A California insurance agency has been granted leave to amend its complaint in a lawsuit seeking a refund for the Employee Retention Credit (ERC), after a federal court found its initial filing failed to adequately plead that its business was partially suspended due to government COVID-19 orders. (I Health and Life Insurance Services v. United States, No. 25-1315T, 7/23/2026)
Judge Armando O. Bonilla of the U.S. Court of Federal Claims deferred a ruling on the government’s motion for judgment on the pleadings. The court gave I Health and Life Insurance Services until August 6, 2026, to file a new complaint that specifies how government mandates caused a temporary cessation of a discrete and more-than-nominal portion of its business.
Agency argues mandates forced ‘partial suspension’
I Health and Life Insurance Services, a life and health insurance sales agency with call centers in Fresno and San Diego counties, sued the United States for a $50,000 tax refund for the third quarter of 2020. The company argued it was eligible for the ERC because its operations were partially suspended by government directives intended to slow the spread of COVID-19.
In its complaint, I Health contended that a series of statewide and local orders in California forced it to fundamentally alter its workplace. These changes included implementing social distancing, testing employees for COVID-19, excluding symptomatic or exposed workers from its call centers, providing sanitization supplies, and increasing the distance between workstations.
The company claimed these government-mandated measures restricted its ability to maintain adequate staffing, reduced its operational capacity, and incurred significant costs, which together constituted a partial suspension of its business under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Court finds orders qualified, caused operational changes
The government moved for judgment on the pleadings, arguing that I Health had not alleged facts sufficient to show its operations were suspended or that any suspension was proximately caused by a government order.
The court first determined which government directives could qualify as an “order” under the ERC statute. Judge Bonilla concluded that statewide executive orders and county-level directives from Fresno and San Diego qualified because they carried enforcement authority, including potential fines and imprisonment for noncompliance. However, press releases from the governor’s office and other guidance that did not include enforcement mechanisms did not rise to the level of a qualifying “order.”
Next, the court found that I Health had successfully pleaded that a qualifying order was the factual and proximate cause of its operational changes. Unlike a recent case, Northeast Health Services v. United States, 2026 WL 1530240, where compliance was voluntary, the county orders here mandated that I Health reduce its in-person call center capacity and exclude certain workers.
Court finds failure to plead cessation of business
However, the court ultimately found I Health’s complaint was deficient because it failed to allege a “partial suspension.” Adopting a standard recently defined in Sundancer Pools Inc. v. United States, 2026 WL 1830419, Judge Bonilla stated that a partial suspension requires “a temporary interruption, postponement, or cessation of a more than nominal portion of a business’s operations.” A reduction in onsite capacity or efficiency, the court explained, is not by itself a cessation of a discrete business activity.
I Health’s complaint alleged it continued operating its call centers throughout the period, and while it had to transition a small portion of its workforce to remote work, it did not allege that any specific, distinct portion of its business temporarily ceased.
Despite this deficiency, the court granted I Health’s request for leave to amend its complaint. The judge noted that key precedents clarifying the pleading standards for ERC cases in the circuit, including Northeast Health and Sundancer Pools, were issued after I Health had filed its complaint.
The court also acknowledged that a summary dismissal of the $50,000 refund claim could have an outsized influence on a separate government counterclaim seeking the return of a nearly $400,000 ERC refund previously remitted to I Health.
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