Mudpie’s Attempt at Class Action for Covid Related Losses Fails


Even the Much Reversed Ninth Circuit Requires Direct Physical Loss to Recover for Lost Business due to Covid

Mudpie, Inc. sued on behalf of itself and a putative class of all retailers in California that purchased comprehensive business insurance coverage from Travelers Casualty Insurance Company of America that included coverage for business interruption; filed a claim for lost business income following California’s Stay at Home order; and were denied coverage. In Mudpie, Inc. v. Travelers Casualty Insurance Company of America, No. 20-16858, United States Court of Appeals, Ninth Circuit (October 1, 2021) the Ninth Circuit ruled on the effort to gain business interruption coverage for losses due to state shut down orders.


Mudpie, Inc. appealed a district court order dismissing its claims against Travelers Casualty Insurance Company of America (Travelers). Mudpie operates a children’s store located in San Francisco that sells clothing, toys, books, and other goods. Mudpie alleged that it purchased a comprehensive commercial liability and property insurance policy from Travelers (the Policy), and made a claim pursuant to the Policy’s “Business Income” and “Extra Expense” coverage in 2020 after state and local authorities in California issued several public health orders in response to the COVID-19 pandemic. Mudpie claimed the orders prevented it from operating its store. Travelers denied the claim because there was no physical loss to the property and its “virus exclusion” applied.

On March 4, 2020, Governor Gavin Newsom declared a state of emergency in California in response to the threat posed by COVID-19. The City and County of San Francisco issued a “Shelter in Place Order” on March 16, 2020. The order required residents to remain at their place of residence unless performing “essential activities.” The Shelter in Place Order also declared that “[a]ll businesses with a facility in the County, except Essential Businesses . . ., are required to cease all activities at facilities located within the County except Minimum Basic Operations.” Failure to comply with San Francisco’s Shelter in Place Order was deemed a misdemeanor punishable by a fine, imprisonment, or both.

Mudpie alleged that it complied with the local and state orders (collectively, the Stay at Home Orders) and as a result, was not able to operate its store after March 16, 2020.

Mudpie presented a claim with Travelers under the Policy. In its letter denying the claim Travelers there was no direct physical loss or damage to property at the described premises and that the Business Income and Extra Expense coverage may not apply to Mudpie’s loss. Travelers further stated that the Policy’s coverage excluded “‘loss or damage caused by or resulting from any virus’ – such as the COVID-19 virus.”

Mudpie sued on behalf of itself and a putative class of others similarly situated.

Travelers moved to dismiss. The district court granted Travelers’ motion. The district court declined to consider Travelers’ argument that the Virus Exclusion barred Mudpie’s recovery. The court dismissed the complaint without prejudice but gave Mudpie leave to amend. Mudpie responded by filing a notice advising “it [would] not be amending its Complaint, as permitted by the Court’s Order.” The court then dismissed the complaint with prejudice, and Mudpie appealed.


Travelers promised, by its policy to “pay for direct physical loss of or damage to [Mudpie’s] Covered Property . . . caused by or resulting from a Covered Cause of Loss.”

Under California law, the burden is on the insured to establish that a claimed loss “is within the basic scope of insurance coverage.” The parties disputed whether Mudpie adequately alleged a “direct physical loss of or damage to” property under the Policy, and they offered competing interpretations of that phrase. California courts require that the USCA interpret an insurance policy according to the “clear and explicit” meaning of the terms as used in their “ordinary and popular sense.” [AIU Ins. Co. v. Superior Ct., 799 P.2d 1253, 1264 (Cal. 1990)]

In California “direct physical loss” contemplates an actual change in insured property occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory. In other words, for loss to be covered, there must be a distinct, demonstrable, physical alteration of the property.

Mudpie contends that under California law “direct physical loss of or damage to” property does not require actual damage to the property but merely requires that the property no longer be suitable for its intended purpose.

California courts, in the opinion of the Ninth Circuit, would construe the phrase “physical loss of or damage to” as requiring an insured to allege physical alteration of its property. The overwhelming majority of cases to consider business income claims stemming from COVID-19 with similar policy language hold that direct physical loss or damage to property requires some showing of actual or tangible harm to or intrusion on the property itself.

Therefore, the Ninth Circuit affirmed the district court’s ruling that Mudpie’s claimed losses are not covered by the Policy. In addition the Ninth Circuit left nothing to question by concluding that the Policy’s Virus Exclusion bars coverage for Mudpie’s claimed losses.

California courts broadly interpret the term “resulting from” in insurance contracts. Mosley v. Pac. Specialty Ins. Co., 263 Cal.Rptr.3d 28, 35 (Ct. App. 2020). And where there is a concurrence of different causes, the efficient cause-the one that sets others in motion-is the cause to which the loss is to be attributed, though the other causes may follow it, and operate more immediately in producing the disaster. The California Supreme Court explained in Garvey v. State Farm Fire & Casualty Co., 770 P.2d 704 (Cal. 1989). California courts apply the efficient proximate cause doctrine because the doctrine creates a workable rule of coverage that provides a fair result within the reasonable expectations of both the insured and the insurer.

Mudpie’s complaint does not allege an attenuated causal chain between the virus and Mudpie’s losses. Nor does Mudpie dispute that the Stay at Home Orders that impacted Mudpie’s business were issued in response to the COVID-19 pandemic. Though Mudpie argues it was the government orders that most directly caused its injury, Mudpie does not plausibly allege that “the efficient cause,” i.e., the one that set others in motion, was anything other than the spread of the virus throughout California, or that the virus was merely a remote cause of its losses. Accordingly, the Policy’s Virus Exclusion bars coverage for Mudpie’s claims.


When even the Ninth Circuit requires actual direct physical loss or damage to pursue a business interruption claim after shut down because the state of California made it a crime to do business, is not a covered cause of loss, many were surprised. Then, it also found that the efficient cause that sets all other causes in motion was the virus and the orders that followed its ability to infect citizens of the state. If any person or entity caused damage to Mudpie and its described class members was not Travelers but the state of California that took the ability to do business from Mudpie who may wish to seek damages under the Fifth Amendment for a taking of its business by the state of California in an effective condemnation of Mudpie’s business.

© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at and Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to my articles at,  the podcast Zalma On Insurance at;  Follow Mr. Zalma on Twitter at; Go to Barry Zalma videos at ; Go to Barry Zalma on YouTube-; Go to the Insurance Claims Library –  The last two issues of ZIFL are available at  podcast now available at

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