96 Cal.App.5th 1
Cal. Ct. App.2023Background
- JRK Property Holdings owned ~100 hotels and residential properties and purchased a layered $250 million business-interruption property insurance program effective June 1, 2019–June 1, 2020.
- The policies provided coverage for business interruption caused by “direct physical loss, damage, or destruction” but contained a pollution exclusion defining “pollutants or contaminants” to include, among other things, a “virus,” and two excess policies (RSUI, Evanston) contained pathogen exclusions.
- JRK alleged SARS‑CoV‑2 contaminated air and surfaces at its properties (creating infectious fomites), caused physical alteration, forced operational changes and remediation costs, and led to lost rental and hotel income; JRK gave prompt notice to insurers.
- Insurers denied coverage and moved for judgment on the pleadings, arguing JRK pleaded only economic effects from government orders (not distinct physical alteration) and that exclusions (pollution and pathogen) barred coverage.
- The trial court granted the motion without leave to amend as to several insurers; JRK appealed.
- The Court of Appeal reversed the dismissal for most insurers (finding JRK adequately alleged physical alteration), but affirmed dismissal as to RSUI and Evanston (their pathogen exclusions unambiguously bar COVID‑19 losses) and remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. Whether actual presence/contamination by COVID‑19 can constitute “direct physical loss or damage” to insured property | JRK: virus physically alters air/surfaces, creating fomites and rendering premises unusable, so it pleads direct physical loss/damage | Insurers: allegations are conclusory; losses stem from government closure orders and economic harm, not demonstrable physical alteration | Held: Court finds JRK’s allegations sufficiently pleaded physical alteration for purposes of judgment on the pleadings and reverses dismissal as to most insurers (fact question remains for trial) |
| 2. Whether the policies’ pollution exclusion (defining contaminants to include a “virus”) precludes coverage for COVID‑19 spread from normal human activity | JRK: pollution exclusion must be read as MacKinnon requires—aimed at traditional environmental pollution, not ordinary viral spread | Insurers: definition explicitly lists “virus,” so exclusion covers dispersal/release of COVID‑19 and bars coverage | Held: Pollution exclusion does not bar coverage for ordinary person‑to‑person breathing/touch transmission; MacKinnon controls—exclusion targets traditional environmental pollution; inclusion of “virus” is not dispositive |
| 3. Whether pathogen exclusions in RSUI and Evanston policies bar COVID‑19 coverage | JRK: exclusions should be read narrowly or are inconsistent with limited communicable disease coverage | Insurers: exclusions explicitly preclude loss/damage from pathogenic materials/organic pathogens (including viruses) | Held: RSUI and Evanston pathogen exclusions unambiguously bar COVID‑19 losses; dismissal as to those carriers is affirmed |
| 4. Whether leave to amend should have been granted after judgment on the pleadings | JRK: any pleading defects could be cured with amendment | Insurers: defects are legal and cannot be cured; leave not warranted | Held: Trial court did not abuse discretion denying leave as to RSUI and Evanston (exclusions unambiguous); for other insurers denial reversed because claims survive on pleading |
Key Cases Cited
- MacKinnon v. Truck Ins. Exchange, 31 Cal.4th 635 (Cal. 2003) (pollution exclusion historically targeted traditional environmental pollution; exclusion should not be read to bar all toxic‑substance claims)
- Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Ins. Co., 81 Cal.App.5th 96 (Ct. App. 2022) (on demurrer, allegations that COVID‑19 contaminated and altered premises can state direct physical loss)
- Shusha, Inc. v. Century‑National Ins. Co., 87 Cal.App.5th 250 (Ct. App. 2022) (allegations of viral contamination and remediation expenses sufficient at pleading stage)
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal.App.4th 766 (Ct. App. 2010) (test requiring a distinct, demonstrable physical alteration for “direct physical loss or damage”)
- Inns‑by‑the‑Sea v. Cal. Mut. Ins. Co., 71 Cal.App.5th 688 (Ct. App. 2021) (hotel closures due to government orders held economic loss, not direct physical loss)