87 Cal.App.5th 250
Cal. Ct. App.2022Background
- La Cava (restaurant) purchased a commercial package policy including Business Income coverage that pays for loss of business income caused by a “suspension” due to “direct physical loss of or damage to” insured premises; the policy also contained a civil authority clause.
- In mid-March 2020 La Cava substantially shut down operations during COVID-19 government orders; it later alleged customers and employees tested positive and that the SARS-CoV-2 virus was present on surfaces and in the air at the premises.
- La Cava alleged the virus adhered to and altered surfaces (creating fomites), made the premises unsafe, required remediation and reconfiguration, and caused lost income and extra expenses; it submitted a claim March 18, 2020.
- Century-National denied the claim on April 9, 2020, asserting no “direct physical loss of or damage to” property and that civil-authority coverage did not apply; La Cava sued for declaratory relief, breach of contract, bad faith and UCL violations.
- The trial court sustained Century-National’s demurrer without leave to amend, holding COVID-19 presence did not constitute direct physical loss or damage; the Court of Appeal reversed, finding La Cava’s contamination allegations sufficient to survive demurrer.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does alleged COVID-19 contamination constitute “direct physical loss of or damage to” property sufficient to trigger Business Income coverage? | Contamination physically alters surfaces/air (fomites), rendering property unsafe and unusable absent remediation, so it is direct physical loss/damage. | The policy requires a distinct, demonstrable physical alteration; ephemeral viral contamination does not meet that standard and federal cases exclude coverage. | Allegations that virus was present and physically altered surfaces were sufficient at demurrer stage; reversed and demurrer overruled. |
| Does civil-authority coverage apply because government orders prohibited access "due to direct physical loss or damage to property other than at the described premises"? | Government orders were issued because of physical contamination risk and thus triggered civil-authority coverage. | Orders did not prohibit access to the premises as required and were not issued due to physical loss/damage at other property. | Appellate court did not resolve civil-authority coverage (trial court had found no prohibition of access); primary reversal rests on direct-physical-loss pleading. |
| Can La Cava state a bad faith/UCL claim based on Century-National’s denial? | Century-National summarily denied the claim without a meaningful investigation, so denial was unreasonable and in bad faith. | A genuine coverage dispute existed; a reasonable dispute negates bad faith. | At pleading stage, allegations that insurer made no investigation and promptly denied coverage suffice to state bad faith/UCL claims; genuine-dispute defense not dispositive on demurrer. |
Key Cases Cited
- Marina Pacific Hotel and Suites, LLC v. Fireman’s Fund Ins. Co., 81 Cal.App.5th 96 (Cal. Ct. App. 2022) (held allegations that COVID-19 contaminated and physically altered property can state direct physical loss or damage and survive demurrer)
- MRI Healthcare Center of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal.App.4th 766 (Cal. Ct. App. 2010) (articulated ‘‘distinct, demonstrable, physical alteration’’ standard for direct physical loss/damage)
- United Talent Agency v. Vigilant Ins. Co., 77 Cal.App.5th 821 (Cal. Ct. App. 2022) (concluded similar contamination allegations insufficient as a matter of law)
- Inns-by-the-Sea v. California Mut. Ins. Co., 71 Cal.App.5th 688 (Cal. Ct. App. 2021) (held closures due to public-health orders, without contamination allegations, did not allege direct physical loss/damage)
- Musso & Frank Grill Co. v. Mitsui Sumitomo Ins. USA Inc., 77 Cal.App.5th 753 (Cal. Ct. App. 2022) (denied coverage for pandemic-related business losses under similar policies)
- Apple Annie, LLC v. Oregon Mut. Ins. Co., 82 Cal.App.5th 919 (Cal. Ct. App. 2022) (affirmed demurrer where insured alleged only suspension from government orders)
- Chateau Chamberay Homeowners Assn. v. Associated Int’l Ins. Co., 90 Cal.App.4th 335 (Cal. Ct. App. 2001) (explains genuine-dispute rule bars bad-faith liability when insurer reasonably contests coverage)