Starlight Cinemas, Inc. v. Massachusetts Bay Insurance Company
91 Cal.App.5th 24
Cal. Ct. App.2023Background
- Starlight Cinemas owned and operated movie theaters and held a commercial property policy from MBIC covering business income losses caused by necessary suspension of operations “caused by direct physical loss of or damage to property.”
- Policy included a civil authority provision and a broad virus/bacteria exclusion barring loss “caused by or resulting from any virus.”
- In March 2020 government public-health orders required theaters to close, and Starlight alleged a “loss of functional use” and suspension of operations, then submitted a claim to MBIC.
- MBIC denied coverage, stating there was no direct physical damage to property and the virus exclusion applied; Starlight sued for breach of contract and bad faith.
- Trial court granted MBIC’s motion for judgment on the pleadings (demurring Starlight’s complaint) without leave to amend, concluding the policy’s “direct physical loss of or damage to” language requires a physical alteration and Starlight alleged only loss of use.
- On appeal the Court of Appeal affirmed, relying on existing California precedent holding temporary loss of use from pandemic-related closure orders — without physical alteration or virus-caused damage — does not trigger business-income coverage.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether “direct physical loss of or damage to property” covers temporary loss of use (no physical alteration) | "Direct physical loss" is undefined and ambiguous; can reasonably include loss of functional use caused by government closure orders | Phrase requires a distinct, demonstrable physical alteration of property; loss of use/economic harm alone is not physical loss | Court held the policy requires physical alteration; loss of use alone is not covered |
| Whether civil authority coverage applies | Government closure orders proximate cause of business suspension, so civil authority coverage applies | Civil authority coverage requires damage to other property causing civil authority action in response to dangerous physical conditions | Issue forfeited on appeal (Starlight did not press it); trial court’s reasoning on primary coverage sufficed |
| Whether the virus exclusion precludes coverage | Predominant cause was government orders, not virus; complaint did not allege virus presence at premises | Virus exclusion bars loss caused by or resulting from any virus; would preclude pandemic-related losses | Trial court found even if physical alteration alleged, virus exclusion would bar coverage; affirmed (exclusion can defeat coverage if applicable) |
| Denial of leave to amend after judgment on the pleadings | Starlight sought leave to allege possible physical alterations (e.g., seat removal) to cure defect | Amendment would not cure defect because virus exclusion would still bar coverage; plaintiff failed to show cure possible | Denial of leave to amend not an abuse of discretion — plaintiff did not prove amendment would overcome legal defects |
Key Cases Cited
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal.App.4th 766 (Cal. Ct. App. 2010) (adopted requirement that “direct physical loss” entails a distinct, demonstrable physical alteration)
- Inns-by-the-Sea v. California Mut. Ins. Co., 71 Cal.App.5th 688 (Cal. Ct. App. 2021) (temporary loss of use from COVID-19 orders insufficient to show physical loss)
- Musso & Frank Grill Co. v. Mitsui Sumitomo Ins. USA Inc., 77 Cal.App.5th 753 (Cal. Ct. App. 2022) (same: pandemic-related closures do not constitute physical loss)
- United Talent Agency v. Vigilant Ins. Co., 77 Cal.App.5th 821 (Cal. Ct. App. 2022) (same principle applied)
- Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Ins. Co., 81 Cal.App.5th 96 (Cal. Ct. App. 2022) (where complaint alleged virus-caused physical alteration, allegations survived demurrer)
- Shusha, Inc. v. Century-Nat. Ins. Co., 87 Cal.App.5th 250 (Cal. Ct. App. 2022) (assumed physical-alteration rule and held virus-caused alteration allegations sufficient to proceed)
- Apple Annie, LLC v. Oregon Mut. Ins. Co., 82 Cal.App.5th 919 (Cal. Ct. App. 2022) (policy language not ambiguous; loss-of-use theory rejected)
- Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir. 2021) (applying California law, held inability to use property from health orders is not physical loss)
- American Alternative Ins. Corp. v. Superior Court, 135 Cal.App.4th 1239 (Cal. Ct. App. 2006) (governmental seizure considered a physical loss in a distinct factual context — relied on by some courts but distinguished here)
- John’s Grill, Inc. v. The Hartford Fin. Servs. Group, Inc., 86 Cal.App.5th 1195 (Cal. Ct. App. 2022) (virus endorsement/definition can change coverage analysis; Supreme Court review granted)