|The California Court of Appeal, Second District, has recently held in an unpublished decision that the Los Angeles County Superior Court erred in sustaining an insurer’s demurrer to an insurance coverage action brought by an insured restaurant, where the insured alleged that the COVID-19 virus physically adhered to surfaces at the business location.
In Shusha, Inc. v. Century-National Insurance Co., No. B313907 (Cal. Ct. App. Dec. 14, 2022), the insured was an Italian restaurant located in Sherman Oaks, California, doing business as La Cava. On March 16, 2020, the restaurant suspended operations in compliance with a shutdown order issued by Los Angeles County. On April 1, 2020, the restaurant reopened with limited hours for take-out and delivery only, prohibiting customers from dining in.
The restaurant submitted a claim for loss of business income to its commercial property insurer, Century-National Insurance Company. The business income coverage form provided in relevant part that “We will pay for the actual loss of business income you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration’. The ‘suspension’ must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a business income limit of insurance is shown in the declarations”. (Slip Op., p. 3.) “Suspension” was defined to mean “[t]he slowdown or cessation of your business activities.” (Id.) The business income coverage form also included civil authority coverage, which provided, “We will pay for the actual loss of business income you sustain and necessary extra expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any covered cause of loss.” (Id. at 3-4.)
The insurer denied coverage, contending that the business income coverage did not apply because “[t]he suspension of your business was not caused by a ‘direct physical loss of or damage to property’ at your designated premises” and “[t]he government directives at issue did not ‘prohibit access’ to your designated premises and did not result from a loss or damage at . . . premises ‘other than’ your designated premises.” (Id. at 8.)
The restaurant then filed suit against the insurer, asserting claims for, inter alia, breach of contract and bad faith. The insurer demurred to the restaurant’s complaint on the grounds that under California law, the phrase “direct physical loss or damage to property” in an insurance contract requires a physical alteration of the insured property. The insurer contended that the restaurant did not and could not allege its loss of business income was attributable to any physical alteration of the business property by the COVID-19 virus. In support of its position, the insurer cited nearly two dozen decisions from federal district courts in California holding that business closures due to the COVID-19 virus or related government orders did not result from direct physical loss of or damage to property, and therefore were not covered. The insurer further contended that the civil authority coverage did not apply because the government shutdown orders did not prohibit access to the restaurant’s premises, and were not issued “due to direct physical loss or damage to property” at the restaurant location, as required by the policy.
The restaurant, for its part, argued that the insurer’s demurrer should be overruled. The restaurant alleged in its complaint that it suffered physical loss of or damage to its dining rooms and other property “caused by the actual presence of virus droplets in the air and on the surfaces in the vicinity of and in [its] restaurant” and “in the form of virus matter present on walls, floors, tables, chairs, silverware, dishes, and other surfaces.” (Id. at 6.)
The appellate court reversed, holding the restaurant alleged sufficient facts of direct physical loss or damage to its property to trigger coverage under the policy. Specifically, the restaurant alleged that the virus was “certain to have been present at [its business premises] at various times,” including “in the form of virus matter present on walls, floors, tables, chairs, silverware, dishes, and other surfaces.” (Id. at 20.) Further, the restaurant alleged that since it had patrons who tested positive for COVID-19 and who had the ability to use the restrooms although they were dining outside, and three employees contracted COVID-19.
The appellate court, citing its earlier decision in Marina Pacific Hotel and Suites, LLC v. Fireman’s Fund Insurance Company, 81 Cal. App. 5th 96, 109 (Cal. Ct. App. 2022), also explained that the insured is not required to provide authority at the pleading stage to support its position that contamination with the COVID-19 virus caused damage to the surfaces in its premises. (Slip. Op., p. 22.)
The appellate court acknowledged that its holding is in conflict with federal district court decisions dismissing claims for pandemic-related business losses. The appellate court stated, however, that those cases did not involve similar factual allegations. The appellate court further noted that California state court pleading standards are different than in federal court. “Unlike in federal court, the plausibility of the insureds’ allegations has no role in deciding a demurrer under governing state law standards, which . . . require us to deem as true, ‘however improbable,’ facts alleged in a pleading—specifically here, that the COVID-19 virus alters ordinary physical surfaces transforming them into fomites through physicochemical processes, making them dangerous and unusable for their intended purposes unless decontaminated.’” (Id. at 15-16 (quoting Marina Pacific, 81 Cal. App. 5th at 109-10).)
This case illustrates, at least for now, that for coverage litigation involving loss of business income claims due to COVID-19, insurers generally will have a more favorable playing field in federal district court than in California state court.