77 Cal.App.5th 753
Cal. Ct. App.2022Background:
- Musso & Frank Grill Co. had a business interruption insurance policy with Mitsui Sumitomo Insurance USA (MSI) effective June 30, 2019–June 30, 2020.
- In March 2020 COVID-19 related orders from the Los Angeles Mayor and public health agencies required restaurants to close for on‑site service; Musso & Frank, which did not offer delivery/takeout, ceased operations.
- Musso & Frank submitted a claim; MSI denied it, citing the policy requirement of coverage only for losses caused by "direct physical loss of or damage to" property and invoking exclusions for losses from governmental action and from viruses.
- Musso & Frank sued for breach of contract, breach of the implied covenant of good faith and fair dealing, and negligence; MSI demurred and the trial court sustained the demurrer without leave to amend, dismissing the complaint.
- On appeal the court reviewed de novo, assumed the complaint’s allegations true, and affirmed dismissal: the court held there was no physical loss or damage as required and the virus exclusion applied.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether "direct physical loss of or damage to" property covers closure due to COVID-19 orders | "Loss of" and "damage" are disjunctive; "loss of" includes loss of use/operations so closures are covered | The phrase requires physicality (alteration, contamination, destruction); mere loss of use from orders is not physical loss/damage | Held: Requirement unambiguously requires physical alteration/contamination/destruction; closures from the pandemic do not qualify |
| Whether "loss" and "damage" must be given distinct meanings to create ambiguity | Policy language allows interpreting "loss" to mean deprivation of use/value, creating coverage | Insurer: ordinary meaning controls; no reasonable dual interpretation exists to create ambiguity | Held: No ambiguity; words mean physical loss/damage and do not encompass nonphysical business interruption |
| Whether virus exclusion bars coverage even if closure otherwise covered | (not argued in opening brief) | Exclusion precludes coverage for loss or damage caused by or resulting from any virus | Held: Virus exclusion applies because closure orders were a response to COVID-19, so losses fall within exclusion |
| Burden at demurrer stage (pleading sufficiency) | Insured contends insurer must conclusively show policy negates insured’s reasonable construction at demurrer | Insurer contends complaint fails to state facts meeting insuring clause and exclusions | Held: Reviewing assumed allegations true, court concluded complaint still fails as a matter of law; demurrer properly sustained without leave to amend |
Key Cases Cited
- Mudpie, Inc. v. Travelers Cas. Ins. Co., 15 F.4th 885 (9th Cir. 2021) (applying California law: ‘‘direct physical loss of or damage to’’ requires physicality; COVID‑19 closures not covered)
- Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021) (similar holding: physical alteration/contamination or destruction required for coverage)
- Inns‑by‑the‑Sea v. California Mut. Ins. Co., 71 Cal.App.5th 688 (Cal. Ct. App. 2021) (California court: policies requiring physical loss/damage do not cover pandemic closures)
- AIU Ins. Co. v. Superior Court, 51 Cal.3d 807 (Cal. 1990) (principles governing insurance policy interpretation and insured expectations)
- Aydin Corp. v. First State Ins. Co., 18 Cal.4th 1183 (Cal. 1998) (insured bears burden to show claimed loss falls within insuring clause)