For countless businesses across the nation, the COVID-19 pandemic, and the resulting shutdowns, restrictions, and mandates aimed at slowing the spread of the disease, created more economic damage than any hurricane, earthquake, or other disasters they had experienced.

Would any of their losses be covered by the business insurance policies many of them carried to protect against unforeseen events that interrupted their operations?

Unfortunately, the answer is no, according to a recent decision by the United States Court of Appeals for the Ninth Circuit (Mudpie v. Travelers Casualty Insurance Co.)

Mudpie, Inc., a San Francisco retailer of children’s clothing, toys, and books, saw its sales plummet due to stay-at-home orders and other pandemic-related difficulties. It filed a claim with Travelers Casualty Insurance Co. under its business insurance policy, which included coverage for “business interruption.”

Mudpie argued that the public health orders imposed by state and local agencies prevented it from operating its store, which it shut on March 16, 2020. These mandates amounted to an external event over which the retailer had no control, qualifying for coverage, Mudpie said.

Travelers denied the claim, citing the language of the policy that limited coverage to “physical loss or damage” to a policyholder’s property.

The insurer also pointed out that the policy had a “virus exclusion” clause, barring claims for losses resulting from contagious diseases such as COVID-19.

Mudpie sued Travelers in federal district court, claiming to represent itself and all retailers in California that had purchased similar insurance from the company and whose “business interruption” claims had been denied.

It asked the court to rule that business income losses were covered by these insurance policies, and such claims were not precluded by exclusions or limitations in the policy contracts.

Travelers responded that Mudpie had not demonstrated any “direct physical loss of or damage to” its store, as specified in the insurance policy.

Mudpie argued that its “inability to operate and occupy its storefront following the government closure orders” was “a direct physical loss” of the property.

The district court agreed with Travelers and dismissed Mudpie’s lawsuit. The retailer appealed, but fared no better at the higher court.

California courts construe the phrase “physical loss or damage” to mean a physical alteration of the property. It is not synonymous with “loss of use” of the property, as Mudpie claimed, the appellate judges ruled.

nsurance policies must be interpreted according to the “clear and explicit” meaning of the terms used in them, California courts have held.

xcept for technical terms, the wording of policies is to be “interpreted in [its] ordinary meaning,” construed as “a reasonable layperson, not an expert,” would understand it.

Thus, the phrase “direct physical loss” in the Travelers policy means an actual change to the property, not the intangible detrimental economic impact of some event.

The judges noted that some years ago a company filed a claim after it suffered a major loss of electronic data when a backup system failed. While the loss was substantial, the courts ruled that it did not qualify under the terms of the policy because there was “no loss of or damage to tangible property.”

The appellate court said the policy’s “virus exclusion” clause also barred coverage for Mudpie’s losses.

The policy stated that it would not “pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

Mudpie argued that its losses were caused by government mandates, not directly by the virus. Travelers responded that it was the virus that prompted authorities to issue those restrictions.

California courts apply a broad interpretation to the term “resulting from” in insurance contracts, the appellate justices noted. When several causes are involved, “the efficient cause – the one that sets the others in motion – is the cause to which the loss is to attributed.”

In this case, the underlying cause of Mudpie’s losses was the virus that causes COVID-19, the justices said. For that reason, the virus exclusion clause in the insurance policy barred the retailer’s claim.

The Court of Appeals affirmed the ruling of the district court in favor of Travelers.

By Laurie Murphy