71 Cal.App.5th 688
Cal. Ct. App.2021Background:
- Inns by the Sea (Inns) purchased a commercial property policy from California Mutual covering five lodging facilities; policy includes Business Income (BI) and Civil Authority (CA) coverages triggered by "direct physical loss of or damage to" property.
- March 2020 county shelter-in-place / closure Orders in Monterey and San Mateo led Inns to cease operations and claim BI losses; California Mutual denied coverage and Inns sued for declaratory relief, breach, and bad faith.
- Inns alleged (in general terms) the COVID-19 virus was present on or around its premises and that the Orders were issued in direct response to that presence, causing the suspension of operations.
- California Mutual demurred, arguing the pandemic/Orders did not cause "direct physical loss of or damage to" insured property and certain exclusions would apply; trial court sustained the demurrer without leave to amend.
- The Court of Appeal affirmed, holding (1) the complaint did not plead direct physical loss or damage sufficient to trigger BI coverage, (2) the County Orders were not issued "due to" physical loss or damage at other premises and so did not trigger CA coverage, and (3) amendment could not cure these defects.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Business Income coverage is triggered by COVID-19–related shutdowns | BI triggered because virus presence and Orders rendered premises unsafe/unusable, producing direct physical loss or damage | No: policy requires "direct physical loss of or damage to" property at insured premises; government Orders and economic loss are not physical loss/damage | No: complaint failed to plead physical loss/damage causing suspension; mere loss of use/economic loss insufficient |
| Whether Civil Authority coverage applies to government closure Orders | CA triggered because Orders were issued in direct response to virus presence (a physical condition) and thus prohibited access due to physical loss/damage elsewhere | No: CA requires Orders due to direct physical loss/damage to other property; Orders were issued to slow community spread, not because of property damage | No: Orders were preventive public-health measures, not issued "due to" physical loss/damage to other property |
| Whether absence of an express virus exclusion implies coverage | Failure to include ISO virus exclusion shows insurer intended to cover virus-caused losses | Absence of an exclusion does not expand or create coverage where the insuring clause—plain language—does not apply | No: coverage must arise from insuring clause first; absence of a specific exclusion is not dispositive |
| Whether demurrer should have been sustained with leave to amend | Inns could plead additional scientific facts about virus presence/transmission to show physical loss/damage | Even with more scientific detail, the core defects (Orders as cause; loss-of-use rule) could not be cured | No leave to amend: court found amendment would not cure the pleading defects |
Key Cases Cited
- Hughes v. Potomac Ins. Co. of District of Columbia, 199 Cal.App.2d 239 (Cal. Ct. App. 1962) (recognizing nonstructural subsurface damage can constitute physical damage)
- Ward Gen. Ins. Servs., Inc. v. Employers Fire Ins. Co., 114 Cal.App.4th 548 (Cal. Ct. App. 2003) ("direct" and "physical" modify both "loss" and "damage")
- Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1 (Cal. 1995) (contract interpretation principles for insurance policies)
- Minkler v. Safeco Ins. Co. of Am., 49 Cal.4th 315 (Cal. 2010) (policy interpretation and ambiguity rules)
- Glavinich v. Commonwealth Land Title Ins. Co., 163 Cal.App.3d 263 (Cal. Ct. App. 1984) (coverage defined by the insuring clause; absence of exclusion not dispositive)
- Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002) (airborne contaminants/asbestos in air can make structure unusable and constitute physical loss)
- Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021) (policy requiring "direct physical loss" does not cover mere loss of use from pandemic restrictions)
- Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir. 2021) (closure orders aimed at slowing COVID-19 spread do not satisfy civil authority coverage requiring prior physical loss)
- Santo’s Italian Cafe LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. 2021) (similar holding that pandemic-related shutdowns do not satisfy direct physical loss or damage requirements)
- TRAVCO Ins. Co. v. Ward, 715 F.Supp.2d 699 (E.D. Va. 2010) (contamination that renders property unusable may qualify as direct physical loss)