There have been a number of cases in the past few months addressing coverage issues arising out of the COVID-19 pandemic. Therefore, for purposes of brevity, we have set forth below the main facts and holding in each of those cases.
- In Shusha, Inc. v. Century-National Insurance Co., 87
Cal. App. 5th 250 (December 14, 2022), the California Second
District Court of Appeal reversed the trial court's order
sustaining Century-National Insurance Company's
("Century-National") demurrer to the insured's first
amended complaint for declaratory judgment, breach of contract, bad
faith, and unfair business practices. The insured sought coverage
for its lost business income and the costs it incurred to mitigate
the damage by reconfiguring its restaurant and increasing its
sanitization procedures as a result of the COVID-19 virus. The
court held the insured sufficiently stated causes of action for
breach of contract and declaratory judgment based on alleged direct
physical loss or damage to its property caused by the COVID-19
virus, which was required to trigger coverage under the
policy's Business Income (and Extra Expense) coverage. In
support of its holding, the Court of Appeal cited allegations in
the first amended complaint that the virus was present at the
restaurant on walls, floors, tables, chairs, silverware, dishes,
and others surfaces, and that alleged health authorities and
medical scientists advised the virus "adheres to, attaches to,
and alters the surfaces of the property and surfaces" it comes
into contact with. The Court of Appeal also found that the insured
adequately pleaded causes of action for bad faith and unfair
business practices based on allegations that Century-National
denied coverage just three weeks after the insured's tender and
without taking any steps to determine whether the virus caused
physical damage to the insured's premises.
- In Best Rest Motel, Inc. v. Sequoia Insurance Co., 88
Cal. App. 5th 696 (February 24, 2023), the California Fourth
District Court of Appeal affirmed the trial court's order
granting summary judgment in favor of Sequoia Insurance Company in
an action for business interruption coverage arising out of the
COVID-19 pandemic where the policy required "direct physical
loss or damage" to the covered property. The Court of Appeal
held that the insured failed to establish a triable issue of fact
regarding whether its hotel could have been operating but for the
presence of the COVID-19 virus on the premises, citing to testimony
from the insured's president and operating partner that the
hotel reservations were not cancelled because of the virus's
presence on the property, but because of government shutdown orders
and travel restrictions. The Court of Appeal reasoned that in order
to trigger coverage, the damage or loss must be "direct"
and there was no evidence "creating a triable issue that the
formites [i.e., the virus-infected droplets] – as
distinguished from massive reductions in tourism – caused any
of [the insured's] lost income."
- In Coast Restaurant Group, Inc. v. Amguard Insurance
Co., 90 Cal. App. 5th 332 (April 10, 2023), the California
Fourth District Court of Appeal affirmed the trial court's
order sustaining Amguard Insurance Company's demurrer to the
first amended complaint for breach of contract and bad faith. The
court held that the insured restaurant sufficiently alleged
"direct physical loss" potentially triggering the
policy's business interruption coverage because the
governmental orders affected the property directly (i.e.,
there was no intervening cause) and physically (i.e., the
orders affected how the physical space of the property and the
physical objects in that space, such as chairs and tables, could or
could not be used), and because the orders caused a loss by
depriving the insured of important property rights in the covered
property. Nevertheless, the Court of Appeal concluded that two
policy exclusions precluded coverage. Specifically, the Court held
that the policy's ordinance or law exclusion barred coverage
since the government orders regulated the use of the covered
property by prohibiting onsite dining, and that the virus exclusion
barred coverage because, at a minimum, COVID-19 triggered the
governmental orders and indirectly caused the insured's
business income loss.
- In Santa Ynez Band of Chumash Mission Indians v. Lexington
Insurance Co., 90 Cal. App. 5th 1064 (April 27, 2023), the
California Second District Court of Appeal affirmed the trial
court's order granting Lexington Insurance Company's motion
for summary judgment, finding that the insured did not qualify for
the policy's business interruption coverage because the casino
and resort did not provide sufficient proof that it sustained
"direct physical loss or damage" as a result of the
COVID-19 virus. The Court of Appeal noted that "[t]here was no
showing that the virus impaired [the insured's] gambling
machines or that any other items of its property had been destroyed
or damaged so they could not be used again." Additionally, the
Court of Appeal cautioned that if a business "is not able to
specifically identify the property that was damaged: (1)
it is not in a position to make an insurance claim, and (2) it is
not in a position to prove its case or oppose summary
judgment."
- In Starlight Cinemas, Inc. v. Massachusetts Bay Insurance Co., 2023 Cal. App. LEXIS 335 (May 1, 2023), the California Second District Court of Appeal affirmed the trial court's order granting Massachusetts Bay Insurance Company's ("MBIC") motion for judgment on the pleadings without leave to amend. The insured, which owns and operates movie theaters, sued MBIC for breach of contract and bad faith after MBIC denied coverage for losses the insured sustained when government orders compelled the insured to suspend its operations during the COVID-19 pandemic. The Court of Appeal interpreted the term "direct physical loss" in the "all-risk" commercial property policy's Business Income (and Extra Expense) Coverage Form as requiring "a physical alteration of the covered property." Based thereon, the Court of Appeal held that the insured was not entitled to coverage under the policy where the insured did not allege that the virus was present in its theaters or that there was any physical alteration of its property as a result of either the virus or the government orders.
Comments: While we expect we will continue to see cases discussing whether insureds are entitled to coverage for losses sustained as a result of the COVID-19 pandemic, we may finally hear from the California Supreme Court on these issues, which would allow us to put these issues to rest once and for all. In Another Planet Entertainment, LLC v. Vigilant Insurance Co., 56 F. 4th 730 (9th Cir. December 28, 2022), the Ninth Circuit Court of Appeals certified the following question to the California Supreme Court: Can the actual or potential presence of the COVID-19 virus on an insured's premises constitute "direct physical loss or damage to property" for purposes of coverage under a commercial property insurance policy? Additionally, with respect to the virus exclusion, the Ninth Circuit Court of Appeals in French Laundry Partners, LP v. Hartford Fire Insurance Co., 58 F. 4th 1305 (9th Cir. February 6, 2023) certified the following question to the California Supreme Court: Is the virus exclusion in [the insured's] insurance policy unenforceable because enforcing it would render illusory a limited virus coverage provision allowing for the possibility of coverage for business losses and extra expenses allegedly caused by the presence and impacts of COVID-19 at an insured's properties, including the loss of business due to a civil authority closure order? The California Supreme Court granted the request for certification in both cases, so there is now a real possibility we may be able to put these issues behind us once the Court issues its rulings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
