SAN JOSE SHARKS, LLC, еt al., Petitioners, v. THE SUPERIOR COURT OF SANTA CLARA COUNTY,
H050441
In the Court of Appeal of the State of California, Sixth Appellate District
December 21, 2023
(Santa Clara County Super. Ct. No. 21CV383780)
The parties to the underlying action dispute whether losses plaintiffs1 incurred as a consequence of the COVID-19 pandemic are covered by a commercial insurance policy issued by defendant Factory Mutual Insurance Company. Plaintiffs’ petition for writ review of a trial court order striking the majority of their coverage theories calls for us to
assess whether plaintiffs adequately pleaded “covered physical loss or damage to property due to COVID-19” and to interpret the terms of the operative insurance agreements.
We conclude that the policies’ contamination exclusion, which the trial court did not reach, unambiguously operates to exclude viral contamination such that the trial court‘s ultimate determination that plaintiffs cannot allege covered physical loss or damage to property is correct. Accordingly, we deny plaintiffs’ petition.
A. Plaintiffs’ Allegations in the Operative Second Amended Complaint2
Factory Mutual insured various of plaintiffs’ properties, including hockey arenas, “against ALL RISKS OF PHYSICAL LOSS OR DAMAGE” except as excluded. The “all risks” policies cover “TIME ELEMENT loss“—business interruption losses “directly resulting from physical loss or damage of the type insured” subject to certain conditions, including either gross earnings or gross profits and “expenses reasonably and necessarily incurred . . . to reduce the loss otherwise payable” under the time element coverage.
The policies contain “additional time element coverage extensions” for “interruption by communicable disease,” which, subject to exclusions, are triggered when “a location owned, leased or rented by the Insured has the actual not suspected presence of communicable disease and access to such location is limited, restricted or prohibited by [¶] [(1)] an order of an authorized governmental agency regulating the actual not suspected presence of communicable disease; or [¶] [(2)] a decision of an Officer of the
Insured as a result of the actual not suspeсted presence of communicable disease.” (Capitalization & boldface omitted.) The interruption by communicable disease coverage extension “covers the Actual Loss Sustained and EXTRA EXPENSE incurred . . . during the PERIOD OF LIABILITY at such location with the actual not suspected presence of communicable disease.” (Boldface omitted.)
Further, the policies contain time element coverage extensions for “civil or military authority.” The civil authority extensions cover “the Actual Loss Sustained and EXTRA EXPENSE incurred by the Insured during the PERIOD OF LIABILITY if an order of civil . . . authority limits, restricts or prohibits partial or total access to an insured location provided such order is the direct result of physical damage of the type insured at thе insured location or within five statute miles/eight kilometres of it.” (Boldface omitted.)
Unless “directly resulting from other physical damage not excluded,” the policies exclude “contamination, and any cost due to contamination including
COVID-19 is a potentially deadly communicable disease caused by a coronavirus. Throughout 2020, the virus was presumed to be present or imminently present everywhere. As of March 22, 2022, there had been over 83 million cases of COVID-19 in the United States and Canada and over 6.1 million deaths worldwide. Many of these
illnesses were caused when people were exposed to “air and surfaces[ ]that had been physiсally . . . altered by the COVID-19 virus.”
People infected with COVID-19 expel the virus when they exhale. Viral droplets may remain suspended in the air or adhere to surfaces. Viral droplets are also transferred to surfaces when an infected individual touches a surface after touching their eyes or nose. Plaintiffs further allege that the virus “changes the chemical composition of air . . . amount[ing] to physical damage” and “alter[s] the molecular structure of . . . otherwise inert property“: “The COVID-19 virus damages property . . . by adhering to and altering the structure of its surfaces. Specifically, . . . it has been reported that the virus changes the surfaces of that property as its spike proteins become entangled with, bound to, and part оf the molecular surface of the materials with which it comes into contact. When that happens, the surfaces change in scientifically measurable and quantifiable ways. Moreover, as studies have shown, these materials then become infectious when touched and unfit for use.” “[B]ecause the virus renders otherwise inert materials dangerous, viral contact with property, and the air within the property, means significant damage and loss.”
The virus was present in each of plaintiffs’ insured locations. As a result, the virus “physically damage[d]” plaintiffs’ insured property by “chang[ing] the chemical composition of air” and “altering the molecular structure of the physical surfaces of otherwise inert property.”
In March 2020, рlaintiffs closed their hockey arenas prior to the issuance of any relevant government orders because “of the presence of the COVID-19 virus at insured arenas, and the resulting physical damage to the arenas,”
property and mitigate the virus‘s harmful physical effects—disinfecting areas and equipment infected individuals used, cleaning and sanitizing high-touch surfaces, developing COVID-19 and Mechanical/HVAC-R policies, and making various physical modifications to arenas. Fans were only allowed to attend games after plaintiffs had undertaken various remedial measures to mitigate the virus‘s physical impact on surfaces and the air, government restrictions and orders were relaxed, and COVID-19 vaccines became more prevalent. If plaintiffs had allowed fans to attend games while COVID-19 rates were high during 2020, their properties would have suffered more damage from the virus.
Plaintiffs paid the required premiums on their insurance policies, provided a timely notice of claim for their virus-related losses, and submitted a proof of loss. Plaintiffs allegе that their insurance policies cover COVID-19-related losses for property damage and restoration costs, business interruption losses and extra expenses, civil authority losses, losses due to the physical prevention of ingress of egress to insured locations, communicable disease losses, and losses incurred to mitigate property damage. Factory Mutual denied plaintiffs’ claims. Plaintiffs filed suit, alleging three causes of action: (1) breach of contract; (2) declaratory relief; and (3) breach of the implied covenant of good faith and fair dealing.
B. Procedural History
Factory Mutual demurred to the operative complaint. In the alternative, Factory Mutual moved to strike allegations “concerning prоvisions of the Policies other than the coverages for Communicable Disease Response and for Interruption by Communicable Disease, which do not require physical loss or damage to the property.”
The trial court overruled Factory Mutual‘s demurrer because plaintiffs had at a minimum stated a claim for relief based on communicable disease coverage. But the trial court granted the motion to strike “in large part,” concluding that plaintiffs failed “to allege covered physical loss or damage to property due to COVID-19.” The trial court
declined to address Factory Mutual‘s contention that the contamination exclusion barred plaintiffs’ claims for coverage.
By petition for writ of mаndate, plaintiffs challenge the trial court‘s ruling on the motion to strike. We issued an order to show cause in which we asked
II. DISCUSSION
Interpreting the parties’ insurance policy in the context of plaintiffs’ factual allegations, we read the contamination exclusion as excluding from coverage both the physical loss or damage caused by viral contamination and the associated time element loss. Accordingly, although we consider plaintiffs to have adequately alleged physical loss or damage from the coronavirus, we deny writ relief. (Cf. Atwell Island Water Dist. v. Atwell Island Water Dist. (2020) 45 Cal.App.5th 624, 627, 634-635 (Atwell).)
A. Standard of Review
A defective portion of а cause of action is subject to a motion to strike. (Baral v. Schnitt (2016) 1 Cal.5th 376, 393-394 [discussion of “conventional” motions to strike], citing PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682; see also
“The trial court‘s ruling on a motion to strike a pleading . . . is generally reviewed for abuse of discretion.” (Cal-Western Business Servs., Inc. v. Corning Capital Group (2013) 221 Cal.App.4th 304, 309 (Cal-Western); see also Abbott Laboratories v. Superior Court (2020) 9 Cal.5th 642, 651 (Abbott) [reviewing denial of motiоn to strike for abuse of discretion].) Under that otherwise deferential standard, we review questions of law de novo. (See Cal-Western, supra, 221 Cal.App.4th at p. 309; Abbott, supra, 9 Cal.5th at p. 651.)
B. Interpretation of Insurance Contracts
The judicial interpretation of an insurance contract presents a question of law. (John‘s Grill, Inc. v. The Hartford Financial Services Group, Inc. (2022) 86 Cal.App.5th 1195, 1206, review granted Mar. 29, 2023, S278481 (John‘s Grill).) ” ’ “While insurance contracts have special features, they are still contracts to which the ordinary rules of contract interpretation apply.” [Citation.] Thus, “the mutual intention of the parties at the time the contract is formed governs interpretation.” [Citation.] If possible, we infer this intent solely from the written provisions of the insurance policy. [Citation.] If the policy language is “clear and explicit, it governs.” ’ . . . ‘If the terms are ambiguous [i.e., susceptible tо more than one reasonable interpretation], we interpret them to protect ” ‘the objectively reasonable expectations of the insured.’ ” [Citations.] Only if these rules do not resolve a claimed ambiguity do we resort to the rule that ambiguities must be resolved against the insurer.’ ” (Yahoo Inc. v. National Union Fire Ins. Co. (2022) 14 Cal.5th 58, 67.)
“Insurance policies typically contain two main components: . . . provisions that specify the risks being covered and . . . exclusionary provisions that ‘remove coverage for certain risks which are initially within the insuring clause.’ [Citation.] The grant of coverage is generally interpreted broadly in favor of the insured to protect the objectively reasonable expectations of the insured. [Citations.] And exclusionary provisiоns that limit or take away coverage are ‘strictly construed against the insurer and liberally
interpreted in favor of the insured’ [citation], while exceptions to exclusions are broadly construed in favor of the insured [citation].” (John‘s Grill, supra, 86 Cal.App.5th at p. 1207, review granted.)
C. Allegations of Physical Loss or Damage Caused by the Virus
1. Physical Loss or Damage
Relying on United Talent Agency v. Vigilant Insurance Company (2022) 77 Cal.App.5th 821 (United Talent), the trial court ruled that the virus‘s presence “in the air and on surfaces is not physical loss or damage to property.” The trial court recognized that a second decision, Marina Pacific, disagreed with United Talent, but found United Talent persuasive. (See Another Planet Entertainment, LLC v. Vigilant Ins. Co. (9th Cir. 2022) 56 F.4th 730, 734, request for certification granted Mar. 1, 2023, S277893 [explaining split between United Talent and Marina Pacific in certifying question to California Supreme Court].) Assuming the truth of plaintiffs’ factual allegations regarding the interaction between the virus and the physical surfaces of the insured property, we are persuaded that plaintiffs have alleged physical loss or damage within the meaning of the policies.
In United Talent, the plaintiff alleged that the virus damaged the air and surfaces of its insured property. (United Talent, supra, 77 Cal.App.5th at pp. 826-827.) The court noted that “[m]any courts have rejected the theory that the presence of the virus constitutes physical loss or damage to property.” (Id. at p. 835.) Acknowledging that “there are ‘some comparable elements between’ allegations that the virus physically altered property and cases in which ‘a physical force rendered real property uninhabitable or unsuitable for its intended use, without any structural alteration,’ because ‘the COVID-19 virus—like smoke, ammonia, odor, or asbestos—is a physical force[,]’ ” the court stated “that courts have rejected claims that ‘short lived’ contamination that can be addressed by simple cleaning constitutes direct physical loss.” (Ibid.) The court held “that the presence or potential presence of the virus does not constitute direct physical
damage or loss. While the contamination of asbestos . . . or environmental contaminants . . . constituted property damage in that they rendered a property unfit for a certain use or required specialized remediation, the comparison to a ubiquitous virus transmissible among people and untethered to any property is not apt. . . . [T]he virus exists worldwide wherever infected people are present, it can bе cleaned from surfaces through general disinfection measures, and transmission may be reduced or rendered less harmful through practices unrelated to the property, such as social distancing, vaccination, and the use of masks. Thus, the presence of the virus does not render a property useless or uninhabitable, even though it may affect how people interact with and within a particular space.” (Id. at p. 838; see also, e.g., Endeavor Operating Co., LLC v. HDI Global Ins. Co. (2023) 96 Cal.App.5th 420, 440-442, review granted Dec. 13, 2023, S282533; Tapestry, Inc. v. Factory Mutual Ins. Co. (2022) 482 Md. 223, 250-251 (Tapestry); Schleicher and Stebbins Hotel, LLC v. Starr Surplus Lines Ins. Co. (2023) 175 N.H. 744, 747; Monarch Casino & Resort, Inc. v. Affiliated FM Ins. Co. (10th Cir. 2023) 85 F.4th 1034, 1042-1044 (Monarch Casino); Circle Block Partners, LLC v. Fireman‘s Fund Ins. Co. (7th Cir. 2022) 44 F.4th 1014, 1022.)
In Marina Pacific, the plaintiffs alleged that the virus bonded with surfaces to physically damage property. (Marina Pacific, supra, 81 Cal.App.5th at p. 101.) The court acknowledged cases requiring allegations that “an external force acted on the insured property causing a physical change in the cоndition of the property to come within the coverage provision for ‘direct physical loss or damage.’ ” (Id. at p. 107.) The court held that the plaintiff‘s allegations were sufficient. (Id. at p. 108.) Assuming the truth of the plaintiffs’ allegations, the plaintiffs had “unquestionably pleaded direct physical loss or damage to covered property” and “adequately alleged that physical loss or damage caused a slowdown in, or cessation of, the operation of the insureds’ business.” (Id. at p. 109.) The court underscored that the policy contained “communicable disease coverage” that “explicitly contemplates that a communicable
disease, such as a virus, can cause damage or destruction of property and that such damage constitutes direct physical loss or
Here, there is presently no dispute that ” ‘physical loss or damage’ requires a ‘distinct, demonstrable, physical alteration of the property,’ ” more than ” ‘mere loss of use of physical property to generate business income, without any other physical impact on the property . . . .’ ” At that level of generality, plaintiffs’ allegations pass muster. At minimum, plaintiffs alleged droplets bearing the virus demonstrably and measurably contaminated the surfaces of the insured properties. To the extent plaintiffs further alleged that the virus altered their property‘s molecular structure, Factory Mutual does not contest that we must assume the truth of that allegation. (See Marina Pacific, supra, 81 Cal.App.5th at p. 108 [crediting allegations to the effect that the virus “bonds to surfaces through physicochemical reactions involving cells and surface proteins, which transform the physical condition of the property“].)
Factory Mutual contends that even if the virus were to alter the surface molecular structure of insured property so as to render the property unsafe, that alteration does not
constitute physical loss or damage. In Factory Mutual‘s reasoning: (1) the ordinary and popular usage of “physical loss or damage” does not include “activity at the molecular level that is imperceptible to any of the [unaided] human senses [even if] ‘scientifically measurable[;]’ ” (2) the communicable disease coverage extension is triggered without a showing of physical loss or damage, indicating an understanding that communicable diseases do not cause physical loss or damage; and (3) cases concerning other noxious substances have required that the substance mаke
Coverage extends to “all risks of physical loss or damage” not expressly excluded. (Italics added.) The parties agreed to an exclusion for “contamination” caused by a virus, unless the contamination directly results from ”other physical damage” that is not excluded.4 (Italics added.) If the parties did not contemplate that viral contamination could constitute a form of physical loss or damage, there would have been no need to specify that contamination resulting from “other” (covered) physical damage was not excluded from coverage. Moreover, given this exclusiоn it is unsurprising that the communicable disease coverage extension does not require physical loss or damage as a trigger. (See Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747, 759 [“an insurer is not absolutely prohibited from drafting and enforcing policy provisions that provide or leave intact coverage for some, but not all, manifestations of a particular peril“]; Monarch Casino, supra, 85 F.4th at p. 1041 [contamination exclusion from all
risk and business-interruption coverage not inconsistent with additional (limited) communicable disease coverage]; Out West Restaurant Group, Inc. v. Affiliated FM Ins. Co. (9th Cir. Sept. 2, 2022, No. 21-15585) 2022 WL 4007998, at p. *2 (Out West) [no conflict between contamination exclusion and communicable disease coverage]; see also Marina Pacific, supra, 81 Cal.App.5th at p. 112 [assessing whether policy contemplated that a communicable disease could cause physical lоss or damage].)
Factory Mutual contends that if plaintiffs may plead a claim for physical loss or damage that is not perceptible by the unaided human senses, plaintiffs may be permitted to state a claim “without pleading any facts specific to a location or property item.” This contention mixes two distinct issues: the means by which the physical loss or damage is ascertained is distinct from the specificity with which plaintiffs must identify the damaged property in their pleadings.
Here, plaintiffs allege that their insured property was damaged by a viral contaminant. Further, plaintiffs allege that they discarded and replaced items as part of their reopening process.5 Nothing in the policies suggests that the
rendered unsuitable for its intended purpose. (See generally Inns-by-the-Sea v. California Mutual Ins. Co. (2021) 71 Cal.App.5th 688, 701-704 (Inns) [distinguishing cases where noxious substances rendered property unsuitable for its intended purpose where analysis turned on whether it was the presence of the virus on the premises or government orders caused unsuitability].)
2. Causation
Factory Mutual contends that even if the virus physically damaged insured property, plaintiffs’ business interruption losses resulted not from that physical damage, but from the risks posed by people assembling in the same space. As alleged, plaintiffs’ core business is “staging hockey games with world[-]class athletes in front of a live audience.” The thrust of Factory Mutual‘s argument is that—regardless of the condition of plaintiffs’ insured property—those games could not have gone forward, because the virus rendered attendance at indoor hockey games inherently unsafe. (See Inns, supra, 71 Cal.App.5th at pp. 713-714 [demurrer properly sustained where business interruption was caused by government orders rather than physical damage to property]; Best Rest Motel, Inc. v. Sequoia Ins. Co. (2023) 88 Cal.App.5th 698, 709 [even if hotel was uninhabitable due to presence of COVID-19 fomites, summary judgment was properly granted because thеre was “no evidence creating a triable issue that fomites—as distinguished from massive reductions in tourism—caused” the plaintiff‘s lost income].) But Factory Mutual‘s line of argument would require us to reject at the pleading stage facts that plaintiffs adequately alleged in their complaint.
Plaintiffs alleged that contaminated surfaces spread the virus. Plaintiffs alleged that they closed hockey arenas during the season as a result of the presence and associated physical damage the virus had caused in their facilities.6 The relative risk
posed by surface-to-person transmission, the
D. Contamination Exclusion
Because plaintiffs alleged that it was a virus that caused the disputed physical damage to their property, their allegations implicate the policies’ contamination exclusion. Plaintiffs concede that the exclusion precludes recovery for the diminution of property value as a result of contamination and costs due to the contamination, but they contend that it does not exclude claims for lost earnings. Factory Mutual contends that the exclusion encompasses any losses from viral contamination including business interruption otherwise covered under the policy‘s “Time Element” provision. Reading the policy as a whole, we conclude that the policy is not reasonably susceptible to plaintiffs’ interpretation. Rather, the policy unambiguously excludes physical loss or damage in the form of viral contamination from the scope of coverage.7
Although, as we have recognized, the policies cover “all risks of physical loss or damage” except as excluded, the policies expressly exclude three categories “unless directly resulting from other physical damage not excluded.” (Capitalization omitted.) In relevant part, the three enumerated exclusions are: “1) contamination, and any cost due to contamination . . .[;] 2) shrinkage[;] and (3) changes in color, flavor, texture or
finish.”8 (Boldface omitted.) Reading the list together and in context, it is clear that the three exclusions are risks of physical loss or damage that are excluded from the all-risks coverage. (Cf. Monarch Casino, supra, 85 F.4th at p. 1040 [“the policy provides all-risk and business-interruption coverage except as excluded
“[C]ontamination” is “any condition of property due to the actual or suspected presence of . . . virus . . . .” (Boldface omitted.) There is no dispute that the risk of physical loss or damage on which plaintiffs rely constitutes contamination within the meaning of the policy; plaintiffs dispute only whether earnings lost due to such damage are excluded.
We reject plaintiffs’ contention that the exclusion of “contamination, and any cost due to contamination” makes the policy ambiguous.9 (See generally Schmier v. City of Berkeley (2022) 76 Cal.App.5th 549, 558 [ ” ’ “[W]here an ambiguous contract is the
basis of an action, it is proper, if not essential, for a plaintiff to allege its own construction of the agreement. So long as the pleading does not place a clearly erroneous construction upon the provisions of the contract, in passing upon the sufficiency of the complaint, we must accept as correct plaintiff‘s allegations as to the meaning of the agreement” ’ “].) Plaintiffs begin from a reasonable premise—if excluding “contamination” were by itself sufficient to remove contamination from the scope of coverage for “all risks of physical loss or damage” then “and any cost due to contamination” would be surplusage. Even so, taking the policies as a whole, plaintiffs’ construction of the provision—that “contamination, and any cost due to contamination” excludes only (1) the diminution of property value due to contamination; and (2) any cost due to contamination—is untenable. Nothing in the structure of
plaintiffs’ coverage claim in lopsided hindsight bereft of textual support. This we are unable to do. Where there is only one reasonable interpretation of contractual language, the contract is unambiguous such that the parties’ dispute may be resolved at the pleading stage. (See George v. Automobile Club of Southern California (2011) 201 Cal.App.4th 1112, 1128 [proрer to sustain general demurrer without leave to amend where insurance contract is not reasonably susceptible to the meaning alleged in the complaint].)
Plaintiffs agree that the policies exclude the risk of radioactive contamination, which is addressed in a distinct policy exclusion. Plaintiffs argue that if the policies excluded the risk of viral contamination, the exclusion applicable to viral contamination would have been in the same form as the exclusion applicable to radioactive contamination. We disagree.
The policies’ enumerated exclusions include three groups of excluded perils subject to different treatment. As to one such group (including “nuclear reaction or nuclear radiation or radioactive contamination“), the “[p]olicy excludes loss or damage directly or indirectly caused by or resulting from any of [the listed perils] regardless of any other cause or event, whether or not insured under this Policy, contributing concurrently or in any other sequence to the loss.” In contrast, “contamination,” “shrinkage,” and “changes in color, flavor, texture or finish” are designated for a more qualified exclusion: the “Policy excludes the following unless directly resulting from other physical damage not excluded by this Policy.” The difference between these sub sections is not whether they exclude risks—both do—but the scope of the exclusion. In the former case, the exclusion аpplies even where loss or damage is “indirectly caused by or result[s] from” the listed perils. In the latter, the exclusion does not apply if the loss or damage directly results from other physical damage not excluded. The difference between the treatment of radioactive contamination and viral contamination is immaterial because plaintiffs did not allege contamination resulting from other physical damage not excluded, but contamination as itself physical damage.
Plaintiffs suggest that the policies are ambiguous because their language could have more clearly indicated to the insured that viral contamination is not the “type” of physical loss or damage used to designate the
E. Civil Authority Coverage
The civil аuthority coverage requires an order of civil authority that is “the direct result of physical damage of the type insured.” Thus, it requires both “physical damage of the type insured” and a nexus between that covered damage and the order. As such, it echoes the coverage and causation questions addressed above. Having concluded that physical damage consisting of viral contamination is subject to the contamination exclusion, it, once again, follows that viral contamination is not “physical damage of the type insured.” Accordingly, the civil authority coverage does not apply.
III. DISPOSITION
The writ petition is denied. In the interests of justice, the parties shall bear their own costs in this writ proceeding. (
LIE, J.
WE CONCUR:
GREENWOOD, P. J.
BAMATTRE-MANOUKIAN, J.
San Jose Sharks LLC et al. v. Superior Court
H050441
Trial Court: Santa Clara County Superior Court
Court No.: 21CV383780
Trial Judge: The Honorable Sunil R. Kulkarni
Attorneys for Petitioner San Jose Sharks LLC et al.: Covington & Burling, Rani Gupta, Thomas Martecchini, Sabrina T. McGraw, Benedict M. Lenhart, Matthew J. Schlesinger, Kristin M. Cobb, Allison C. Hawkins
Attorneys for Real Parties in Interest Factory Mutual Insurance Company: Simpson Thacher & Bartlett, Chet A. Kroneberg, Bryce L. Friedman, Isaac Rethy; Carlson, Calladine & Peterson, Joyce C. Wang
Attorneys for Amicus Curiae California Medical Association: California Medical Association: Center for Legal Affairs, Jamie Ostroff, Shari Covington
San Jose Sharks LLC et al. v. Superior Court
H050441