After COVID-19 wreaked so much havoc on businesses across the country, it is no surprise insurers are still dealing with the fallout to this day. COVID-19 business interruption coverage has been a hot topic in state and federal courts in California for the past few years. The Ninth Circuit even recently affirmed the dismissal of In-N-Out Burgers Inc.’s claim seeking coverage for COVID-19 business interruptions, which it alleged its insurer had wrongfully denied.[i]
But there is some light at the end of the tunnel, and a more final answer coming soon. The California Supreme Court agreed to provide guidance on one of the main arguments insurers make when rejecting COVID-19 business interruption claims.
In-N-Out: The Facts
In an unpublished opinion on March 10th, the Court of Appeals concluded plaintiff In-N-Out’s policy with Zurich American Insurance Co. contained a viral contamination exclusion, which barred the plaintiff’s claims.
In-N-Out sought coverage under policy provisions requiring the occurrence of “physical loss” or “physical damage” to property. In-N-Out argued it had plausibly alleged physical damage due to mandatory closures for their dining spaces during COVID-19.
The Ninth Circuit panel determined the policy’s contamination exclusion barred coverage because it referenced a viral contaminant. The panel also rejected In-N-Out’s assertion the Louisiana endorsement, language in the contract specific to the state of Louisiana, should apply and exempt its claims from the exclusion. The court concluded the endorsement was state-specific.[ii]
Supreme Court to the Rescue!
The California Supreme Court will have the last word on this issue. When a federal court finds the resolution of a dispute is governed by state law and there is no controlling state law precedent, the court may certify the state law question to that state’s supreme court for resolution. The Court granted a request by the Ninth Circuit to and agreed to answer crucial a question posed in Another Planet Ent., LLC v. Vigilant Ins. Co.:
“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?”[iii]
The Ninth Circuit’s need for additional clarification is because two divisions of the Second District of the California Courts of Appeal issued conflicting decisions about whether allegations like Another Planet (which alleged virtually the same claim as In-N-Out) were viable for coverage under the policy’s operative coverage language, “direct physical loss of or damage to.”
In United Talent Agency v. Vigilant Ins. Co., the court sustained the insurer’s demurrer, concluding that the insured did not establish that the virus constituted physical damage to the insured property.[iv] But in Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Ins. Co., a different division of the appellate courts, came to a different conclusion.[v] The Marina Pacific court acknowledged United Talent Agency was not distinguishable but maintained the court there had improperly disregarded the insured’s factual allegations as improbable.
The California Supreme Court’s agreement to decide the question in Another Planet is unsurprising. The Court rarely turns down a Ninth Circuit request for help in resolving questions of California law, now granting 19 of the last 20 requests, dating back to July 2018.
State courts of last resort remain an important battleground for policyholders. Only a small minority of the highest state appellate courts have spoken, including Vermont, Washington, Iowa, Oklahoma, Maryland, the District of Columbia, Wisconsin, Ohio, South Carolina, Massachusetts, Connecticut, and Louisiana. The California Supreme Court will soon join to provide clarity for this three-year protracted litigation and on other important issues.
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[i] In-N-Out Burgers v. Zurich Am. Ins. Co., No. 22-55266, 2023 WL 2445681 at *2 (9th Cir. Mar. 10, 2023).
[ii] Id. at *3-4.
[iii] 56 F. 4th 730 (9th Cir. 2022).
[iv] United Talent Agency v. Vigilant Ins. Co., 293 Cal. Rptr. 3d 65 (Ct. App. 2022).
[v] Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Ins. Co., 296 Cal. Rptr. 2d 777 (Ct. App. 2022).