88 Cal.App.5th 696
Cal. Ct. App.2023Background
- Best Rest Motel (Holiday Inn Express, 126 rooms) sued Sequoia after Sequoia denied a business-interruption claim for COVID-19 losses under a commercial multiperil policy covering loss of business income caused by “direct physical loss of or damage to” the insured property.
- In March 2020 occupancy collapsed (~90% drop) as tourism, conventions, graduations and cross-border travel ceased; the hotel remained open at low occupancy, installed sanitation measures, and cordoned/sanitized rooms after some guests and employees tested positive.
- Best Rest submitted expert evidence (infectious-disease specialist) that SARS‑CoV‑2 can remain viable on surfaces (fomites) and thus causes direct physical damage making rooms temporarily unusable; declarations said some rooms were placed out of order.
- Sequoia moved for summary judgment arguing no “direct physical loss or damage” as a matter of law and, alternatively, lack of causal nexus between any on‑premises contamination and the hotel’s lost income (losses were from reduced travel and government orders).
- Deposition testimony from Best Rest’s executives showed cancellations were caused by travel restrictions and closures of local attractions—not by the presence of virus on hotel property; hotel managers conceded rooms were available if customers had come.
- The trial court granted summary judgment for Sequoia; the Court of Appeal affirmed, holding Best Rest failed to raise a triable issue that on‑premises COVID‑19 caused its lost business income (causation failure), so judgment was affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether COVID‑19 contamination/fomites constitute “direct physical loss of or damage to” property | Fomites render surfaces and air infectious and physically damage property (loss of use); therefore policy covers lost income | "Direct physical loss or damage" requires a distinct, demonstrable physical alteration; virus harms people, not property | Court did not decide the threshold issue definitively here; assumed virus was present but affirmed on another ground (see causation) |
| Whether Best Rest showed a causal nexus between on‑premises virus contamination and lost business income | Losses were caused by virus presence on hotel premises that made rooms/areas unusable | Losses were caused by government shutdowns, travel restrictions, and closures of tourist attractions — not by any particular presence of virus on the premises | No triable issue of causation; depositions show cancellations due to lack of travel/closures, so summary judgment for Sequoia affirmed |
| Whether closures of dependent properties (e.g., SeaWorld, zoo) triggered dependent‑property coverage because of their own direct physical loss/damage | Dependent properties closed because of COVID‑19 contamination, which led to Best Rest’s business collapse | Dependent properties closed due to government orders and reduced travel, not demonstrable direct physical loss/damage to those businesses | No evidence that dependent properties closed from their own physical loss/damage; dependent‑property coverage not established |
| Civil‑authority / extra‑expense or bad‑faith claims | Best Rest asserted related contractual and covenant claims arising from denial | Sequoia denied coverage; trial court rejected civil‑authority claim | Contract claim fails for the same reasons as coverage; implied‑covenant/bad‑faith claims fail as derivative (and civil‑authority ruling was not pursued on appeal) |
Key Cases Cited
- Inns‑by‑the‑Sea v. California Mut. Ins. Co., 71 Cal.App.5th 688 (2021) (rejected coverage where losses stemmed from statewide shutdowns rather than on‑premises virus presence; left open hypothetical on‑premises contamination scenario)
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal.App.4th 766 (2010) (treated “direct physical loss or damage” as requiring a distinct, demonstrable physical alteration)
- Hughes v. Potomac Ins. Co., 199 Cal.App.2d 239 (1962) (earlier California authority holding coverage need not be limited to tangible structural injury where property is rendered useless)
- Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Ins. Co., 81 Cal.App.5th 96 (2022) (demurrer context: alleged on‑premises viral adhesion sufficient to plead causal nexus)
- Shusa, Inc. v. Century‑National Ins. Co., 87 Cal.App.5th 250 (2022) (demurrer context: restaurant’s allegations that virus was present on surfaces survived demurrer)
- Verveine Corp. v. Strathmore Ins. Co., 184 N.E.3d 1266 (Mass. 2022) (short‑lived or surface‑level contamination removable by cleaning does not constitute physical alteration for coverage)
- Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1 (1995) (bad‑faith and covenant claims are derivative of coverage outcome)