The Central District Court of California has dismissed the Complaint of two Fresno hotels claiming business losses to COVID-19. Following the trend of other California courts, the Central District Court found the Complaint failed to specifically allege facts supporting a claim for Business Income and Civil Authority coverage under the applicable Insurance Policy. Accordingly, the Court held the hotels’ COVID-19 related business losses were excluded from coverage under the Policy’s Virus Exclusion.
Two Fresno hotels, the University Square Hotel and The Hotel Fresno, began to suffer losses due to the COVID-19 pandemic in January 2020. In March 2020, the Mayor of Fresno issued an Executive Order directing the closure of all non-essential businesses. The same week, the Governor of California issued a similar state wide Executive Order (collectively the “Orders”). In their Complaint, the Fresno hotels alleged the Orders caused severe financial losses because of prohibited public access to the hotels.
The parent companies of the plaintiff hotels, West Coast Hotel Management, LLC dba University Square Hotel and West Coast Orange Group, LLC dba The Hotel Fresno, were insured under a business policy furnished by AmGUARD and administered by Berkshire Hathaway. The policy only covers losses resulting from a “Covered Cause of Loss.” The policy specifically excludes any “loss or damage caused directly or indirectly by… any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” (2020 WL 6440037, p. 1). The exclusion also provides, “such loss or damage is excluded regardless of any other cause or event that contributed concurrently or in any sequence of the loss.” (Ibid.)
The policy does provide business income and extra expense coverage during a period of restoration following a “direct physical loss of or damage to property.” (Id.) The policy also provides coverage for losses resulting from damage to property outside the described premises caused by an action of civil authority prohibiting access to the premises. The Civil Authority coverage is limited to civil authority action taken in response to damage caused to the area surrounding the premises.
AmGUARD denied the hotels’ claims for indemnification. The hotels filed suit, seeking a judicial declaration that (1) the Orders were civil authority orders prohibiting access to the hotels; (2) the prohibition of access is a covered loss; (3) the prohibition of access was necessitated by physical loss or damage to the hotels; (4) coverage is warranted under the Policy despite the Virus Exclusion; and (5) the Policy provides Civil Authority and Business Income coverage for losses or damage due to COVID-19 and the Orders. AmGUARD filed a motion to dismiss the hotels’ Complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief may be granted.
The key to the Court’s analysis in determining whether the hotels asserted a cognizable claim was interpretation of the policy language. In doing so, the court gives policy terms their “ordinary and popular usage” unless used by the parties in a “technical sense or a special meaning is given to them by usage.” (2020 WL 644037, p. 3, citing Palmer v. Truck Insurance Exchange, 21 Cal. 4th (1999) 1109, 1115.) Under California Law, insurance policy terms “must be read in context and in reference to the policy as a whole, with each clause helping to interpret the other.” (Ibid., Cal. Civil Code § 1641.)
Examining the language of the Business Income provision of the policy, the Court first noted the phrase “direct physical loss of or damage to property” is not defined in the policy. However, the Court determined the phrase plainly requires, at minimum, a loss or damage “physical in nature.” (2020 WL 6440037, p. 3.) This interpretation is supported by reference in the policy to the “restoration” period during which the physical property damage is “repaired, rebuilt, or replaced.” (Ibid.) In support of its interpretation, the Court cited several California opinions relying on the “physical alteration” standard, best defined by the Fourth District Court of Appeal as “a material existence, formed out of tangible matter, and  perceptible to the sense of touch.” (Ibid., citing Ward Gen. Ins. Servs., Inc. v. Employers Fire Ins. Co. (2003) 114 Cal. App. 4th 548, 556.)
The hotels attempted to argue coverage was owed under the policy due to loss of use of the property, which the hotels contended fell within the “direct physical loss” language of the policy. Although the Complaint alleged there was “direct physical loss of or damage” to the hotels, the Court dismissed this pleading allegation as conclusory. The Court further found generic references to the physical nature of the COVID-19 virus and the number of cases in California and Fresno County were too attenuated to establish physical alteration of the properties.
Next, the Court analyzed Civil Authority coverage under the policy. The Court found the bare allegations in the Complaint did not specify facts that the Orders caused actual physical damage to property in the surrounding area. Instead, the Court found the pleading allegations simply recited the coverage criteria under the policy. (2020 WL 644037, p. 4.)
Ultimately, the Court found the Virus Exclusion in the policy precludes coverage. The Virus Exclusion was clear and conspicuous under a bold-font heading, along with other coverage exclusions. The Court reasoned even if the hotels had argued the Orders caused their losses, the hotels nonetheless concede the Orders were issued to stop the spread of COVID-19. The hotels did not dispute their losses were caused by a virus; instead, they argued the Virus Exclusion is unenforceable under the reasonable expectations doctrine because the defendant insurers did not highlight and explain the provision. In response, the Court explained the reasonable expectations doctrine is an interpretive tool to resolve an ambiguity but cannot be used to create an ambiguity when none exists. (2020 WL 644037, p. 6., citation omitted.) In response to the hotels’ attempt to distinguish the pandemic from a simple virus, the Court reasoned the hotels’ interpretation is “akin to arguing a coverage exclusion for damage caused by a fire does not apply to damage caused by a very large fire.” (Ibid.)
Finally, the Court refused to grant the hotels leave to amend the Complaint because regardless, the Virus Exclusion precludes coverage under the Business Income and Civil Authority provisions of the policy. (2020 WL 644037, p. 6.)
It is difficult not to sympathize with business owners in this time of unprecedented economic upheaval caused by a global pandemic and the often-confusing state and local civil authority orders issued to curb the spread of the COVID-19 virus. However, insurance companies are also businesses, and if they were forced to cover the losses of every business impacted by the pandemic, the impact on the global economy could be even more catastrophic.
The long-term economic impact for business who rely on insurance services to protect their assets from property damage, personal injury claims, and any number of other calamities – as well as to provide them with a legal defense when they are sued – could be even worse than the immediate losses caused by the pandemic. The cost of premiums, which is already high, would skyrocket if insurers were forced to cover pandemic losses, as the competitive insurance market would deteriorate with some insurance companies unable to withstand the losses. Even worse, businesses no longer able to afford insurance would be forced to self-insure. With a vaccine and the prospects of an improved business climate on the horizon, the reality of courts not allowing these pandemic loss claims to survive the pleading stage may, in the long-run, be a blessing in disguise for business owners.