The California Court of Appeal affirmed the trial court's dismissal of the insured's business interruption claim based upon COVID-19 government shutdown orders. The Inns by the Sea v. California Mut. Ins. Co., 2021 Cal. App. LEXIS 956 (Calif. Ct. App. Nov. 15, 2021). The Inns is the first state appellate court decision in the country on coverage for COVID-19 claims.
The case presented an issue of first impression for a California appellate court: did a property policy provide coverage for business loss of income due to the COVID-19 pandemic?
The Inns by the Sea (Inns) owned five lodging facilities along the California coast. Due to government orders issued in March 2020, the Inns closed its facilities. Inns then submitted its claim to California Mutual, who quickly denied the claim, stating that loss of business due to reasons other than covered physical damage was beyond the scope of the policy.
Inns filed suit. The complaint alleged that the closure orders were issued in direct response to dangerous physical conditions, and prohibited Inns from selling any rooms to the public, therefore forcing Inns to close and lay off nearly all of its workers. Further, the closure orders were made in direct response to the continued and increasing presence of the coronavirus on Inns' property and around its premises. The trial court granted California Mutual's demurrer.
The appellate court noted that the presence of the virus throughout the county and state, not the presence of the virus specifically on Inns' premises, gave rise to the orders, leading to Inns' suspension of operations. Therefore, Inns could not argue the the presence of the COVID-19 virus on its premises was what caused the premises to be uninhabitable or unsuitable for their intended purpose. Accordingly, despite Inns' allegation that the COVID-19 virus was present on its premises, it did not identify any direct physical damage to property that caused it to suspend it operations.
Inns argued that regardless of the physical presence of the COVID-19 virus, it adequately pled direct physical loss by alleging "the loss of use, function, and value of its property." This argument failed because it collapsed coverage for "direct physical loss" into "loss of use" coverage. The policy could not reasonably be interpreted to cover mere loss of use when the insured's property suffered no physical loss or damage.
The policy's reference to the "period of restoration" further supported the conclusion that mere loss of use, without any other physical impact to Inns' property, was not sufficient to trigger the business income coverage. The "period of restoration" was defined as ending on the earlier of "(1) the date when the property should be repaired, rebuilt or replaced with reasonable speed and similar quality; or (2) the date when business is resumed at a new permanent location." This language focusing on repairing, rebuilding or replacing property implied that the "loss" or "damage" that gave rise to business income coverage had a physical nature that could be physically fixed or removed to a new location. Accordingly, Inns did not allege "direct physical loss of" property based on the fact that it lost the ability to use its physical premises to generate income.
Inns also argued that although many first party property policies contained an express exclusion for loss or damage resulting "from any virus," no such exclusion was included in this policy. Failure to included a virus exclusion was prima facie proof that the insurer actually intended to provide coverage for virus losses by not taking advantage of a specific exclusion. The court disagreed. Inns was improperly attempting to rely on the absence of an exclusion to create an ambiguity in an otherwise unambiguous insuring clause.
Finally, Inns argued that the Civil Authority coverage applied because its complaint alleged that the government orders were made in direct response to the continued and increasing presence of the coronavirus, a dangerous physical condition on and around its property. The court disagreed, however, because the plain language of the orders showed that they were not based on "direct physical loss of or damage to property" to other premises as required to establish Civil Authority coverage.
Therefore, the trial court did not abuse its discretion in sustaining the demurrer to the complaint.
