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California Supreme Court:
Presence of COVID-19 Is Not Loss for Insurance Purposes
Responding to Question Certified by Ninth Circuit, Guerrero Says Virus Generally Will Not Qualify as Property Damage or Loss, but Leaves Door Open for Coverage in Case With Differing Fact Situation
By a MetNews Staff Writer
The California Supreme Court held yesterday that the actual or potential presence of COVID-19 on an insured’s premises, without more, generally does not constitute a direct physical loss or damage within the meaning of a commercial property insurance policy, but held open the possibility that particular facts in a future case may justify a finding of coverage.
Chief Justice Patricia Guerrero, writing for a unanimous court, repudiated a controversial 2022 opinion from Div. Seven of this district’s Court of Appeal in Marina Pacific Hotel and Suites, LLC v. Fireman’s Fund Insurance Company.
The question before the Supreme Court arose in a challenge to a denial of coverage by Vigilant Insurance Company to a claim by the Bay Area-based Another Planet Entertainment, LLC, a live-entertainment production company that suffered pandemic-related losses when its venues closed.
Certified Question
After judgment was issued in favor of the insurer after U.S. District Court Judge Vince Chhabria of the Northern District of California on June 21, 2021 dismissed Another Planet’s complaint for failure to state a claim, the Ninth U.S. Circuit stayed the matter and certified the following question to the state’s high court:
“Can the actual or potential presence of the COVID-19 virus on an insured’s premises constitute ‘direct physical loss or damage to property’ for purposes of coverage under a commercial property insurance policy?”
In answering “no,” Guerrero wrote:
“While we conclude Another Planet’s allegations are insufficient, and it appears that such allegations represent the most common allegations in support of pandemic-related property insurance coverage, we cannot and do not in this proceeding determine that the COVID-19 virus can never cause direct physical loss or damage to property.”
Insurance Policy
The chief justice noted that as the matter arose from a dismissal under Federal Rule of Civil Procedure 12(b)(6)—analogous to a demurrer in the state court—“the question at this stage is the legal sufficiency of the pleadings,” which requires treating the allegations in the complaint as true.
Guerrero pointed out that Another Planet’s policy with Vigilant stated “[w]e will pay for direct physical loss or damage to [a building or personal property] caused by or resulting from a peril not otherwise excluded” and provided for coverage for the actual business income loss incurred due to “actual impairment of operations” which are “caused by or result from direct physical loss or damage by a covered peril to property.”
Another Planet asserted that when the virus, a physical substance, “attaches or binds to surfaces…it converts those surfaces and objects to active fomites” or vectors of transmission.
That was the assertion by the plaintiff in Marina Pacific. Then-Presiding Justice Dennis M. Perluss, now lecturer in law at UCLA, said that allegation, for pleading purposes, must be regarded as valid.
Most courts examining the issue parted company with that decision, though Div. Seven clung to it in subsequent cases.
Meaning of ‘Damage’
Guerrero said the plain meaning of the words ‘‘direct,” “physical,” and “damage” is clear, declaring:
“It is self-evident, of course, that ‘property insurance is insurance of property….’ Thus, for direct physical damage to property to occur, the property itself must have been physically harmed or impaired….
“It is also evident, based on the plain meaning of direct physical damage, that the general requirement of a distinct, demonstrable, physical change or alteration to property applies here.”
She elaborated:
“[I]t is the effect of the change or alteration of the property that is determinative. If the change or alteration causes harm or injury to the property itself, such a change or alteration may constitute direct physical damage to property. Conversely, if a change or alteration does not cause any damage or harm to the property, it does not constitute direct physical damage to property. Many physical forces, such as heat and cold, cause physical changes or alterations to property, but these changes or alterations do not necessarily cause physical damage.”
Meaning of Loss
As to the term “loss,” the jurist said “the precise meaning of direct physical loss is more contested” and commented that “[l]oss can simply be a more extreme form of damage, but its meaning is also broader.”
She reasoned that the pairing of “physical” with “loss” narrows the definition by requiring that there be some “physicality” to the loss of property, such as a physical change, contamination or destruction.
Guerrero concluded that “[t]he longstanding California view that direct physical loss to property requires a distinct, demonstrable, physical alteration of property is correct,” but found that such physicality does not require a structural change, remarking:
“We agree that an invisible substance or biological agent may, in some cases, be sufficiently harmful and persistent to cause a distinct, demonstrable, physical alteration to property. As one court explained, a physical contaminant may cause direct physical loss or damage where it is ‘so connected to the property that the property effectively becomes the source of its own loss or damage.’ ”
She closed the door on the argument that the government closures during the pandemic might give rise to a covered loss or damage, saying that “[t]he requirement of a direct physical loss to property generally excludes impairments that are purely legal in nature” and does not cover situations where there the loss is caused by a government order as opposed to a physical condition of the property.
Virus Presence
With these principles in mind, she said:
“Given this physicality requirement, Another Planet is incorrect that direct physical loss to property may be found anytime a property may not be used as intended. A property insurance policy does not cover a particular intended use; it covers the property itself.”
She continued:
“Moreover, to the extent Another Planet claims it was the physical presence of the virus that caused its property to become unusable, it has failed to allege that the virus caused a distinct, demonstrable, physical alteration to property. Where a substance is alleged to cause harm to humans, rather than property, it must still alter the property itself in a lasting and persistent manner.”
Finding the formite argument to be unpersuasive, Guerrero said: “Describing an object as a fomite primarily reflects a conceptual or analytical change, not a physical one. And, to the extent the change is physical, it fails to satisfy the definition of direct physical damage to property for the same reason that other allegations of microscopic bonding or adhesion is insufficient. It does not involve damage or harm to property.”
Resolving Split
The Ninth Circuit, in its certification order, pointed both to Marina Pacific and another decision from this district’s Court of Appeal in United Talent Agency v. Vigilant Insurance Company as representative of the split in authority that has erupted as to the question of coverage for losses purportedly caused by the presence of COVID-19.
In United Talent, decided by Div. Four on April 22, 2022, Justice Audrey B. Collins wrote that “the presence or potential presence of the virus does not constitute direct physical damage or loss.” Perluss said in Marina Pacific, filed July 13, 2022:
“[T]he United Talent court, based on its de novo review, affirmed a trial court ruling that, like the decision we review, found—without evidence—the COVID-19 virus does not damage property. But the insureds here expressly alleged that it can and that it did, including the specific allegation they were required to dispose of property damaged by COVID-19. We are not authorized to disregard those allegations when evaluating a demurrer, as the court did in United Talent….”
Guerrero declared:
“To the extent the Ninth Circuit’s question is premised on the split in authority represented on one side by United Talent…and on the other by Marina Pacific…we further conclude that United Talent was correct.”
Causes of Action
In May 2020, Another Planet submitted an insurance claim to Vigilant for direct physical loss or damage to its properties. After the insurer denied coverage, Another Planet filed a complaint alleging breach of contract, tortious breach of the implied covenant of good faith and fair dealing, and various forms of fraud, as well as seeking declaratory relief.
It alleges that it suffered losses in excess of $20 million due to being forced to cancel all events scheduled for its venues.
The Superior Court accepted certification notwithstanding that it has granted review in California cases that raise the issue. These include Shusha, Inc. v. Century-National Insurance Company, in which Div. Seven of this district’s Court of Appeal clung to its stance in Marina Pacific.
The case is Another Planet Entertainment, LLC v. Vigilant Insurance Company, 2024 S.O.S. 1703.
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