CA Court finds direct physical loss or damage adequately caused by presence of COVID-19
The California Court of Appeal recognized that its conclusion differed from courts across the country.
The California Court of Appeal has reversed the trial court’s granting of demurrer and found that an insured adequately pled a claim of direct physical loss or damage due to the presence of the COVID-19 virus on an insured property. The case is Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Ins. Co., No. B316501, 2022 Cal. Ct. App. (Ct. App. July 13, 2022).
Fireman’s Fund insurance company issued a commercial property policy to Mariana Pacific Hotel and Suites for the time period between July 1, 2019, and July 1, 2020, that provided coverage for direct physical loss or damage to the insured property. The policy provided business interruption coverage with a $22 million limit for the “actual loss of business income and necessary extra expense you sustain due to necessary suspension of your operation during the period of restoration arising from direct physical loss or damage to property.”
Fireman’s paid out for the actual loss of business income due to the necessary suspension of operations during the period of restoration arising from direct physical loss or damage to the property. The hotel filed an amended complaint alleging that “the presence of COVID-19 on property, including on and within Insured Properties, caused and continues to cause physical loss and/or damage to property by causing, among other things, a distinct, demonstrable or physical alteration to property.”
The first amended complaint also alleged that “[a] study by the Virology Journal showed that COVID-19 can survive on surfaces up to 28 days, serving as a vehicle for transmission during that time span.” The hotel alleged that COVID-19 had been present in and before March 2020 on a variety of physical objects in the insured properties, including furniture, countertops, walls, bedding, appliances and food and other packaged items, as well as in the air. According to a government order, the hotel had to be evacuated, decontaminated, or disinfected and one employee was ordered by the Department of Health to evaluate the hotel and quarantine.
In order to meet the physical loss or damage to property requirement, the hotel must have closed or completely suspended operations. Fireman’s Fund demurred to the first amended complaint and argued that the hotel failed to allege facts showing that there was direct physical loss or damage to the covered property. Fireman’s Fund noted that courts across the country had ruled the pandemic did not equate to physical loss or damage and then argued that loss of use alone did not constitute direct physical loss or damage.
The trial court granted Fireman’s Fund’s demurrer, and relied on MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co., 187 Cal. App. j4th 766 (2010), which held that “accidental direct physical loss required ‘an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so. . . . where the property has simply been rendered unusable based on a virus, rather than an external force, the loss of use of the property in a typical manner is not a ‘directly physical loss’ contemplated by the insurance policy.”
On appeal, the hotel pointed to prior cases where the Court of Appeal held that a home had suffered physical loss or damage when the land under the home slid away, leaving the home standing on the edge of a previously nonexistent cliff. The hotel noted another case in which a third-party liability policy was in place, and the existence of asbestos fibers on surfaces in a building constituted property damage.
The hotel pleaded direct physical loss or damage to covered property within the definition articulated in MRI Healthcare, a distinct, demonstrable, physical alteration of the property. The hotel also alleged that physical loss or damage caused a slowdown of the operation of the business while the covered property was restored or remediated, triggering their business interruption coverage. The court decided that direct physical loss or damage could be shown without evidence of a physical alteration in the insured property.
Many prior cases, including Inns-by-the-Sea v. California Mutual Ins. Co., 71 Cal. App. 5th 688 (2021), involved allegations of loss of use of insured property as a result of government-ordered closures to limit the spread of COVID-19, rather than a claim the presence of the virus on the insured premises caused physical damage to covered property, which in turn led to business losses. Because the insureds adequately alleged losses covered by Fireman’s Fund’s policy, they were entitled to an opportunity to present their case, at trial or in opposition to a motion for summary judgment.
Editor’s Note: The court recognized that its conclusion was at odds with almost all of the decisions considering whether business losses from the pandemic shutdowns were covered. In this case, the federal case law was not binding on the court, and the pleading rules were different in federal court when evaluating a trial court order sustaining a demurrer. Under California law, different from federal law, the plausibility of the insureds’ allegations has no role in deciding a demurrer requiring the court to deem as true, however improbable, facts alleged in a pleading.
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