CA Insurers Watch Out:  COVID-19 Business Interruptions Are Changing The Tide

Author: Sheila Baker

Guest Editor: Grace Shuman

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August 5, 2022 9:00am

 

As we continue to experience the impact of the pandemic, the number of court cases involving COVID-19 is steadily growing.  The Second District Court of Appeal, Division Seven, recently held if an insurer fails to provide coverage under a commercial property policy for its insured’s property damages caused by COVID-19, the insurer can be liable.

 

The Case: Marina Pacific Hotel and Suites, LLC v. Fireman’s Fund Ins. Co.

On July 23, 2022, in the matter of Marina Pacific Hotel and Suites, LLC v. Fireman’s Fund Ins. Co.[i], the Second District Court of Appeal held the defendant insurance company wrongfully denied plaintiffs’ claim for damages arising from the government’s shutdown due to COVID-19.[ii]

Defendant issued plaintiff a commercial property policy effective July 1, 2019 to July 1, 2020.[iii]  The policy provided $22 million in business interruption coverage for lost income and extra expenses due to suspended operations during a restoration period “arising from direct physical loss or damage to [covered] property.”[iv]  The policy also provided $1 million in communicable disease coverage “for direct physical loss or damage” to property “caused by or resulting from a covered communicable disease event.”[v]  A “communicable disease event” was defined as “an event in which a public health authority has ordered that a location be evacuated, decontaminated, or disinfected due to the outbreak of a communicable disease at such location.”[vi]  However, the policy excluded coverage for “mortality and disease,” defined as any loss, damage or expense caused directly or indirectly by, or resulting from, mortality, death by natural causes, disease, sickness, any condition of health, bacteria, or virus.[vii]

In plaintiffs’ complaint, they alleged COVID-19 was present on their property, causing physical loss and/or damage within the meaning of their commercial property insurance policy.[viii]  In the August 3, 2021, first amended complaint, plaintiffs described how COVID-19 caused their property to remain in an unsafe and hazardous condition.[ix]  Plaintiff asserted:

porous and nonporous surfaces or objects can harbor COVID-19 and serve as vehicles of transmission. Once this occurs, the transfer of COVID-19 may and does readily occur between inanimate and animate objects, or vice versa.[x]

Plaintiffs also stated they were required to “dispose of property damaged by COVID-19 and limit operations” at the insured properties.[xi]

Defendant insurance company refused to pay policy benefits.[xii]  Defendant argued there was no direct physical loss or damage to covered property.[xiii]  In defendants’ demurrer to the first amended complaint, they argued, “courts across the country had ruled the pandemic does not equate to physical loss or damage and argued loss of use alone does not constitute direct physical loss or damage.”[xiv]

The trial court sustained defendant’s demurrer without leave to amend and dismissed the complaint ruling COVID-19 could not cause direct physical loss or damage to property for purposes of insurance coverage.[xv]  The trial court based its decision on Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co.[xvi], which held “direct physical loss or damage,” was necessary for there to be a “loss” triggering coverage within the meaning of policies.[xvii]  In other words, the trial court sustained the demurrer finding where a physical change in the properties’ condition was required to trigger coverage and that the exclusion also applies to bar coverage.[xviii]

Plaintiffs appealed, arguing there was coverage for business interruption.  The Second District Court of Appeal, Division Seven, agreed and overturned the trial court’s dismissal of the case stemming from sustaining defendant’s demurrer.[xix]  The appellate court reasoned the term “direct physical loss or damage” is a crucial term in the subject commercial property insurance policy; however, it is left undefined and therefore, subject to interpretation.[xx]   Because the plaintiffs’ first amended complaint alleged direct physical loss or damage, the appellate court reasoned the claim was adequately pled.[xxi]  The appellate court also held the mortality and disease exclusion does not bar coverage because “if all losses caused by a virus were excluded … the communicable disease coverage would be meaningless.”[xxii]

 

Take Away

The Marina Pacific Hotel case suggests an insurance company may be held to litigate business loss cases stemming from claims of property damage due to COVID-19.  This goes against the previous trend of California state court cases on COVID-19, which have historically held COVID-19 does not cause property damage.  The resolution of the Marina Pacific Hotel case will be instructive on evaluating future COVID-19 claims.

 

 

 

 


[i] Marina Pacific Hotel & Suites LLC et al. v. Fireman’s Fund Insurance Co., No. B316501, (Cal. Ct. App., 2d Dist. July 13, 2022).

[ii] Id.

[iii] Id.

[iv] Sepion, Troy, California panel revives Venice Beach hotel’s COVID-19 coverage action, Westlaw Insurance Daily Briefing, 2022 INSDBRIEF 0432 ( July 18, 2022)

[v] Id.

[vi] Id.

[vii] Id.

[viii] Marina Pacific Hotel & Suites LLC et al. v. Fireman’s Fund Insurance Co., No. B316501, (Cal. Ct. App., 2d Dist. July 13, 2022).

[ix] Id.

[x] Id.

[xi] Id.

[xii] Id.

[xiii] Id.

[xiv] Id.

[xv] Id.

[xvi] Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co. (2010) 187 Cal.App.4th 766.

[xvii] Marina Pacific Hotel & Suites LLC et al. v. Fireman’s Fund Insurance Co., No. B316501, (Cal. Ct. App., 2d Dist. July 13, 2022).

[xviii] Sepion, Troy, California panel revives Venice Beach hotel’s COVID-19 coverage action, Westlaw Insurance Daily Briefing, 2022 INSDBRIEF 0432 ( July 18, 2022)

[xix] Marina Pacific Hotel & Suites LLC et al. v. Fireman’s Fund Insurance Co., No. B316501, (Cal. Ct. App., 2d Dist. July 13, 2022).

[xx] Id.

[xxi] Id.

[xxii] Sepion, Troy, California panel revives Venice Beach hotel’s COVID-19 coverage action, Westlaw Insurance Daily Briefing, 2022 INSDBRIEF 0432 ( July 18, 2022)

 

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