77 Cal.App.5th 821
Cal. Ct. App.2022Background
- United Talent Agency (UTA) bought commercial property policies from Vigilant and Federal covering losses caused by “direct physical loss or damage” to insured premises, including business income/extra expense and civil authority provisions.
- In 2020 UTA alleged COVID-19, related governmental closure orders, and the virus’s presence on or in property impaired use of insured locations and dependent premises, causing roughly $150 million in losses.
- UTA’s FAC alleged (1) loss of use from civil authority closure orders and (2) physical damage from SARS‑CoV‑2 contaminating air, surfaces, and HVAC systems; it also alleged some employees tested positive.
- Insurers demurred, arguing the policies require a tangible, demonstrable physical alteration and that pandemic restrictions or transient viral presence do not qualify as physical loss/damage.
- The trial court sustained the demurrer without leave to amend; the Court of Appeal affirmed, holding UTA failed to plead direct physical loss or damage under either theory and civil authority coverage did not apply.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether temporary loss of use from closure orders is “direct physical loss or damage” | UTA: government orders and the danger posed by the virus rendered properties unusable, constituting physical loss | Insurers: mere economic loss or use restriction, without tangible physical alteration, is not covered | Court: Loss of use due to orders is not direct physical loss/damage; demurrer affirmed |
| Whether presence of SARS‑CoV‑2 on property constitutes physical damage | UTA: virus physically alters air and surfaces (like mold/asbestos), creating contamination that requires remediation and thus is property damage | Insurers: virus harms people, not property; contamination is transient and remediable by ordinary cleaning, not a tangible, reparable physical alteration | Court: Alleged viral presence does not establish direct physical loss/damage under the policies; claim fails |
| Whether civil authority coverage applies (orders issued "due to" physical loss to property within one mile) | UTA: orders were issued because of the virus’s physical effect on property, so civil authority clause is triggered | Insurers: orders were issued to protect public health, not in response to physical property damage nearby; UTA did not allege property damage within one mile | Court: Civil authority coverage not triggered; orders were responses to a public‑health risk to people, not to demonstrated property damage |
Key Cases Cited
- Inns‑by‑the‑Sea v. California Mut. Ins. Co., 71 Cal.App.5th 688 (Cal. Ct. App.) (temporary pandemic closures and alleged viral presence do not, without more, constitute direct physical loss or damage)
- Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir.) (California law requires physical alteration to trigger "direct physical loss or damage")
- AIU Ins. Co. v. Superior Court, 51 Cal.3d 807 (Cal. 1990) (environmental contamination can constitute property damage under CGL context)
- Armstrong World Indus. v. Aetna Cas. & Sur. Co., 45 Cal.App.4th 1 (Cal. Ct. App.) (asbestos contamination can be property damage in CGL context)
- Simon Marketing, Inc. v. Gulf Ins. Co., 149 Cal.App.4th 616 (Cal. Ct. App.) (policy threshold requires physical loss or damage to property)
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal.App.4th 766 (Cal. Ct. App.) (physical loss contemplates an actual change in property requiring repair)
- Brown Jug, Inc. v. Cincinnati Ins. Co., 27 F.4th 398 (6th Cir.) (pandemic‑related business interruptions do not allege property damage absent physical alteration)
- Santo’s Italian Cafe LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir.) (policy language construed to require physical damage; pandemic closures insufficient)