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Law360 (December 15, 2020, 12:51 PM EST) -- A California magistrate judge has thrown out a hair salon's suit for coverage of business interruption losses stemming from the COVID-19 shutdown, saying a clear and unambiguous exclusion for losses resulting from a virus bars any recovery.
U.S. Magistrate Judge Jacqueline Scott Corley dismissed with prejudice the complaint by Franklin EWC Inc. against Hartford Financial Services Group Inc. and Sentinel Insurance Co. Ltd., saying the latest complaint alleges that the company's losses are a result of the virus, and the exclusion applies.
While Franklin EWC had argued that the exclusion was meant to apply only to contamination that started on the premises and not to risks associated with a pandemic, Judge Corley sided with Hartford, saying the exclusion applies to any virus that "directly or indirectly" causes the losses.
"Nothing in the virus exclusion indicates it is limited to viruses arising from the insured premises rather than a pandemic," Judge Corley said. "In sum, the virus exclusion applies under its plain and unambiguous language. Plaintiffs' new allegations do not — and cannot — change its clear and explicit meaning."
Franklin EWC operates a European Wax Center in Fresno, California, with over 30 employees, according to court records. The salon said it was forced to close and lay off its staff in March due to state-mandated closures. The salon later sued Sentinel and Hartford, seeking business interruption coverage after the insurers denied payment.
In September, a California magistrate judge said Sentinel has no duty to cover the salon's pandemic loss because a virus exclusion bars coverage, but allowed the salon to amend its complaint.
And in October, Hartford Financial Services Group Inc. asked to be dropped from the suit, arguing it was just the holding company of the insurer that issued the policy and therefore has no legal liability toward the salon whatsoever. The judge sided with Hartford's position.
In Monday's order, Judge Corley also rejected Franklin EWC's argument that the exclusion was null because Hartford had misrepresented its scope to state regulators, saying California does not recognize that theory.
Franklin EWC had also argued that it should receive some recovery under a limited virus provision in the policy, but again Judge Corley sided with Hartford, saying that provision only provides coverage if the virus results from another covered cause of loss.
The hairdresser had said the limits of the provision should be null, because none of the other covered causes of loss can cause a virus, and therefore its coverage is illusory. Judge Corley, however, pointed to other cases with similar clauses, such as one where coverage was granted because a virus was transmitted by pigs via a tornado, showing that other covered losses could indeed cause a virus.
Finally, the judge threw out Franklin EWC's claims for breach of contract and bad faith, as they were based on the argument that coverage was wrongly denied, and the company's fraud claims, as the complaint does not plead the particulars of how Hartford or Sentinel misled the salon about the coverage, and at oral argument the company admitted it did not have proof of when and how specifically such misrepresentation happened.
"COVID-19 is a tragedy that has devastated the lives of so many small businesses and their employees," Brian Danitz of Cotchett Pitre & McCarthy LLP, representing Franklin EWC, told Law360 on Tuesday. "The Hartford policy in this case promised to provide limited coverage for loss caused by virus; but the fine print made that coverage virtually impossible to obtain. We believe that raises factual issues, not appropriate for determination at the pleading stage."
A representative for Hartford could not immediately be reached for comment Tuesday.
Franklin EWC is represented by Nanci Eiko Nishimura, James Gerard Beebe Dallal, Brian Danitz and Andrew F. Kirtley of Cotchett Pitre & McCarthy LLP.
Hartford and Sentinel are represented by Sarah D. Gordon and Anthony John Anscombe of Steptoe & Johnson LLP.
The case is Franklin EWC Inc. v. Hartford Financial Services Group et al., case number 3:20-cv-04434, in the U.S. District Court for the Northern District of California.
--Additional reporting by Daphne Zhang. Editing by Alyssa Miller.
For a reprint of this article, please contact reprints@law360.com.
