82 Cal.App.5th 919
Cal. Ct. App.2022Background
- Apple Annie, LLC operated multiple restaurants and held a commercial property policy promising to pay for "direct physical loss of or damage to" covered property and resulting business income loss during the "period of restoration."
- In March–April 2020 local and state COVID-19 closure orders required or encouraged suspension of in‑person dining; Apple Annie alleged it suspended operations and lost business income.
- Oregon Mutual denied the claim; the trial court granted the insurer's motion for judgment on the pleadings (functionally a demurrer) and entered judgment for the insurer without leave to amend.
- On appeal Apple Annie argued the policy language is ambiguous (the disjunctive "loss of or damage to"), that government closure orders caused a covered "physical loss," and that presence of the virus or loss of use should trigger coverage.
- The Court of Appeal affirmed, following recent California appellate and federal precedent that mere loss of use or temporary viral presence does not constitute "direct physical loss of or damage to" property; leave to amend was denied as untimely and speculative.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether government COVID closures caused "direct physical loss of or damage to" insured property | Closure orders deprived Apple Annie of use of property and thus caused a physical loss covered by the policy | The orders caused only economic loss/ loss of use, not a direct physical loss or physical damage to the property | No — suspension from closure orders without physical alteration does not satisfy "direct physical loss of or damage to" |
| Whether the disjunctive phrase "loss of or damage to" is ambiguous and requires reading "loss of" to include loss of use | The disjunctive phrasing gives "loss of" independent meaning that should include loss of use, avoiding surplusage | The phrase is not ambiguous; "direct physical" modifies both terms and requires physicality (physical alteration, contamination, destruction, or dispossession) | No ambiguity; phrase requires a "direct physical" cause and does not cover mere loss of use |
| Whether the physical presence of the COVID-19 virus on premises constitutes physical damage | Virus presence is a physical contaminant that made premises unusable, so it is physical damage | Virus is transient, cleanable, not tied to the structure like asbestos or toxic contamination, and does not effect repair/restore scenarios contemplated by the policy | No — courts generally find transient viral presence does not equal the kind of physical alteration/contamination that triggers coverage |
| Whether leave to amend should be granted to plead facts like those in Marina Pacific | Apple Annie argued Marina Pacific shows plausible amendments could cure pleading defects (e.g., alleging viral contamination on premises) | Oregon Mutual and the court noted Apple Annie never sought leave below, offered no proposed amendments, and had ample time after Marina Pacific | Denied — Apple Annie failed to show a reasonable possibility of curing defects and offered no concrete amendment; denial of leave affirmed |
Key Cases Cited
- Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1 (California 1995) (policy terms given plain meaning; ambiguity is a question of law)
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal.App.4th 766 (Cal. Ct. App. 2010) ("direct physical loss" requires a distinct, demonstrable physical alteration)
- Inns-by-the-Sea v. Cal. Mut. Ins. Co., 71 Cal.App.5th 688 (Cal. Ct. App. 2021) (business shutdowns from COVID orders do not show direct physical loss or damage; policy's "period of restoration" supports that conclusion)
- Musso & Frank Grill Co. v. Mitsui Sumitomo Ins. USA Inc., 77 Cal.App.5th 753 (Cal. Ct. App. 2022) (rejects treating "loss of" as covering temporary loss of use; follows Inns-by-the-Sea)
- United Talent Agency v. Vigilant Ins. Co., 77 Cal.App.5th 821 (Cal. Ct. App. 2022) (presence of virus and closure orders insufficient to establish direct physical loss or damage)
- Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Ins. Co., 81 Cal.App.5th 96 (Cal. Ct. App. 2022) (distinguishable: insured adequately pled facts alleging direct physical loss or damage and was allowed to proceed)
- Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir. 2021) (Ninth Circuit anticipated California courts in rejecting pandemic business‑income claims absent physical loss or damage)
- Sandy Point Dental, P.C. v. Cincinnati Ins. Co., 20 F.4th 327 (7th Cir. 2021) (transient viral contamination does not qualify as direct physical loss)
- Santo's Italian Cafe, LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. 2021) (distinguishes dispossession/theft and physical loss; loss of use is not physical loss)
- Goodwill Indus. of Cent. Okla., Inc. v. Philadelphia Indem. Ins. Co., 21 F.4th 704 (10th Cir. 2021) (rejects reading "loss of" to cover economic loss absent physical alteration)