Modesto inn claims Farmers Insurance entities breached contract in lawsuit

A lawsuit filed in Stanislaus County, California claims that Farmers Insurance entities failed to honor a valid insurance contract by refusing valid COVID-19 business interruption insurance claims. American Traders, Inc. d/b/a/ Ramada Inn Modesto filed the lawsuit, naming Mid-Century Insurance Company, Farmers Insurance Exchange, Fire Insurance Exchange, Truck Insurance Exchange and Does 1 through 20 (“Farmers”) as defendants.

The lawsuit seeks a declaratory judgment ordering the defendants to “honor a valid contract of insurance requiring payment for lost business income, extra expenses, and other business-related losses in light of action by governmental authority requiring closure of their covered businesses or premises.” The complaint also “seeks damages for breach of contract for benefits due under the insurance policy contracts.”

The complaint states, “if an insurer promises that by taking out ‘business income coverage, your policy helps replace the income lost while your company is closed,’ it needs to keep that promise,” noting that this is what Farmers’ own website advertised. The complaint notes that Farmers’ own website showed they “understand that business interruption insurance is critical,” because it keeps capital flowing to keep companies running, helping with payroll, lost profits, taxes and other expenses.

“Though Defendants assure prospective customers that Farmers has ‘a solid reputation for doing the right thing for the right reason,’ Defendants have proven during the COVID-19 pandemic that this reputation is undeserved,” the complaint states.

The complaint states that the defendants “have reflexively denied or will reflexively deny coverage based on consideration of their own interests.”

The complaint notes that the defendants’ insureds dutifully paid premiums, sometimes thousands of tens of thousands of dollars per year, so they’d be protected when the unimaginable caused their business to close.

The complaint argues that being forced to shut down one’s business due to the COVID-19 pandemic and associated government orders constitutes a loss of a physical nature. “Using or accessing one’s real property or employing or putting into service (or removing therefrom) one’s equipment and business property, is inherently physical in nature,” the complaint states, adding that “ousting or precluding the use of or access to real property results in a loss of a physical nature.”

The complaint notes that the defendants chose to “cover all suspensions of business operations caused by ‘direct physical loss’” in their policy language, noting that they “chose not to define” the term direct physical loss, implying this was so they could take advantage of this by arbitrarily denying claims.

“Defendants’ interpretation of the policy contract is wrong, and its denial of coverage for losses caused by limitations on the physical use and access to insureds’ property breached the contract,” the complaint argues.

State orders essentially forced inn to shut down

The complaint states that the Ramada Inn in Modesto was originally the Hotel Modesto, which “has served the community of Modesto since 1989.”

The complaint states that state orders mandated that “non-essential” workers such as hotel employees were ordered to stay home “unless the hotel was used for COVID-19 mitigation, treatment, or containment measures.” The complaint notes that “this restriction on its employees limited the hotel to use for COVID-19 mitigation, containment, or treatment,” essentially shutting down the business.

The complaint also notes that the inn had to spend money on masks, disinfectants, Plexiglas, bleach and hand-sanitization stations. “Plaintiff incurred great expense enacting these measures,” the complaint states.

Inn’s insurance policy covers all risks unless expressly limited or excluded

The complaint notes that the inn’s insurance policy, which cost $31,070,00 for one year’s worth of coverage, is an “all risks” policy, meaning it “covers the insured for any peril, imaginable or unimaginable, unless expressly limited or excluded.”

The complaint states that the policy says the defendants “must pay for the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration’.”

The defendants must pay the “necessary Extra Expense you incur during the ‘period of restoration’ that you would not have incurred if there had been no direct physical loss or damage to property at the described premises,” according to the complaint.

The complaint notes that the policy lacks any limitations or exclusions regarding “coverage for the governmental orders pursuant to which” in the inn suspended their business operations.

“The governmental orders therefore constitute a covered ‘direct physical loss’ under the Policy,” the complaint argues.

“The denial is wrong,” the complaint argues, stating that the state shutdown orders “caused a loss of income and an increase in expense. This risk – of governmental action – is nowhere limited or excluded in the Policy.”

Claims for relief

The lawsuit makes two claims for relief:

Declaratory judgment against all defendants: The complaint seeks a declaratory judgment ordering the defendants to honor the inn’s contract.

The complaint brings the cause of action under California Rule of Civil Procedure Section 1060 et seq., seeking a declaration that the inn’s policy “covers Business Income and Extra Expense during the period of restoration caused by or resulting from governmental action that forced Plaintiff to suspend operations, subject to no limitations or exclusions under the Policy.”

The complaint argues that the declaratory judgment is warranted because governmental action resulting in the inn’s loss of use of property is a direct physical loss and no limitations or exclusions apply in the policy to deny coverage.

Breach of contract against all defendants: The complaint claims that the defendants’ “failures to affirm coverage and pay benefits breach the contract and represent a systematic failure to pay the benefits required by the contract.”

The complaint states the policy mandates that losses due to government-mandated suspension of operation be reimbursed under the policy, stating that “coverage for these losses is in no way limited or excluded under the Policy terms.”

The complaint states that the defendants’ decision to deny the coverage “was rendered based on its reading of the contract language, and not by any specifics relating to each insured (as no investigation occurred here). By making its decision known, Defendants have anticipatorily breached the contracts.

About the author

Jeffrey Nadrich is the managing partner of Nadrich & Cohen, LLP, a Modesto California personal injury law firm which represents COVID-19 business interruption insurance denial clients.