev. Stat. § (“O.R.S.”) 15.350(1)–(2). Because the insurance contract does not
contain a choice of law provision, O.R.S. 15.360 applies. O.R.S. 15.360 established the process
6 – OPINION & ORDER
Page 7 of 31
for determining what law applies when the parties have not made an effective choice of law in
the contract. Under that statute, the court must identify the most appropriate law to apply by:
(1) Identifying the states that have a relevant connection with the transaction or the
parties, such as the place of negotiation, making, performance or subject matter
of the contract, or the domicile, habitual residence or pertinent place of business
of a party;
(2) Identifying the policies underlying any apparently conflicting laws of these
states that are relevant to the issue; and
(3) Evaluating the relative strength and pertinence of these policies in:
(a) Meeting the needs and giving effect to the policies of the interstate and
international systems; and
(b) Facilitating the planning of transactions, protecting a party from undue
imposition by another party, giving effect to justified expectations of the
parties concerning which state’s law applies to the issue and minimizing
adverse effects on strong legal policies of other states.
As to the first factor, the states with a relevant connection to the transaction and parties
are Oregon and California. Defendant’s principal place of business is located in Oregon. Compl.
¶ 8. Defendant issued an insurance contract that insured Plaintiffs, both of which are California
businesses, and covered Plaintiffs’ business property located in California. Policy 4. The Policy
includes an endorsement entitled “California Changes – Businessowners” which amends certain
portions of the Policy. Id. at 87. The performance of the contract occurred in California, and
Plaintiffs’ alleged losses occurred in California. Compl. ¶ 59. Thus, both Oregon and California
have a “relevant connection with the transaction or the parties[.]” See Portfolio Recovery Assoc.,
LLC v. Sanders, 366 Or. 355, 371 (2020) (holding that O.R.S. 15.360 does not limit “relevant
connection[s]” to those that existed at the time of the transaction).
7 – OPINION & ORDER
Page 8 of 31
The second factor asks the court to identify the policies undergirding any apparent
conflict between the relevant states’ law. The Court finds that there is no apparent conflict
between Oregon and California law concerning the interpretation of insurance contract language.
Both states’ law applies general contract interpretation principles aimed at giving effect to the
mutual intent of the parties. Compare Am. Claims Mgmt., Inc. v. Allied World Surplus Lines Ins.
Co., 484 F. Supp. 3d 869, 875 (S.D. Cal. 2020) (“While insurance contracts have special
features, they are still contracts to which the ordinary rules of contractual interpretation apply.”)
(quotation marks omitted) with Ortiz v. State Farm Fire & Cas. Co., 244 Or. App. 355, 360–61
(2011) (noting that interpreting a term of the insurance policy required determining the intent of
the parties given the ordinary meaning of the term). Both states’ laws begin with determining the
plain meaning of the terms to determine whether the terms are ambiguous because they have
more than one plausible meaning. Am. Claims Mgmt., Inc., 484 F. Supp. 3d at 874–75; Ortiz, 244
Or. App. at 360. If the terms of the contract are unambiguous, the courts of both states apply the
plain meaning and conduct no further analysis. Am. Claims Mgmt., Inc., 484 F. Supp. 3d at 874–
75; Ortiz, 244 Or. App. at 360. Thus, there is no “apparent conflict” between California and
Oregon law concerning the interpretation of insurance contracts. O.R.S. 15.360(2). As a result,
the Court will apply Oregon law. Portfolio Recovery Assoc., 366 Or. at 374 (“. . . when the laws
are not ‘apparently conflicting,’ there is no path to choosing the law of another state unless the
parties have made an ‘effective choice’ of law to govern the contract claim.”).
Defendant argues that Plaintiffs’ pandemic-related business losses are not covered under
the terms of the Policy because no risk of direct physical loss to Plaintiffs’ businesses occurred.
Determining whether insurance coverage exists is a two-step process. First, the insured bears the
8 – OPINION & ORDER
Page 9 of 31
burden to establish that the loss falls within the Policy’s grant of coverage. ZRZ Realty Co. v.
Beneficial Fire & Cas. Co., 222 Or. App. 453, 465 (2008). If the insured meets that burden, then
the insurer bears the burden of establishing that an exclusion applies. Id.
To determine whether the Policy covers Plaintiffs’ claims, the Court must first decide
whether Plaintiffs’ alleged losses were caused by or resulted from a “Covered Cause of Loss.”
The Policy defines Covered Causes of Loss as “[r]isks of direct physical loss” unless otherwise
limited or excluded under other provisions of the Property coverage. Policy 10. Next, the Court
must determine whether a Covered Cause of Loss caused or resulted in (1) “direct physical loss
of or damage to property” as required to invoke coverage under the Business Income and Civil
Authority Coverages; and (2) “direct physical loss or damage to property,” as required to invoke
coverage under the Extra Expense coverage. Policy 13–15. If coverage exists, then the Court
determines whether Plaintiffs’ claims fall within a policy exclusion. ZRZ Realty Co., 222 Or.
App. 453 at 465.
Interpretation of an insurance policy is a question of law. Holloway v. Rep. Indem. Co. of
Am., 341 Or. 642, 649 (2006). To interpret an insurance policy, the court must “ascertain the
intention of the parties to the insurance policy.” Id. (citing Hoffman Constr. Co. v. Fred S. James
& Co., 313 Or. 464, 469 (1992)). “If an insurance policy defines the phrase in question, [then the
court] applies that definition.” Id. at 650. If the insurance policy does not define the phrase, the
court first considers whether it has a plain meaning. Id. If so, the court applies that meaning and
conducts no further analysis. Id. If the phrase “has more than one plausible interpretation,” then
the court examines “the phrase in light of the particular context in which that [phrase] is used in
the policy and the broader context of the policy as a whole.” Id. (quotation marks and citation
omitted). If a term of the policy remains ambiguous after engaging in those exercises, then “‘any
9 – OPINION & ORDER
Page 10 of 31
reasonable doubt as to the intended meaning of such [a] term will be resolved against the
insurance company[.]’” Id. (quoting N. Pac. Ins. Co. v. Hamilton, 332 Or. 20, 25 (2001)). A term
is ambiguous only if it is susceptible to more than one plausible interpretation. Id.
None of the parties argue that the relevant policy provisions are ambiguous. The Court
agrees with the courts which have construed the phrase “physical loss of or damage to covered
property” and similar language and finds that the relevant policy language is unambiguous. See,
e.g., Protégé Rest. Partners, LLC v. Sentinel Ins. Co., Ltd., ____ F. Supp. 3d ____, 2021 WL
428653, at *4 (N.D. Cal. Feb. 8, 2021) (finding the phrase “direct physical loss of or physical
damage to” unambiguous); Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. Civ. 98-434-HU,
1999 WL 619100, at *5 (D. Or. Aug. 4, 1999) (same). Thus, the Court will construe the terms of
the Policy by applying the definitions of the defined terms and the plain meaning of the
undefined terms. Holloway, 341 Or. at 650. The parties also appear to implicitly agree that it is
appropriate for the Court to decide this motion based on the Court’s review of the Policy because
it is incorporated by reference into Plaintiffs’ Complaint and quoted extensively in the parties’
briefing on this motion. Def. Mot. 13–15; Compl. ¶¶ 55–60.
Plain Meaning of the Policy’s Terms
Each of the coverage provisions apply only if a Covered Cause of Loss occurred. Policy 9
(“We will pay for direct physical loss of or damage to Covered Property . . . caused by or
resulting from any Covered Cause of Loss.”). A “Covered Cause of Loss” is defined in the
Policy as a risk of “direct physical loss.” Id. at 10. The court determines whether words have a
plain meaning by “reference to the usual source of ordinary meaning, the dictionary.” Phillips v.
State Farm Fire & Cas. Co., 302 Or. App. 500, 506 (2020) (noting that “directly” means
“without any intervening space or time : next in order[;] . . . “in a straight line: without deviation
10 – OPINION & ORDER
Page 11 of 31
of course.” (quoting Webster’s Third New Int’l Dictionary 641 (unabridged ed. 2002)). “Direct”
means “‘characterized by or giving evidence of a close esp. logical, causal, or consequential
relationship.’” Summit Real Est. Mgmt., LLC v. Mid-Century Ins. Co., 298 Or. App. 164, 177
(2019) (holding that “direct loss” means “loss resulting immediately and proximately from an
event”) (quoting Webster’s Third New Int’l Dictionary 640).
“Physical” means “of or relating to natural or material things as opposed to things mental,
moral, spiritual, or imaginary: material, natural[.]” Webster’s Third New Int’l Dictionary 1706;
see also 10A Couch on Insurance § 148.46 (3d ed. 2019) (“The requirement that the loss be
‘physical,’ given the ordinary definition of that term, is widely held to exclude alleged losses that
are intangible or incorporeal and, thereby, to preclude any claim against the property insurer
when the insured merely suffers a detrimental economic impact unaccompanied by a distinct,
demonstrable, physical alteration of the property”). The dictionary defines “loss” as “the act or
fact of losing : failure to keep possession : deprivation;” or “an instance of losing[.]” Webster’s
Third New Int’l Dictionary 1338.
Applying those definitions, the Court concludes that for a Covered Cause of Loss to have
occurred, Plaintiffs must demonstrate that COVID-19 or the state and local closure orders caused
harm to or destroyed its business property or dispossessed Plaintiffs of their business property.
Meaning of “direct physical loss of or damage to property”
The Business Income provision covers the insured’s lost income “caused by direct
physical loss of or damage to property at the described premises.” Policy 13. The Civil Authority
provision covers lost business income when an action of civil authority prohibits access to the
insured’s property due to “direct physical loss of or damage to property” at a location other than
11 – OPINION & ORDER
Page 12 of 31
the insured’s property. Id. at 15. Thus, whether those provisions cover Plaintiffs’ losses turns on
the meaning of “direct physical loss of or damage to property.”
The word “damage” means “loss due to injury : injury or harm to person, property, or
reputation[.]” Webster’s Third New Int’l Dictionary 571. Applying that definition, the plain
meaning of the phrase “direct physical loss of or damage to property” is direct (without any
intervening space or time) physical (of or relating to natural or material things) loss of (the act or
fact of losing) or damage (injury or harm) to property. The plain meaning of those terms thus
requires a Covered Cause of Loss to directly cause property to be lost or physically damaged for
coverage to exist under the Business Income and Civil Authority provisions. See Or.
Shakespeare Festival Ass’n v. Great Am. Ins. Co., No. 1:15-cv-01932-CL, 2016 WL 3267247, at
*5 (D. Or. June 7, 2016) (“physical loss or damage” means “any injury or harm to a natural or
material thing”), vacated by stipulation of the parties, 2017 WL 1034203 (Mar. 6, 2017);
Columbiaknit, Inc., 1999 WL 619100, at *5 (“‘The inclusion of the terms “direct” and “physical”
could only have been intended to exclude indirect, nonphysical losses.’” (quoting Great N. Ins.
Co. v. Benjamin Franklin Fed. Sav. and Loan Ass’n, 793 F. Supp. 259, 263 (D. Or. 1990))). Cf.
Wy. Sawmills, Inc. v. Transp. Ins. Co., 282 Or. 401, 406 (1978) (Including the word “‘physical’
in the phrase ‘physical injury to . . . tangible property’ . . . negates any possibility that the policy
was intended to include ‘consequential or intangible damage,’ such as depreciation in value,
within the term ‘property damage.’”).
The Civil Authority provision extends coverage for loss of Business Income and
necessary Extra Expense “caused by action of civil authority that prohibits access to the
described premises due to direct physical loss of or damage to property, other than at the
described premises, caused by or resulting from any Covered Cause of Loss.” Policy 15. Thus,
12 – OPINION & ORDER
Page 13 of 31
the Civil Authority provision requires that an action of civil authority prohibited access to
Plaintiffs’ restaurants due to the destruction, dispossession of or injury to property other than
Plaintiffs’ property for coverage to apply.
Meaning of “direct physical loss or damage to property” and “direct loss
or damage to property”
The Extra Expense coverage covers “direct physical loss or damage to property.” Policy
14. Despite the slightly different phrasing, the parties do not argue that the phrase “direct
physical loss or damage to property” has a different meaning from the phrase “direct physical
loss of or damage to property.” The Court thus assumes, without finding, that the three phrases
have the same plain meaning for purposes of this Opinion.
Having determined the plain meaning of the undefined terms of the Policy, the Court now
applies the plain meaning of those terms to the language of the Policy to determine whether
Business Income Coverage
Defendant argues that the phrase “direct physical loss of or damage to property” in the
Business Income provision requires Plaintiffs to lose of possession of their property or
demonstrate a physical alteration in the condition of their property for coverage to apply. Def.
Mot. 9. The Court agrees.
Oregon courts have construed the phrase “direct physical loss of or damage to property”
and similar phrases to require some degradation in the condition of the property to invoke
coverage. In Columbiaknit, Inc. v. Affiliated FM Ins. Co., this Court emphasized that a policy
that covers “direct physical loss”—and the inclusion of the word “physical” in particular—
covers only direct damage and does not extend to consequential damages. 1999 WL 619100, at
13 – OPINION & ORDER
Page 14 of 31
*4. Applying that construction, the Court held that the insurance policy of the plaintiff, a clothing
manufacturer whose property had suffered water intrusion damage resulting in water damage to
some of its merchandise, could recover only for the damage to the clothing directly damaged by
the water intrusion. Id. at *7. The court ruled that only articles of clothing that were “physically
changed in some manner,” either by the water intrusion or the resulting mold and mildew spores,
were “damaged” to an extent covered under the terms of the policy. Id. at *7–8.
The Oregon Supreme Court held in the context of a liability insurance policy that
including the word “physical” in the terms of the policy excluded coverage for consequential or
intangible damages. Wy. Sawmills, 282 Or. at 406. In that case, the plaintiff sought
indemnification for damages it caused by selling defective lumber to a customer. Id. at 403. The
purchaser used the defective lumber as studs in a building, and the studs later warped and
twisted. Id. The court held that the policy, which defined “property damage” as “physical injury
to or destruction of tangible property,” did not cover consequential damages such as diminished
value but did cover the cost of labor for “tearing out and putting back other parts of the building
. . . in order to replace the studs[.]” Id. at 404, 408.
The Ninth Circuit also has held that the phrase “direct physical loss” requires damage to a
tangible item of property. Sentience Studio, LLC v. Travelers Ins. Co., 102 F. App’x 77, 81 (9th
Cir. 2004) (mem.) (holding that a business property insurance policy covering “direct physical
loss” did not cover losses stemming from the removal of a producer’s name from the film credits
because film credits are not tangible property—“‘physical’ loss cannot occur to the intangible.”);
Commonwealth Enters. v. Liberty Mut. Ins. Co., 101 F.3d 705, at *2 (9th Cir. 1996) (table)
(holding that tenants’ fear of asbestos contamination that led tenants to vacate commercial
buildings was not physical loss or damage covered under business interruption provision).
14 – OPINION & ORDER
Page 15 of 31
The Oregon Court of Appeals has held that methamphetamine odor in a home constituted
“accidental direct physical loss” within the meaning of an all-risk homeowner’s insurance policy.
Farmers Ins. Co. of Or. v. Trutanich, 123 Or. App. 6, 9–10 (1993). The court reasoned that the
“odor was ‘physical’ because it damaged the house.” Id. at 10. The court rejected the insurer’s
argument that Wyoming Sawmills compelled a finding of no coverage by distinguishing the
building in Wyoming Sawmills from the odor-permeated home and personal items damaged by
the methamphetamine odor. Id. at 11.
In Great Northern Insurance Company v. Benjamin Franklin Federal Savings and Loan
Association, a tenant of a commercial building owned by the insured discovered asbestos while
remodeling a unit and demanded that the insured remove the asbestos. 793 F. Supp. at 261, aff’d,
953 F.2d 1387 (9th Cir. 1992). When the landlord refused and the tenant then vacated the unit,
the insured submitted a business interruption claim under its property insurance policy, which
covered “direct physical loss or damage.” Id. The court ruled that coverage did not exist based on
the presence of asbestos in the building because “[t]here is no evidence here of physical loss,
direct or otherwise.” Id. at 263. Affirming the district court, the Ninth Circuit held:
We agree with the district court, applying Oregon case law, that [the insured’s] loss
did not result “from direct physical loss.” While [the insured] no doubt sustained
consequential loss caused by the necessity of cleaning up asbestos, we conclude
that it did not sustain “direct physical loss.”
953 F.2d 1387, at *1 (9th Cir. 1992) (mem.).
Plaintiffs’ Complaint does not allege a loss that would trigger coverage under any of the
relevant provisions of the Policy. Plaintiffs do not allege that their restaurants or the business
personal property located inside them was lost, destroyed, or physically changed in any manner.
Plaintiffs’ Complaint alleges that (1) “The prohibitions and limitations imposed by the Orders
prohibited access to, use of, and operations at and by the Restaurants, their employees and their
15 – OPINION & ORDER
Page 16 of 31
customers;” and (2) “As a result of the Orders, components of the Restaurants became unusable
and/or lost the ability to generate income;” (3) “There are numerous individuals who had tested
positive for COVID-19, and those numbers continue to grow;” (4) “COVID-19 was and is
present in these areas because, for example, it has attached to properties and surfaces on, at, or
within properties near the Restaurants;” and (5) “COVID-19 was and is being transmitted in or
between properties throughout the areas near the Restaurants, including but not limited to
transmission through the air, through ventilation systems, or through contact with contaminated
surfaces.” Compl. ¶¶ 62–63.
Plaintiffs also allege that “[t]he presence of COVID-19 resulted in and continues to result
in direct physical loss, including but not limited to loss of use of properties, as well as direct
physical damage to properties, and this direct physical loss and/or direct physical damage
prompted the issuance of the Orders.” Compl. ¶ 62. Absent from those allegations are any facts
from which a factfinder could conclude that (1) the government closure orders dispossessed or
damaged any of Plaintiffs’ property or (2) that the virus that causes COVID-19 dispossessed
Plaintiffs of their property or physically damaged their property. Plaintiffs’ conclusory
allegations that they suffered direct physical loss and damage are insufficient to state a claim. See
Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th Cir. 2009) (“conclusory allegations of law and
unwarranted inferences are insufficient to avoid a Rule 12(b)(6) dismissal”). The absence of facts
demonstrating any physical loss or damage to their business property is fatal to Plaintiffs’ claim.
Numerous courts in this circuit and around the country have reached the same conclusion
that this Court reaches today. See, e.g., Protégé Rest. Partners, LLC, 2021 WL 428653, at *4
(finding “direct physical loss of or physical damage to” unambiguous, that it requires a “distinct,
demonstrable, physical alteration of the property” to invoke coverage, and noting that every
16 – OPINION & ORDER
Page 17 of 31
California court to address COVID-19 business interruption claims to date has concluded that
“government orders that prevent full use of a commercial property or that make the business less
profitable do not themselves cause or constitute ‘direct physical loss of or physical damage to’
the insured property.”); Pappy’s Barber Shops, Inc. v. Farmers Grp., Inc., 491 F. Supp. 3d 738,
740 (S.D. Cal. 2020) (finding that even assuming presence of virus at the plaintiffs’ business
premises, business income losses were directly caused by precautionary measures taken by the
state to prevent the spread of COVID-19 rather than by direct physical loss of or damage to
property); Uncork & Create LLC, 498 F. Supp. 3d 878, 883 (S.D. W. Va. 2020) (no coverage
because “COVID-19 does not threaten the inanimate structures covered by property insurance
policies, and its presence on surfaces can be eliminated with disinfectant.”); Johnson v. Hartford
Fin. Servs. Grp., No. 20-cv-02000, ___ F. Supp. ___, 2021 WL 37573, at *7 (N.D. Ga. Jan. 4,
2021) (“COVID-19 hurts people, not property”); Circus Circus LV, LP v. AIG Specialty Ins. Co.,
No. 2:20-cv-01240-JAD-NJK, 2021 WL 769660, at *3 (D. Nev. Feb. 26, 2021) (ruling that
“pure, economic losses caused by COVID-19 closures do not trigger policy coverage predicated
on “direct physical loss or damage”); Levy Ad Grp., Inc. v. Chubb Corp., No. 2:20-cv-00763JAD-DJA, 2021 WL 777210, at *3 (D. Nev. Feb. 16, 2021) (same); Nguyen v. Travelers Cas.
Ins. Co. of Am., No. 2:20-cv-00597-BJR, 2021 WL 2184878, at *10–11 (W.D. Wash. May 28,
2021) (granting insurer’s dispositive motions in consolidated actions against ten groups of
insurers brought by hundreds of Washington businesses and finding that COVID-19 does not
cause “direct physical damage to” or “direct physical loss of” property).2
See also Newman Myers Kreines Gross Harries, P.C. v. Gr. N. Ins. Co., 17 F. Supp. 3d 323,
331 (S.D.N.Y. 2014) (finding that the phrase “direct physical loss or damage . . .
unambiguously requires some form of actual, physical damage to the insured premises to
trigger loss of business income and extra expense coverage.”); Ass’n of Apartment Owners of
Imperial Plaza v. Fireman’s Fund Ins. Co., 939 F. Supp. 2d 1059, 1069 (D. Haw. 2013) (finding
17 – OPINION & ORDER
Page 18 of 31
Construing the allegations in the light most favorable to Plaintiffs, the losses Plaintiffs
allege are purely economic and not the result of any “direct physical loss of or damage to
property.” Plaintiffs’ pleadings attempt to characterize the harmful effects of government closure
orders issued in response to the public health crisis presented by the pandemic as “physical loss”
or “physical damage,” but no physical loss of or physical damage to its property occurred. As a
result, no coverage exists under the Business Income provision of the Policy.3
The Policy does not cover a “deprivation of functionality” of undamaged
dining rooms and related property.
Plaintiffs argue that the phrases “loss of” and “damage to” have different meanings and
that Plaintiffs can recover for a loss of undamaged property. Pl. Opp’n 7–8. The Court agrees.
See Total Intermodal Servs. v. Travelers Prop. Cas. Co. of Am., No. CV 17-04908AB (KSx),
2018 WL 3829767, at *3 (C.D. Cal. July 11, 2018) (“[t]o interpret ‘physical loss of’ as requiring
‘damage to’ would render meaningless the ‘or damage to’ portion of the same clause, thereby
violating a black-letter canon on contract interpretation—that every word be given a meaning.”).
But the Court declines to adopt the definition of “loss” that Plaintiffs urge the Court to apply.
Plaintiffs argue that the Court should apply definitions of the word “loss” that are synonymous
with “deprivation,” “dispossession,” and “impairment.” Pl. Opp’n 10. But that argument ignores
the context in which the words “loss” and “damage” appear in the Policy. “Loss” and “damage”
do not appear in isolation. Those words are modified by the word “physical.” The modification
of those words by the word “physical” means that the insured must demonstrate a deprivation,
that “direct physical loss or damage” means “that an event had a direct impact and proximately
caused a loss related to the physical matter of the Property”).
To the extent that Plaintiffs allege that the Extended Business Income provision covers their
losses, see Compl. ¶ 59, no coverage exists under that provision because it applies only “[i]f the
necessary suspension of your “operations” produces a Business Income loss payable under this
policy.” Because no business income loss is payable under the Policy, the Extended Business
Income provision does not apply.
18 – OPINION & ORDER
Page 19 of 31
dispossession, or impairment that is physical in nature, which requires that the loss is a physical
loss of possession, deprivation, or impairment of the property:
In order to trigger coverage under a direct physical loss theory, an outside peril
must cause an inability to interact with the property because of an alteration to its
physical status. COVID-19, and more specifically the Governor’s Proclamations,
may have limited the uses of the property by preventing certain indoor activities
previously conducted on the premises, but they did not cause dispossession of the
buildings [or the business personal property located in them].
Ngyuen, 2021 WL 2184878, at *10–11. The requirement that “physical loss” requires physical
dispossession or loss of the presence of property for coverage to exist is consistent with the
authority cited by Plaintiffs. For example, Plaintiffs cite Nautilus Group, Inc. v. Allianz Global
Risks US for the proposition that a covered “physical loss” can occur in the absence of any
damage. Pl. Opp’n 11. In Nautilus, the district court found that the insured had suffered a
covered physical loss when a disgruntled former employee took important business documents
necessary to keep the business open and refused to return them. Nautilus Grp., Inc. v. Allianz
Global Risks US, No. C11-5281BHS, 2012 WL 760940, at *2–3, 7 (W.D. Wash. Mar. 8, 2012).
Nautilus is distinguishable from the facts of this case. In Nautilus, the insured physically lost
possession of the important business documents when the disgruntled former employee took
them and refused to return them. Id. at *7. Plaintiffs have not alleged a similar dispossession of
Plaintiffs also rely on Total Intermodal, in which the Central District of California found
that a policy that covered risks of direct physical loss or damage covered the loss of cargo that
the insured’s employee improperly labeled and was later destroyed by Chinese authorities. 2018
WL 3829767, at *2–4. Plaintiffs’ Complaint alleges no loss of business property similar to that at
issue in Nautilus Group and Total Intermodal that would trigger coverage under the Policy.
19 – OPINION & ORDER
Page 20 of 31
The selective definition of “loss” that Plaintiffs urge the Court to apply would render the
word “physical” surplusage and is contrary to longstanding insurance law doctrine which
provides that all-risk insurance policies are intended to cover damage to property, not economic
loss. Ngyuen, 2021 WL 2184878, at *11 (finding that the plaintiffs “conflate physical loss with
non-physical loss of use.”).
The requirement that the loss be “physical,” given the ordinary definition of that
term, is widely held to exclude alleged losses that are intangible or incorporeal and,
thereby, to preclude any claim against the property insurer when the insured merely
suffers a detrimental economic impact unaccompanied by a distinct, demonstrable,
physical alteration of the property.
Generally; “Physical” loss or damage, 10A Couch on Ins. § 148:46 (3d ed. Supp.
2021) (footnotes omitted). As a result, although the word “loss” in isolation has a meaning that
could include intangible losses, the Court declines to adopt that definition because “loss” is
modified by “physical” in the Policy, which limits the meaning to tangible losses.
The plain meaning of the policy language and the multitude of cases interpreting identical
and similar language make clear that “direct physical loss of or damage to property” does not
include a loss of use or “impairment of functionality” of undamaged property for its intended
purpose. See, e.g., Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141, 1145 (8th Cir. 2021)
(holding that policy covering direct “accidental physical loss or accidental physical damage” did
not cover oral surgeons’ “partial loss of use of its offices . . . due to the COVID-19 pandemic and
the related government-imposed restrictions.”) (emphasis omitted); Real Hosp., LLC v. Travelers
Cas. Ins. Co. of Am., 499 F. Supp. 3d 288, 298 (S.D. Miss. 2020) (“Plaintiffs’ operations are not
what is insured—the building and the personal property in or on the building are.”). Even
affording Plaintiffs the most liberal reading of its allegations, their Complaint alleges only that
the government orders restricted the manner in which their restaurants may serve customers,
20 – OPINION & ORDER
Page 21 of 31
while leaving the property itself in Plaintiffs’ possession, unharmed, and undamaged. As a result,
Plaintiffs have failed to allege a direct physical loss of or damage to its covered property.
Whether property must become completely uninhabitable or be rendered
completely useless to invoke coverage
Plaintiffs also contend that a line of cases finding that direct physical loss or damage had
occurred after a contaminant rendered the property uninhabitable or useless applies to the facts of
this case. Pl. Opp’n 12–13. Plaintiffs rely on cases from other districts and state courts to suggest
that “physical loss or damage” occurs when business property becomes useless or only partially
inhabitable. Id. The Court finds those cases unpersuasive and distinguishable.
Plaintiffs first rely on Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 52 Cal.
Rptr. 2d 690 (Ct. App. 1996). Pl. Opp’n 12–13. In Armstrong World Industries, the court
analyzed whether “property damage” had occurred under a third-party liability policy that
defined “property damage” as “i) physical injury to or destruction of tangible property which
occurs during the policy period, including the loss of use thereof at any time resulting therefrom,
or ii) loss of use of tangible property which has not been physically injured or destroyed
provided such loss of use is caused by an occurrence during the policy period.” 52 Cal. Rptr. 2d
at 731. That case is distinguishable because Plaintiffs’ Policy does not include a definition of
“property damage” that includes a loss of use of undamaged property.
Plaintiffs also rely on cases in which courts found that contamination by smoke, lead, and
arsenic constituted physical loss or damage. But in each of those cases, the contamination either
1) physically damaged the property requiring repairs or remediation to part or all of the building,
or 2) rendered the property completely uninhabitable. See, e.g., Or. Shakespeare Festival Ass’n,
2016 WL 3267247, at *5 (finding business interruption coverage applied when poor air quality
from wildfire smoke rendered performance of a play unsafe for performers and guests); Stack
21 – OPINION & ORDER
Page 22 of 31
Metallurgical Servs, Inc., 2007 WL 464715, at *8 (finding that the disintegration of a hammer in
a furnace that contaminated it with lead particles constituted “direct physical damage”); Ass’n of
Apartment Owners of Imperial Plaza, 939 F. Supp. 2d at 1069 (finding that arsenic
contamination in a concrete slab requiring remediation and replacement constituted “direct
physical loss or damage”). Plaintiffs’ argument thus has two flaws. First, Plaintiffs failed to
allege any contamination of its restaurant that rendered it physically uninhabitable. Second,
Plaintiffs’ assertion that those cases demonstrate that any “deprivation of functionality” caused
by contamination is covered is an overbroad reading of the rulings in those cases, which apply to
contaminations in such quantities that render buildings temporarily completely uninhabitable or
which physically damage property in a manner that requires repair. Plaintiffs have alleged no
Civil Authority Coverage
For coverage to exist under the Civil Authority provision, Plaintiffs must plausibly allege
that an action of civil authority prohibited access to their restaurants due to “direct physical loss
of or damage to property, other than at the described premises.” Thus, to survive a motion to
dismiss, Plaintiffs must plausibly allege that (1) an action of civil authority prohibited access to
their restaurants, and (2) the action of civil authority was due to “direct physical loss of or
damage to property” somewhere other than Plaintiffs’ restaurants. The allegations in Plaintiffs’
Complaint fail to meet both requirements.
Plaintiffs allege that the orders prohibited access to their restaurants because (1) the
orders prohibited customers from accessing the dining rooms of their restaurants, Compl. ¶ 43;
(2) “the Restaurants’ employees were prohibited from traveling to or accessing the Restaurants
for purposes of serving dine in food,” Compl. ¶ 45; and (3) their employees were prohibited from
22 – OPINION & ORDER
Page 23 of 31
working in close proximity to each other, including but not limited to “social distancing
guidelines and other safety requirements that are not compatible with professional use of a
kitchen,” Compl. ¶ 47.
On March 16, 2020, the San Francisco Department of Public Health issued Order of the
Health Officer No. C19-07, which provided that “[r]estaurants and cafes—regardless of their
seating capacity—that serve food are ordered closed except solely for takeout and delivery
service.”4 Id. ¶ 28; Compl. Ex. 1 at 2, ECF 1-1. That order also permitted travel to work at
“Essential Businesses” and travel to perform “Essential Activities” like obtaining food,
medicine, and pet supplies. Compl. Ex. 1 at 6. “Essential Businesses” are defined in the order to
include “Restaurants and other facilities that prepare and serve food, but only for delivery or
carry out.” Id. at 8. The order required that people engaged in work at Essential Businesses abide
by social distancing requirements “at all times as reasonably possible . . . by maintaining six-foot
social distancing for both employees and members of the public.” Id. at 4. The order clarified
that “[a]ll Essential Businesses are strongly encouraged to remain open.” Id.
Each of the orders issued by the San Francisco Department of Public Health—the entity
that ordered restaurant services limited to takeout and delivery and thus caused Plaintiffs’
losses—indicate that the Order was issued to slow the spread of COVID-19 to avoid
overwhelming the healthcare system and to protect the most vulnerable to COVID-19 infection.
Id. at 5. For example, the March 31, 2020 Order indicates that it was issued “to slow the spread
of COVID-19 and mitigate the impact on delivery of critical healthcare services to those in need.
The Court considers the orders and proclamations discussed in this section because they are
incorporated by reference into Plaintiffs’ Complaint and judicially noticeable under Fed. R. Evid.
201. See McGhee v. City of Flagstaff, No. CV-20-08081-PCT-GMS, 2020 WL 2309881, at * 4–5
(D. Ariz. May 8, 2020) (taking judicial notice of Arizona governor’s executive orders issued in
response to the COVID-19 pandemic).
23 – OPINION & ORDER
Page 24 of 31
All provisions of this Order must be interpreted to effectuate this intent.” Compl. Ex. 2 at 5. See
also Compl. Ex. 1 at 3 (March 16, 2020 Order of the Health Officer issued “to slow the spread of
COVID-19 to the maximum extent possible”); Compl. Ex. 5 (Governor’s March 19, 2020 Order
“issued to protect the public health of Californians”).
On April 10, 2020, the mayor of San Francisco issued a “Ninth Supplement to Mayoral
Proclamation Declaring the Existence of A Local Emergency.” The Proclamation placed limits
on the fees that third-party delivery companies can charge San Francisco restaurants and
provided that “this order and the previous orders issued during this emergency have all been
issued because of the propensity of the virus to spread person to person and also because the
virus physically is causing property loss or damage due to its proclivity to attach to surfaces for
prolonged periods of time.” Compl. ¶ 40; Compl. Ex. 3 at 3, ECF 1-3. There is no indication in
Mayor Breed’s Ninth Supplement that her reference to “the previous orders issued during this
emergency” referred to the orders of the Health Officer rather than her own.
Contrary to Plaintiffs’ contentions, none of the orders prohibited access to specific
portions of restaurants or restaurant property. Although Plaintiffs suggest that the orders
restricted the access to their restaurants by employees because of social distancing guidelines, the
orders require social distancing when “reasonably possible” or “to the greatest extent feasible”
and were otherwise encouraged to remain open. Comp. Ex. 1 at 4, 6. Thus, the orders did not
“prohibit” Plaintiffs’ employees from accessing Plaintiffs’ restaurants. Instead, the orders
prohibited restaurants from providing dine-in service.
In addition, Plaintiffs failed to plausibly allege that the orders were issued “due to direct
physical loss of or damage to property, other than at the described premises.” Although San
Francisco Mayor Breed proclaimed in her Ninth Supplement that the April 10, 2020 order and
24 – OPINION & ORDER
Page 25 of 31
“the previous orders issued during this emergency have all been issued because . . . the virus
physically is causing property loss or damage”, that statement belies the purposes reflected in the
San Francisco Department of Public Health Orders of the Health Officer. Each of the Health
Officer’s orders incorporated by reference into Plaintiffs’ Complaint ordered restaurants to serve
food only for take-out or delivery in order to slow the spread of COVID-19. There is no
allegation that the Health Officer’s orders had any other purpose or that San Francisco’s mayor
referred to the Health Officer’s previous orders rather than her own when she proclaimed that the
previous orders were issued due to property loss or damage. Thus, Plaintiffs failed to establish
that the relevant orders—those of the Health Officer—were issued “due to direct physical loss of
or damage to property, other than at the described premises.” As a result, Plaintiffs have failed to
plausibly allege that coverage exists under the Civil Authority provision of the Policy.
Context within the Policy as a Whole
When the terms of an insurance policy have plain meaning, then the Court applies the
plain meaning without need to resort to other methods of contract interpretation. Holloway, 341
Or. at 650. However, it is worth emphasizing that the context in which the phrases “direct
physical loss,” “direct physical loss of or damage to property,” and “direct physical loss or
damage to property” appear in the Policy confirms the accuracy of the Court’s conclusion that
the Policy requires a direct physical alteration of the condition of the property or dispossession of
the property for coverage to apply.
The Policy covers Plaintiffs’ business liability and provides property coverage. Policy 9.
Section I of the Policy, which covers “PROPERTY”, explains that “Covered Property” includes
items of tangible property including “Buildings,” which are defined as “the buildings and
structures at the premises” and their fixtures, additions, and permanently installed machinery;
25 – OPINION & ORDER
Page 26 of 31
and “Business Personal Property.” Id. All items described in the definition of “Covered
Property” are tangible items. The “Property Not Covered” also includes a list of tangible items.
Id. at 9–10. Nothing in the Policy suggests that Covered Property includes intangible things like
profitability, business operations, and loss of use or function. When read in the context of the
Policy as a whole, the phrases “direct physical loss,” “direct physical loss of or damage to,” and
“direct physical loss or damage to” refer to the loss of or damage to the Covered Property—the
building, its fixtures, and the personal property in it—and the loss of business income resulting
from the insured’s inability to continue its business operations as a direct result of having lost or
damaged that tangible property.
The definition of “period of restoration” also supports the Court’s interpretation that loss
of or damage to tangible property must occur to invoke coverage under the Policy. The Business
Income provision covers certain financial losses incurred “during the ‘period of restoration.’”
Policy 13. The “period of restoration” starts seventy-two hours after the “physical loss or
damage” occurs and ends on “[t]he date when the property at the described premises should be
repaired, rebuilt or replaced with reasonable speed and similar quality” or when the insured’s
“business is resumed at a new permanent location.” Id. at 30–31. That definition of “period of
restoration” implies that Plaintiffs must lose or suffer physical damage to its tangible property
which requires repair or replacement to invoke coverage.
The “Loss Payment” section of the Policy which governs how Defendant will pay for
damage to Covered Property also demonstrates that property must be physically lost or damaged
to invoke coverage. That provision allows the insurer to decide whether it will
(1) Pay the value of lost or damaged property;
(2) Pay the cost of repairing or replacing the lost or damaged property;
(3) Take all or any part of the property at an agreed or appraised value; or
26 – OPINION & ORDER
Page 27 of 31
(4) Repair, rebuild or replace the property with other property of like kind and
Id. at 24. The option of the insurer to decide whether to repair, replace, or take and pay the
insured the value of damaged property also suggests that to invoke coverage (1) the loss or
damage of the property must be tangible; and (2) the property must have had an initial
satisfactory state that changed to an unsatisfactory state when an external force acted on the
property. The “Loss Payment” provision is entirely inconsistent with the Policy covering an
inability to use undamaged restaurant dining rooms and related business personal property. An
inability to use property in the manner the insured intended is not something that can be repaired,
rebuilt, or replaced.
Ordinance or Law Exclusion
Defendant argues that even if Plaintiffs had stated a plausible claim for coverage, the
Ordinance or Law exclusion excludes Plaintiffs’ claims. Def. Mot. 28–29. That provision
excludes from coverage “loss or damage . . . caused directly or indirectly by . . . [t]he
enforcement of any ordinance or law . . . [r]egulating the construction, use or repair of any
property.” Policy 19. Because Plaintiffs have not demonstrated that coverage exists, the Court
need not determine whether any exclusion applies. See ZRZ Realty Co., 222 Or. App. at 465.
Plaintiffs’ Remaining Claims
Defendant argues that the Court should dismiss Plaintiffs’ claims for breach of the
implied covenant of good faith and fair dealing and for violation of California’s Unfair
Competition Law because both of those claims are based on Plaintiffs’ allegation that Defendant
breached the insurance contract by failing or refusing to pay for covered losses. Def. Mot. 29.
Plaintiffs did not respond to this argument.
27 – OPINION & ORDER
Page 28 of 31
The Court agrees that dismissal of Plaintiffs’ breach of the implied covenant of good faith
and fair dealing and unfair business practices claims is appropriate.
Duty of Good Faith and Fair Dealing
Plaintiffs’ Complaint alleges that Defendant breached the implied covenant of good faith
and fair dealing claim by
(a) unreasonably and in bad faith denying Plaintiffs and the Class members
insurance coverage to which they are entitled; (b) failing and refusing to perform a
fair, objective, good faith, and thorough investigation of the claim; (c) asserting
coverage defenses that were legally and/or factually invalid and thereby delaying
resolution of Plaintiffs’ and the Class members’ claims; and (d) placing unduly
restrictive interpretations on the terms of its insurance policies for the purpose of
Compl. ¶ 112. Under Oregon law, Plaintiffs can pursue a claim for breach of the duty of good
faith and fair dealing that is independent from Plaintiffs’ claim for breach of the express terms of
the Policy. See Klamath Off-Project Water Users, Inc. v. Pacificorp, 237 Or. App. 434, 445
(2010). The duty of good faith and fair dealing “serves to effectuate the objectively reasonable
expectations of the parties,” Hampton Tree Farms, Inc. v. Jewett, 320 Or. 599, 615 (1995), and
bars “improper behavior in the performance and enforcement of contracts . . . to ensure that the
parties ‘will refrain from any act that would have the effect of destroying or injuring the right of
the other party to receive the fruits of the contract,’” Klamath Off-Project Water Users, 237 Or.
App. at 445 (quoting Iron Horse Eng’g v. Nw. Rubber, 193 Or. App. 402, 421 (2004)). However,
the duty of good faith and fair dealing “‘cannot contradict an express contractual term, nor
otherwise provide a remedy for an unpleasantly motivated act that is expressly permitted by the
contract.’” Id. (quoting Zygar v. Johnson, 169 Or. App. 638, 645 (2000)). Because the duty of
good faith and fair dealing cannot contradict an express contractual term, it “‘may be implied as
to a disputed issue only if the parties have not agreed to an express term that governs that issue.’”
28 – OPINION & ORDER
Page 29 of 31
Arnett v. Bank of Am., N.A., 874 F. Supp. 2d 1021, 1033 (D. Or. 2012) (quoting Or. Univ. Sys. v.
Or. Pub. Emp. Union, 185 Or. App. 506, 511 (2002)) (emphasis in Arnett).
Each of the breaches identified by Plaintiffs seeks a remedy for an act that Defendant was
permitted to do under the express terms of the contract—that is, deny Plaintiffs’ insurance claim.
The first basis for Plaintiffs’ breach of the covenant of good faith and fair dealing claim simply
alleges that Defendant breached the contract. Compl. ¶ 112(a). The second breach identified by
Plaintiffs—failure to investigate—did not have the effect of destroying or injuring Plaintiffs’
rights under the contract because no coverage existed. Compl. ¶ 112(b). Third, Plaintiffs’
allegation that Defendant asserted legally and factually invalid defenses to coverage that delayed
the resolution of Plaintiffs’ claims, Compl. ¶ 112(c), also fails to allege any conduct that
jeopardized Plaintiffs’ rights under the Policy because Defendant correctly determined that the
Policy did not cover Plaintiffs’ pandemic-related financial losses. Finally, the fourth breach
identified by Plaintiffs—that Defendant improperly applied unduly restrictive interpretations of
the terms of the Policy—is another way of saying that Defendant breached the contract by
denying coverage. Compl. ¶ 112(d). Plaintiffs had no objectively reasonable expectation of
coverage under the express terms of the Policy. If Defendant had extended coverage for
Plaintiffs’ claims, it would have contradicted the express terms of the contract. Accordingly,
Plaintiffs failed to state a plausible claim for breach of the duty of good faith and fair dealing.
Plaintiffs also allege that Defendant “has acted with malice, shown a reckless and
outrageous indifference to a highly unreasonable risk of harm, and acted with a conscious
indifference to Plaintiffs’ and the Class members’ rights and welfare, thereby entitling Plaintiffs
and the Class members to punitive and exemplary damages against the Defendant.” Id. ¶ 113.
Punitive damages are not recoverable in an action for an insurer’s breach of an insurance
29 – OPINION & ORDER
Page 30 of 31
contract. See Farris v. U.S. Fidelity & Guar. Co., 284 Or. 453, 466 (1978). Thus, to the extent
that Plaintiffs seek punitive or exemplary damages in connection with their breach of the duty of
good faith and fair dealing claim, that claim also fails to plausibly allege a claim for relief.
California Unfair Competition Law Claim
Plaintiffs’ unfair business practices claim under California’s Unfair Competition Law is
based on Plaintiffs’ allegation that Defendant failed to investigate Plaintiffs’ insurance claim and
instead categorically denied their claims. Compl. ¶ 118. Plaintiffs also allege that Defendant
violated the California Insurance Code. Under California law, unfair competition means “any
unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading
advertising[.]” Cal. Bus. & Prof. Code § 17200. The California Insurance Code prohibits certain
acts, including but not limited to misrepresentations concerning the terms of any policy issued or
to be issued. Cal. Ins. Code § 790.03(a). The California Insurance Code also includes provisions
requiring the prompt investigation and acceptance or denial of claims. Cal. Ins. Code. §
790.03(h)(4). The allegations in Plaintiffs’ Complaint buttressing their unfair business practices
claim are based on “Defendant’s conduct alleged herein” and mirror the bases of their claim for
breach of the covenant of good faith and fair dealing. Compl. ¶¶ 117–123. They also allege that
Defendant denied their claim without first conducting a proper investigation. Id. ¶ 119.
Because the Court finds that the conduct Plaintiffs allege in the Complaint did not
constitute a breach of contract, Plaintiffs failed to state a claim for violation of California’s
Unfair Competition Law. Plaintiffs also allege that Defendant failed to properly investigate their
insurance claim. However, a more thorough investigation into Plaintiffs’ insurance claims, if
required, would have yielded no different result than the Court reaches today. Plaintiffs have
30 – OPINION & ORDER
Page 31 of 31
identified no provision of the California Insurance Code that Defendant violated by promptly
denying their insurance claim, and the Court has identified none.
Because Plaintiffs have identified no other basis for their unfair business practices claim
and did not oppose Defendant’s motion to dismiss their unfair business practices and breach of
the covenant of good faith and fair dealing claims, the Court dismisses those claims.
Leave to Amend
Because the Court finds that Plaintiffs’ Complaint cannot be amended to plausibly allege
a claim under the terms of the Policy, the Court denies leave to amend. Wheeler v. City of Santa
Clara, 894 F.3d 1046, 1059 (9th Cir. 2018) (“Leave to amend may be denied if amendment
would be futile[.]”).
The Court GRANTS Defendant’s Motion to Dismiss . Plaintiffs’ Complaint is
dismissed with prejudice.
IT IS SO ORDERED.
September 6, 2021
MARCO A. HERNÁNDEZ
United States District Judge
31 – OPINION & ORDER
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?