Late last week, the California Court of Appeal issued another COVID-19 business interruption decision reminding us that creative arguments do not win the day for policyholders in California. The true facts are decisive.
In Best Rest Motel, Inc. v. Sequoia Ins. Co., No. D079927, 2023 WL 2198660 (Cal. Ct. App. Feb. 24, 2023), the court upheld a trial court's ruling on summary judgment, reasoning the policyholder could not show that its loss of business income was caused by "direct physical loss of or damage to property," within the meaning of its commercial multi-peril insurance policy.
The policyholder, San Diego-based Best Rest Motel, Inc. argued that the presence of virus-infected droplets caused physical loss or damage rendering its property incapable of safely providing lodging to guests. Readers familiar with these issues may recognize this as an attempt to plead facts that fall within the "hypothetical scenario" posited in dicta by the court in Inns-by-the-Sea.
Unlike the vast majority of COVID-19 business interruption authorities that arise on demurrer or motion to dismiss, the Court of Appeal in Best Rest Motel reviewed the lower court's ruling on summary judgment. Thus, the court did not assume the truth of the allegations in the complaint. Instead, it reviewed and considered the admissible evidence that had come out in discovery.
In particular, the court reviewed deposition testimony that revealed that Best Rest Motel's reservations were cancelled because of the widespread disruptions caused by the COVID-19 pandemic: would-be guests could not travel, San Diego tourist attractions were shuttered, and graduations were cancelled. Indeed, insured's representatives testified there was no other reason why Best Rest Motel could not rent out its rooms.
The court observed that even if Best Rest Motel had eradicated all traces of COVID-19 from its premises, it still would have suffered the same lost income. Thus, the court concluded, there was no evidence creating a triable issue that the insured's claimed business loss was caused by the presence of virus in or on the insured's premises. As such, the insurer was entitled to summary judgment in its favor.
For insurance carriers litigating similar disputes, the Best Rest Motel decision imparts a noteworthy reminder: simply because a policyholder pleads that it suffered business income losses caused by the presence of virus on its premises, does not mean this will be borne out by facts revealed in discovery. To the contrary, many businesses like Best Rest Motel suffered business income losses as a result of the significant shift in consumer demand caused by the pandemic and resulting stay-at-home orders. Thus, insurance carriers that do not succeed at the demurrer stage should tailor their discovery requests to seek information about the causes of the policyholder's losses, and the extent to which the policyholder would have still suffered its claimed income loss had it eradicated all traces of coronavirus from its premises. Depending on the facts discovered, there might be support for the position that summary judgment is appropriate because there is no triable issue of fact with respect to causation.
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