Lulu's Fashion Lounge LLC v. Hartford Fire Ins. Co.

598 F.Supp.3d 888

LULU'S FASHION LOUNGE LLC, Plaintiff,

v.HARTFORD FIRE INSURANCE COMPANY, Defendant.

No. 2:20-cv-01836-MCE-DMC

United States District Court, E.D. California.

Signed April 4, 2022

Filed April 5, 2022

Latosha M. Ellis, PHV, Pro Hac Vice, Hunton Andrews Kurth LLP, Washington, DC, Walter J. Andrews, PHV, Pro Hac Vice, Hunton Andrews Kurth LLP, Miami, FL, Scott P. DeVries, Hunton Andrews Kurth, San Francisco, CA, for Plaintiff.

Catherine D. Cockerham, PHV, Johanna Dennehy, PHV, Pro Hac Vice, Sarah D. Gordon, PHV, Pro Hac Vice, Steptoe & Johnson LLP, Washington, DC, Melanie Atswei Ayerh, Steptoe & Johnson LLP, Los Angeles, CA, for Defendant.

MEMORANDUM AND ORDER

MORRISON C. ENGLAND, JR., SENIOR UNITED STATES DISTRICT JUDGE

In bringing the present action, Plaintiff Lulu's Fashion Lounge LLC ("Plaintiff" or "Lulu's") alleges that its liability insurance carrier, Defendant Hartford Fire Insurance Company ("Hartford") wrongfully denied its claim for business losses stemming from the COVID-19 pandemic. In addition to seeking declaratory judgment that Hartford's policy in fact provides coverage for its pandemic-related losses, Lulu's Complaint also contains four different breach of contract claims correlating with the types of coverage provided by Hartford's policy, in addition to causes of action for breach of the implied covenant of good faith and fair dealing and for violation of California's Unfair Competition law as codified at California Business and Professions Code §§ 17200, et seq. ("UCL").

Through a Motion to Dismiss now before the Court, Hartford alleges that Plaintiff's claims fail to state a claim upon which relief can be granted and therefore are subject to dismissal under Federal Rule of Civil Procedure 12(b)(6).¹ In addition to fully briefing the Motion, the parties have each submitted multiple notices of supplemental authority attaching additional decisions on the insurance coverage questions raised by this case.

As set forth below, Hartford's Motion is GRANTED.²

BACKGROUND³

Lulu's, a women's apparel, footwear and accessories retailer, sells its products online as well as at a physical location in Chico, California. A significant portion of its sales is related to special occasion events, including, but not limited to, proms, graduations and weddings. As a result of the global COVID-19 pandemic, a majority of such events were canceled or indefinitely postponed. Lulu's claims it was accordingly forced to close all of its locations except for two distribution and fulfillment facilities.

Plaintiff was insured through an all-risks insurance policy issued by Hartford that covered Lulu's, as the named insured, against "direct physical loss of or direct physical damage to" Covered Property from a Covered Cause of Loss. A Covered Cause of Loss, in turn, is defined as "direct physical loss or direct physical damage unless the loss or damage is directly excluded or limited in this policy." Pl.’s Compl., ECF No. 1, ¶ 24, Ex. A, pp. COMPLAINT-00079, 00092.

In addition to insuring against direct loss or damage as indicated above, the Hartford policy provides Business Income and Extra Expense coverage where a policyholder is required to suspend its operations due to a "Covered Cause of Loss," as well as limited coverage when access to insured premises is "specifically prohibited as the direct result of a Covered Cause of Loss" by civil authority. Id. at 00071-72, 00085, 00074-75.

The Hartford policy, however, contains an exclusion as to loss or damage caused by virus, providing as follows:

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 or damage:

.....

g. "Fungus," Wet Rot, Dry Rot, Bacteria or Virus

Presence, growth, proliferation, spread or any activity of "fungus," wet rot, dry rot, bacteria or virus ...⁴

Id. at 00092-00093. This virus exclusion applies "whether or not the loss or event results in widespread damage or affects a substantial area." Id. at 00095.

Plaintiff sought coverage under the Hartford policy in the wake of the COVID-19 pandemic, arguing that in addition to having to close substantially all of its facilities, supply chain disruptions and staffing issues resulting from the disease also caused it to incur losses that directly impacted its gross earnings and gross profits. Pl.’s Compl., ¶¶ 67, 76, 79. Lulu's argues that COVID-19 caused it to sustain physical loss and/or damage on grounds it "has been deprived of the use and function of its buildings ... [and] the immovable objects within [those] buildings," because "the virus itself is tangible, visible through a microscope, breathable and otherwise physical." Id. at ¶ 110. Plaintiff cites to the fact that the COVID-19 virus "can remain on various objects and surfaces a period of hours to days," can be transmitted through contact with surfaces, and can further be spread from person to person through airborne "droplets" that are exhaled by a person infected with the virus. Id. at 37-49. All of the coverages under which claims were made depended on the presence of a Covered Cause of Loss under the Hartford policy as defined above.

With respect to whether Hartford's virus exclusion applies, Lulu's contends somewhat confusingly that "COVID-19 is not a bacteria or a virus; it is a communicable disease that is caused by the virus known as SARS-CoV-2." Id. at 143. Plaintiff further argues that the exclusion for "virus" should be construed in any event as applying only to circumstances similar to the other excluded eventualities (fungus, wet rot, and dry rot) and not to "disease" which the exclusion does not address. Id. at 146, 149.

According to Plaintiff's Complaint, on April 15, 2020, Lulu's submitted a notice of loss arguing that COVID-19 had caused it to sustain "direct physical loss of or damage to property." Id. at 153, Ex. J. Hartford denied its claims the following day, April 16, 2020, on grounds that no such direct physical loss or direct physical damage had occurred, and that even had such loss or damage occurred, it would be excluded as having been caused by virus. Pl.’s Compl., Ex. K.

Plaintiff subsequently filed the present lawsuit on September 11, 2020, alleging multiple causes of action against Hartford as enumerated above. Hartford now moves to dismiss on grounds that the policy's virus exclusion bars any coverage whatsoever under its policy for the COVID-19 related losses that Plaintiff asserts. While Defendant claims that "because the Virus Exclusion is dispositive, it is unnecessary for the Court to [first] decide whether or not Plaintiff has alleged direct physical loss" so as to come within the basic coverage of its policy, it goes on to argue that every case applying California law "has determined that coronavirus and coronavirus-related closures do not cause or constitute ‘direct physical loss’ or direct physical damage’ for property coverage. Def.’s Mot., ECF No. 14, p. 16, n. 7.

STANDARD

On a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), all allegations of material fact must be accepted as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Rule 8(a)(2) "requires only ‘a short and plain statement of the claim showing that the pleader is entitled to relief’ in order to ‘give the defendant fair notice of what the ... claim is and the grounds upon which it rests.’ " Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957) ). A complaint attacked by a Rule 12(b)(6) motion to dismiss does not require detailed factual allegations. However, "a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. (internal citations and quotations omitted). A court is not required to accept as true a "legal conclusion couched as a factual allegation." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955 ). "Factual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (citing 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1216 (3d ed. 2004) (stating that the pleading must contain something more than "a statement of facts that merely creates a suspicion [of] a legally cognizable right of action")).

Furthermore, "Rule 8(a)(2) ... requires a showing, rather than a blanket assertion, of entitlement to relief." Twombly, 550 U.S. at 555 n.3, 127 S.Ct. 1955 (internal citations and quotations omitted). Thus, "[w]ithout some factual allegation in the complaint, it is hard to see how a claimant could satisfy the requirement of providing not only ‘fair notice’ of the nature of the claim, but also ‘grounds’ on which the claim rests." Id. (citing Wright & Miller, supra, at 94, 95). A pleading must contain "only enough facts to state a claim to relief that is plausible on its face." Id. at 570, 127 S.Ct. 1955. If the "plaintiffs ... have not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed." Id. However, "a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and ‘that a recovery is very remote and unlikely.’ " Id. at 556, 127 S.Ct. 1955 (quoting Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974) ).

A court granting a motion to dismiss a complaint must then decide whether to grant leave to amend. Leave to amend should be "freely given" where there is no "undue delay, bad faith or dilatory motive on the...