90 Cal.App.5th 332
Cal. Ct. App.2023Background
- Coast Restaurant Group (Cedar Creek Inn) held a business-interruption policy covering "actual loss of business income" caused by "direct physical loss of or damage to" the described premises (policy period Mar. 30, 2019–Mar. 30, 2021).
- In March 2020 Orange County health orders prohibited on-site dining (allowed pickup/delivery); Coast alleged its loss resulted from those orders (deprivation of use), not from virus contamination of the property.
- Coast submitted a claim; AmGUARD denied it, citing lack of "direct physical loss or damage" and invoking two policy exclusions: an "ordinance or law" exclusion (regulating construction/use/repair) and a "virus" exclusion.
- Coast sued for breach of contract and breach of the implied covenant; the trial court sustained AmGUARD’s demurrer without leave to amend, concluding the virus exclusion precluded coverage.
- On appeal the court examined (1) whether government-use restrictions can constitute "direct physical loss or damage," and (2) whether either the ordinance-or-law exclusion or the virus exclusion bars coverage as a matter of law.
- The Court of Appeal held there is potential coverage because government orders can cause "direct physical loss" by depriving the insured of possession/use, but the virus exclusion (and the ordinance/law exclusion) nonetheless applied to bar recovery; judgment affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether government orders prohibiting on-site dining constitute "direct physical loss of or damage to" property | Governmental orders deprived Coast of possession/use — that deprivation qualifies as "direct physical loss" even without physical alteration | No physical change to property; mere restriction of use is not "direct physical loss or damage" | Court: loss of use/dispossession can qualify as "direct physical loss"; potential coverage exists |
| Whether the ordinance-or-law exclusion bars coverage for losses caused by government orders | "Use" should be read narrowly (structural integrity); exclusion shouldn’t sweep in temporary use restrictions | Exclusion expressly covers losses caused by enforcement of laws regulating construction, use or repair — applies to orders restricting on-site dining | Held: exclusion applies to government orders regulating use; "use" not limited to structural integrity |
| Whether the virus exclusion bars coverage | Efficient proximate cause doctrine could preserve coverage if covered peril predominated; or exclusion should not apply where loss is from orders rather than virus contamination | Virus exclusion excludes loss caused directly or indirectly by any virus; COVID-19 triggered the orders, so the exclusion applies | Held: virus exclusion applies — COVID-19 triggered the orders and thus indirectly caused the loss; exclusion precludes coverage |
| Whether the efficient proximate cause doctrine saves coverage | If the covered peril (government order) was the predominant cause, coverage should attach | Doctrine inapplicable: both perils are excluded and government orders are not conceptually distinct from the virus (orders depend on COVID-19) | Held: doctrine does not apply because the perils are not conceptually distinct and both are excluded |
Key Cases Cited
- American Alternative Ins. Corp. v. Superior Court, 135 Cal.App.4th 1239 (2006) (governmental seizure/confiscation may constitute direct physical loss of property)
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal.App.4th 766 (2010) (in that business-personal-property context, court required physical change/damage under the policy’s insuring language)
- Minkler v. Safeco Ins. Co. of America, 49 Cal.4th 315 (2010) (principles for construing insurance policies and ambiguities)
- State Farm Fire & Casualty Co. v. Von Der Lieth, 54 Cal.3d 1123 (1991) (explains efficient proximate cause doctrine)
- Roberts v. Assurance Co. of America, 163 Cal.App.4th 1398 (2008) (efficient proximate cause applies only to conceptually distinct perils)
- Julian v. Hartford Underwriters Ins. Co., 35 Cal.4th 747 (2005) (defines efficient proximate cause as the predominant cause)
- Chadwick v. Fire Ins. Exchange, 17 Cal.App.4th 1112 (1993) (where a single cause accounts for the loss, efficient proximate cause analysis does not apply)