83 Cal.App.5th 1062
Cal. Ct. App.2022Background
- Amy’s Kitchen purchased a comprehensive property policy from Fireman’s that included a communicable-disease coverage extension and a loss-avoidance/mitigation extension for the 2019–2020 policy year.
- Amy’s alleged COVID-19 was present at its insured locations, incurred expenses (temperature scanners, shields, PPE, cleaning supplies, testing, "hero pay") to mitigate, clean, disinfect, monitor and test, and referenced public-health orders and guidance requiring sanitation and safety measures.
- Fireman’s denied the claim for lack of "direct physical loss or damage," refused mediation, and Amy’s sued for breach of contract, declaratory relief, and bad faith.
- The trial court sustained Fireman’s demurrer without leave to amend, reasoning Amy’s had not alleged "direct physical loss or damage," and dismissed the complaint.
- The Court of Appeal held the trial court erred in its reasoning: the communicable-disease extension’s subparagraph (c) (covering costs to mitigate/clean/disinfect/test) reasonably falls within the policy’s phrase "direct physical loss or damage," but Amy’s complaint failed to plead a required "communicable disease event" (a public-health order to evacuate, decontaminate, or disinfect a specific location).
- The appellate court reversed the dismissal and remanded with instructions to sustain the demurrer with leave to amend so Amy’s may attempt to plead a location-specific public-health order.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether "direct physical loss or damage" excludes mitigation/cleaning/testing costs under the communicable-disease extension | Amy’s: the extension expressly covers necessary costs to "mitigate, ... clean, ... test" and thus such costs are within "direct physical loss or damage" | Fireman’s: "direct physical loss or damage" requires a distinct physical alteration of property; cleaning/mitigation costs absent physical alteration are not covered | Court: subparagraph (c) plainly includes mitigation/cleaning/testing costs as part of "direct physical loss or damage"; trial court erred to the contrary |
| Whether Amy’s pleaded a "communicable disease event" as defined by the policy | Amy’s: jurisdiction-wide public-health orders and guidance, and presence of COVID at facilities, suffice; can allege more specifics if needed | Fireman’s: policy requires a public-health order specific to the insured location issued "due to the outbreak of a communicable disease at such location" | Court: complaint failed to allege a location-specific public-health decontamination/disinfection order; demurrer properly sustainable on that ground |
| Whether demurrer should have been sustained without leave to amend | Amy’s: could allege additional facts (counsel represented he had communications showing location-specific directions) | Fireman’s: the complaint cannot be cured to state a claim | Held: trial court erred in denying leave to amend; plaintiff showed at least a nonconclusive potential to plead location-specific orders |
Key Cases Cited
- Inns-by-the-Sea v. California Mut. Ins. Co., 71 Cal.App.5th 688 (principles of insurance contract interpretation in COVID context)
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal.App.4th 776 (construing "direct physical loss or damage" in property-insurance context)
- Minton v. Dignity Health, 39 Cal.App.5th 1155 (standard of review on demurrer; accept pleaded facts)
- Blank v. Kirwan, 39 Cal.3d 311 (leave-to-amend standard)
- E.M.M.I., Inc. v. Zurich Am. Ins. Co., 32 Cal.4th 465 (contract interpretation: reasonable lay understanding controls)
- Marina Pacific Hotel & Suites v. Fireman’s Fund Ins. Co., 81 Cal.App.5th 96 (same policy carrier; did not construe communicable-disease extension)