(October 2024) - Over the past few months, there were two California Supreme Court cases addressing coverage issues arising out of the COVID-19 pandemic. We have set forth below the main facts and holding in both of those cases.
- In Another Planet Entertainment, LLC v. Vigilant Insurance
Company, 15 Cal. 5th 1106 (May 23, 2024), the California
Supreme Court finally addressed the question of whether the
presence of the COVID-19 virus satisfies the threshold requirement
of "direct physical loss or damage to property" under a
commercial property insurance policy. In response to a certified
question from the U.S. Court of Appeals for the Ninth Circuit, the
California Supreme Court held that "the actual or potential
presence of COVID-19 on an insured's premises generally does
not constitute direct physical loss or damage to property within
the meaning of a commercial property insurance policy under
California law."
The question arose in the context of a civil lawsuit filed by Another Planet Entertainment, LLC ("Another Planet") against its property insurer, Vigilant Insurance Company ("Vigilant"), alleging that the actual or potential presence of the COVID-19 virus at its venues or nearby properties caused direct physical loss or damage to property and triggered coverage under its insurance policy. In its analysis, the Supreme Court held that under California law, "direct physical loss or damage to property requires a distinct, demonstrable, physical alteration to property." While the Supreme Court acknowledged that the physical alteration need not be visible to the naked eye or structural, "it must still result in some injury to or impairment of the property as property." The Supreme Court concluded that the factual allegations in Another Planet's complaint did not meet that standard. While Another Planet alleged that the virus altered its property by bonding or interacting with it on a microscopic level, it did not allege that any such alteration resulted in injury to or impairment of the property itself. The Supreme Court also found that the fact that the property could not be used as intended was insufficient on its own to establish direct physical loss to property, as was the fact that a business was forced to curtail its operations, in whole or in part, based on pandemic-related government public health orders. In addition, the Supreme Court held that the "property damage" definition in Another Planet's commercial general liability policy did not expand the definition of "direct physical loss or damage" since such a definition, on its face, is materially different from the terms used in a property insurance policy. Finally, the Supreme Court held that the extrinsic evidence proffered by Another Planet in support of its claim of a latent ambiguity in the meaning of "direct physical loss or damage," as applied to its allegations of insurance coverage for COVID-19-related losses, was not inconsistent with the plain meaning of the term and did not reveal any ambiguity in the policy language. Despite its holding, the Supreme Court noted that it was not, and could not, determine that the COVID-19 virus could never cause direct physical loss or damage to property. While the Supreme Court acknowledged that Another Planet's allegations represented the most common allegations in support of pandemic-related property insurance coverage, its "contemplation of the virus and the affected property, [was] necessarily limited by Another Planet's factual allegations."
- In John's Grill, Inc. v. Hartford Financial Services Group, Inc., 16 Cal. 5th 1003 (August 8, 2024), the California Supreme Court reversed the judgment of the Court of Appeal finding that the policy at issue did not provide coverage for losses sustained in connection with the COVID-19 pandemic even though the policy provided virus-related coverage if the virus resulted from certain specified causes of loss. In this case, John's Grill, Inc. ("John's Grill") sought compensation for losses it suffered as a result of the COVID-19 pandemic from its insurer, Sentinel Insurance Company Ltd. ("Sentinel"). Sentinel denied coverage on various grounds, including that the loss or damage did not fall within the policy's "Limited Fungi, Bacteria or Virus Coverage" endorsement. The endorsement generally excluded coverage for any virus-related loss or damage that the policy would otherwise provide, but extended coverage for virus-related loss or damage if the virus was the result of certain specified causes of loss, including windstorms, water damage, vandalism, and explosion. John's Grill acknowledged that it could not satisfy the specified cause of loss limitation that was needed to trigger the virus-related coverage, but argued that the limitation was unenforceable because it rendered the policy's promise of virus-related coverage illusory. The Supreme Court disagreed, finding that the Court of Appeal erred in declining to enforce the specified cause of loss limitation. Specifically, the Supreme Court held that the terms of the endorsement were "clear and unambiguous" and provided virus-related coverage only if the virus resulted from specified causes of loss. Because John's Grill admitted that it could not satisfy the specified cause of loss limitation under the endorsement, the Supreme Court held that John's Grill had no claim for coverage under the policy. The Supreme Court also refused to allow John's Grill to invoke the illusory coverage doctrine to transform the policy's limited virus-related coverage into unlimited coverage, finding that the policy's limitations on such coverage were "explicit and unambiguous." The Supreme Court noted that even if it were to consider such an argument, John's Grill would have to show that it had a reasonable expectation of coverage for its pandemic-related losses and the court found that it could not make such a showing. Specifically, the court held that "ased on the policy language, John's Grill could not have an objectively reasonable expectation when it obtained the policy that it would provide coverage for all virus-related loss or damage, regardless of cause."
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.
