81 Cal.App.5th 96
Cal. Ct. App.2022Background
- Fireman’s Fund issued a commercial property policy (7/1/2019–7/1/2020) covering Hotel Erwin and Larry’s, including business interruption coverage for losses from "direct physical loss or damage" and a separate communicable-disease coverage; the policy also contained a "mortality and disease" exclusion.
- Insureds alleged SARS-CoV-2 (COVID-19) was present on and within insured premises, bonded to surfaces, and physically transformed property (rendering items unsafe/unsuitable), causing closures, remediation costs, disposal of affected property, and business-income losses.
- Fireman’s Fund demurred, arguing the complaint failed to allege 'direct physical loss or damage' (loss of use insufficient) and that the disease exclusion barred coverage; the trial court sustained the demurrer without leave to amend.
- The Court of Appeal reviewed de novo, accepting pleaded facts as true for demurrer purposes and examined policy language in context (insuring clause, communicable-disease coverage, and the exclusion).
- The court reversed: the complaint sufficiently alleged physical alteration under the standard in MRI Healthcare; the mortality-and-disease exclusion was ambiguous or at least not clearly broad enough to bar the claims; insureds must be allowed to pursue proof at trial or summary judgment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does COVID-19 cause 'direct physical loss or damage' to property? | COVID-19 bonds to surfaces, causes physico-chemical alterations and distinct physical change to property. | Virus does not physically alter structures; loss of use or fear of contagion is intangible and not covered. | Allegations that the virus physically altered property were sufficient at pleading stage; cannot be rejected as a matter of law. |
| Were the insureds’ factual allegations sufficient to plead a covered loss? | Yes — pleaded continuous contamination, remediation/disposal costs, and suspension of operations due to physical contamination. | Pleading is speculative and describes only temporary contamination/remediation that does not equal physical damage. | Court must accept pleaded facts as true on demurrer; allegations adequately pleaded direct physical loss or damage. |
| Does the policy’s mortality-and-disease exclusion bar coverage for COVID-related property loss? | Exclusion language is ambiguous and reasonably read to bar losses from death/illness, not all virus-caused property loss; communicable-disease coverage shows insurer contemplated disease-related property damage. | Exclusion plainly excludes any loss caused by a virus, so COVID-19 losses are excluded. | Exclusion is not clearly broad like ISO virus endorsements; construed narrowly or ambiguous — does not bar insureds’ claims at this stage. |
| Was dismissal without leave to amend appropriate? | Leave should be granted because factual development could support claims. | Complaint legally insufficient; leave unnecessary. | Trial court erred to sustain demurrer without leave; remand with directions to overrule demurrer. |
Key Cases Cited
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal.App.4th 766 (definition requiring a distinct, demonstrable physical alteration for 'direct physical loss')
- United Talent Agency v. Vigilant Ins. Co., 77 Cal.App.5th 821 (rejected virus-as-physical-damage at pleading stage)
- Inns-by-the-Sea v. California Mut. Ins. Co., 71 Cal.App.5th 688 (loss-of-use from closure orders insufficient without property-specific contamination allegations)
- Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 45 Cal.App.4th 1 (asbestos contamination can constitute property damage in appropriate context)
- AIU Ins. Co. v. Superior Court, 51 Cal.3d 807 (environmental contamination may amount to property damage)
- Hughes v. Potomac Ins. Co., 199 Cal.App.2d 239 (substantial physical impairment of property can be physical loss even without obvious structural breakage)
- Mudpie, Inc. v. Travelers Cas. Ins. Co., 15 F.4th 885 (policy virus exclusion bars claim where exclusion language is broad)
- Montrose Chemical Corp. of California v. Superior Court, 9 Cal.5th 215 (principles of insurance contract interpretation; resolve ambiguities to protect insured)