Late at night, a young woman named Vickie frantically buzzes the intercom of a palatial beach house, imploring the owner to let her in. She's holding a manila envelope. Vickie turns around to find someone she recognizes wielding a knife at her. The unseen individual chases Vickie down a steep embankment behind the house and stabs her to death beside a rundown trailer on the beach - a nude beach. The killer proceeds to take the envelope from Vickie's dead hands.
At the crime scene, Natalie, Capt. Stottlemeyer, and Lt. Disher attempt to distract Monk from seeing the naked bystanders. They're temporarily successful, and Monk is able to deduce that Vickie was clutching something when she died. But sure enough, Monk freaks out when the trailer's owner, a nudist named Chance Singer, arrives home from a night in jail. Singer urges Monk to chill out and suggests that the owner of the beach house, billionaire software mogul Peter Magneri, might be involved.
Magneri is high-strung and impatient, berating assistants and bragging about how a recent physical at the hospital confirms he'll bury them all. Like Monk, he's agitated by the nudists, who he feels are ruining his view. In fact, Magneri is preparing for a zoning board meeting, where he hopes the nudists will be ordered to move somewhere else. In any event, Magneri has a solid alibi for the night of the murder. Magneri also mentions that Singer once hit him with a microphone. This sign of aggression is all Monk needs to convince himself that Singer killed Vickie. But how?
Vickie's roommate Arlene, a newly minted day trader, tells the detectives Vickie had recently been spending more time at the beach. Arlene thinks Vickie was seeing someone. Monk suspects Singer. While Arlene is questioned, Natalie is using a pad of Arlene's to write something down while she talks on the phone.
Pursuing what seems to have become a personal vendetta, Monk breaks into Singer's trailer later that night with Natalie in tow. The two are unable to find anything incriminating. However, Singer and his nude activist friends come home in the middle of their search, and Monk and Natalie are forced to hide in Singer's closet. Eventually, Monk hits the circuit breaker, killing the lights. In the ensuing confusion, Monk accidentally grabs Singer's hand, not Natalie's, and drags him out of the trailer. Monk and Singer get into a heated argument.
At the police station, Monk offers a series of increasingly implausible scenarios for how Singer could have escaped while in police custody the night of Vickie's death. When Natalie, Stottlemeyer and Disher attempt to reason with him, Monk launches into a vicious, anti-nudist rant. Stottlemeyer, concerned, takes Monk into his office and reads him the riot act. Monk's fear of nudity is not a mental health issue, Stottlemeyer says, but rather hate prompted by bigotry. He tells Monk to get out of his office until Monk has dealt with his phobia.
In a session with Dr. Kroger, Monk has a breakthrough. He traces his fear of nudity to an incident from his childhood when he was naked and scared. With Kroger's help, however, he realizes the incident is actually a case of Monk - the man with unparalleled memory - remembering the terror of birth.
Monk bursts into Natalie's apartment to tell her the good news. There, he spots the note Natalie wrote at Arlene's - the notepaper's letterhead says "St. Andrew's Hospital." Thinking clearly for the first time in days, Monk remembers that this is the hospital where Magneri spoke of having his physical.
Eureka! Here's what happened: Arlene, who mentioned working as an X-ray technician before becoming a day trader, found something serious on Magneri's X-ray. Knowing that Magneri was absolutely integral to his company's success and that the stock would plummet in his absence, Arlene made a decision to switch his X-ray with that of someone healthy. She started selling short, betting against Magneri Computer. When he died, she would make a small fortune! But Vickie found out about the X-ray and Arlene's plan, and she attempted to warn Magneri. Arlene killed Vickie to prevent her from warning Magneri.
Faced with the truth, Arlene confesses and admits Magneri's heart condition is so dire that serious excitement could kill him. Monk remembers the nude beach zoning board meeting is happening that day, even as they speak! Unable to get to Magneri in time, Monk calls Singer and implores him to halt the nudists' bid for the beach, for the sake of Magneri's health. Singer, ultimately a peaceful man, does exactly that, and the paramedics get to Magneri in time to save his life.
In the end, Magneri buys the nudists their own private island. Monk also makes amends with Singer, resulting in a giant hug from the nudist. Realizing he may not totally be over his issues, Monk walks away fully clothed... into the ocean!