Insurance Law Hawaii

California Appellate Court Reverses and Remands Denial of COVID-19 Claim

    The California Court of Appeal reversed the trial court's dismissal of the insured's COVID-19 claim seeking coverage under communicalbe disease provisions. Amy's Kitchen, Inc. v. Fireman's Fund Ins. Co., 2022 Cal. App. LEXIS 836 (Oct. 4, 2022).    

    Amy's employed over 2,500 people to manufacture organic and vegetarian meals at facilities in California, Oregon and Idaho. Amy's commercial property policy provided coverage for communicable disease and for loss avoidance and mitigation.

    The communicable disease coverage provided that Fireman's "will pay for direct physical loss or damage to Property Insured casued by . . . a covered  communicable disease event at a location, including costs to mitigate, contain, remediate, . . . the effects of the communicabl disease." The policy defined "communicable disease event" as one in which "a public health authority has orderd that a location be evacuated, decontaminated, or disinfected due to the outbreak of a communicable disease at such location." The loss avoidance or mitigation coverage extension stated that Fireman's would pay "necessary expenses you incur to protect, avoid, or significantly mitigate potential covered loss or damage . . ." 

    After coverage was denied, Amy's filed a complaint alleging that it incurred costs to mitigate and test for the effects of the coronavirus at insured locations and to avoid or mitigate potential coronavirus-related losses threatening its locations. Staff of Amy's tested positive for COVID-19. The virus allegedly caused "direct physical loss or damage" by altering the physical condition of the locations' air and surfaces that made them unsafe absent precautionary measures. The complaint further alleged that Amy's had to sanitize its facilities to comply with public health orders.

    Fireman's filed a demurrer to the complaint. The trial court sustained the demurrer without leave to amend because Amy's failed to allege "direct phaysical loss or damage" to its property. 

    On appeal, Fireman's argued that "direct physical loss or damage" did not include costs to mitigate or clean the communcable disease unless the communicable disease event physically altered the property. "Physical alteration" did not appear anywhere in the policy. Fireman's relied upon numerous decisions from other jurisdictions construing the phrase "direct physical loss or damage" as used in very different policy provisions regarding business interruption, civil authroity, etc. None of these decisions focused on the reasonable interpretation of a communicable disease extension in which coverage was triggered by a communicable disease event causing costs to be incurred to mitigate effects of the communicable disease. The only plausible interpretaion of the provision in this policy was that the need to clean or disinfect infected or potentially infected covered property constituted "direct physical loss or damage" of that property within the meaning of the policy.

    However, the provision only applied if a public health authority ordered decontamination "due to the outbreak of a communicable disease a such location." Here, Amy's pleading did not adequately allege a basis for coverage. Thus, Fireman's demurrer was propertly sustained.

    The trial court denied leave to amend, however, based not on the failure to allege a location-specific order, but solely on the incorrectly perceived inability to allege "direct physical loss or damage." Therefore, the judgment of dismissal was reversed and the matter was remanded with direction to sustain Fireman's demurrer with leave to amend. 

COVID-19, Business Interruption Claim Survives Motion for Judgment on the Pleadings in Vermont

    The Vermont Supreme Court found that the insured's complaint alleging business interruption due to COVID-19 could survive the insurer's motion for judgment on the pleadings. Huntington Ingall's Industries v. Ace Am. Ins. Co., 2022 Vt. LEXIS 47 (Sept. 23, 2022). 

    In March 2020, the Undersecretary of Defense told the insured, a military shipbuilding company, that it should follow CDC and state and local government guidelines to limit the spread of the virus. The insured kept the shipyard open but made changes to its operations to comply with CDC guidance and protect employees. Nevertheless, by September 2020, over 1000 positive tests were reported to the insured by its employees. By April 2021, this number increased to over 6000 employees. 

    When coverage was denied, the insured sued for business interruption. The complaint alleged that the pandemic caused "direct physical loss or damage to property' when the virus adhered to surfaces for several days and lingered in the air for several hours at the shipbuilding yards. The alleged losses included disruption in orderly construction and repair of vessels, schedule impacts in the construction and repair of vessels, expenses incurred to continue as near to normal operations as practicable, loss of profit caused by the change in labor volume, and other time-element losses. 

    Before any discovery, the insurer filed a motion for judgment on the pleadings. The trial court granted the motion.

    On appeal, the Vermont Supreme Court acknowledged the jurisdictional split on how courts had approached the interpretation of similar or identical policy language concerning "direct physical loss or damage to property" in pretrial motions. The court was not bound by these decisions, but would be guided by Vermont law.

    The court found that direct physical damage required a distinct, demonstrable, physical change to property. The change need not be visible because alterations at the microscopic level could meet this threshold. Direct physical loss to property required persistent destruction or deprivation, in whole or in part, with a causal nexus to a physical event or condition. Deprivation could occur when property was unusable due to a health hazard. Further, an actual loss had to have occurred and could not be prospective. Moreover, the insured had to show it had been deprived of use of its property.

    Further, the deprivation or destruction could be in whole or part. In the business-interruption clause, the policy covered losses "whether total or partial . . . caused by physical loss or damage insured herein." The policy also stated the period of recovery could cease when repair or replacement of "such part of the property as has been damaged is actually completed." Deprivation of property had to also be causally linked to a physical event. The plain meaning of "direct physical loss" required an explicit nexus between the purported loss and the physical condition of the insured property. Finally, destruction or deprivation of property had to be persistent. 

    Therefore, "direct physical damage" required a distinct, demonstrable, physical change to property. "Direct physical loss" meant persistent destruction or deprivation, in whole or in part, with a causal nexus to a physical event or condition.

    Here, the complaint alleged the virus causing COVID-19 had been continuously present at the insured's shipbuilding facilities. Its employees had contracted COVID-19 after being infected at work, and infected persons spread the virus to surfaces. The virsuit could adhere to surfaces. Because of this alteration, the property could not function for its intended purpose and the insured's business had to operate at a reduced capacity. If the insured could prove such alteration occurred, it could consitute "direct physical damage" even if it was at a microscopic level. 

    The theory of "direct physical damage" alone was sufficient to reverse, so the court did not reach whether the complaint alleged facts that would entitle the insured to relief under a theory of "direct physical loss." The case was reversed and remanded for further proceedings consistent with the opinion. 

COVID-19, Business Interruption Claim Triggered Under Civil Authority Provision

    The California Court of Appeal found that the insured alleged facts sufficient to trigger coverage under a civil authority endorsement after government shutdown orders due to COVID-19 caused the insured to close its business. Butter Nails & Waxing v. Underwriters at Lloyd's, 2022 Cal. App. Unpub. LEXIS 5264 (Cal. Ct. App. Aug. 25, 2022).

    The insured was a salon which was forced to close its doors after the local government issued public health order requiring businesses to cease in-person activities to protect against the spread of COVID-19. The insured filed a claim for business losses under a policy issued by Lloyd's. The claim was denied and the insured filed suit. The trial court entered judgment against the insured after sustaining Lloyd's demurrer.

    On appeal, the insured argued that the policy's civil authority endorsement covered its business losses because the public health orders required evacuation of the property. Lloyd's contended there was no coverage because the orders did not require evacuation. Further, Lloyd's argued a mold exclusion was applicable. 

    On appeal, the court noted that the insured did not seek coverage under any provision that required any type of property loss or damage. The Civil Authority Endorsement provided the policy would pay for business loss "caused by interruption of business due to Civil Authority Action that requires evacuation of the described premises." The court found that the term "evacuation" was broad enough to encompass the public health orders that required the insured's non-essential business, providing in-person service, to close its doors in order to prevent the spread of COVID-19. 

    The court next found that the mold exclusion did not apply. Although the exclusion included the term "virus" in the list of "organic pathogens" that were not covered, this did not make the mold exclusion applicable to every claim stemming directly or indirectly from a virus. The exclusion was meant to exclude coverage for losses stemming from the presence of mold, mildew, or organic pathogens on the business  premises and not anything beyond that. 

    The judgment sustaining Lloyd's demurrer was reversed. 

    

South Carolina Supreme Court Finds Presence of COVID-19 is Not "Direct Physical Loss or Damage"

    Answering a certified question, the South Carolina Supreme Court determined that the presence of COVID-19 and/or government shutdown orders did not constitute "direct physical loss or damage" to property. Sullivan Mgmt. v. Fireman's Fund Ins. Co., 2022 S.C. LEXIS 90 (S.C. Sup. Ct. Aug. 10, 2022).

    Sullivan Management, LLC operated restaurants in South Carolina. After government shutdown orders were issued, Sullivan filed a claim for business interruption with Fireman's Fund. The claim was denied and Sullivan filed suit. The federal district court certified the following question to the South Carolina Supreme Court:

Does the presence of COVID-19 in or near Sullivan's properties, and/or governmental orders, which allegedly hinder or destroy the fitness, habitability or functionality of property, constitute "direct physical loss or damage" or does "direct physical loss or damage" require some permanent dispossession of the property or physical alteration to the property.

    Fireman's relied upon policy language affording coverage during the "period of restoration," which was the time it took to repair, replace, or rebuild the property. The restoration provision would be mere surplusage if the phrase in question were construed as broadly as Sullivan requested. The court agree with Fireman's. 

    The mere loss of access to a business was not the same as direct physical loss or damage. Although the government orders affected business operations, these restrictions did not cause any direct physical loss or damage. Loss connoted destruction, meaning it was broader than the term damage. A property that suffered physical loss was damaged, but the converse was not necessarily true because a property could suffer damage without enduring destruction or loss. 

    Moreover, the policy's restoration period provision limited business interruption coverage during the period of restoration, or put differently, the time for the physical loss or damage to be repaired, rebuilt, or replaced with reasonable speed and like kind and quality. Without a physical alteration to property, there would be nothing to repair, rebuild or replace. This further demonstrated that direct physical loss or damage required something material and tangible.

 

Louisiana Court of Appeals Denies Insurer's Motion for Rehearing on COVID-19 Claim

    After reversing the trial court's denial of the insured's petition for declaratory judgment on a business interruption claim, the Louisiana Court of Appeals denied the insurer's motion for rehearing en banc. Cajun Conti LLC v. Certain Underwriters at Lloyd's, 2022 La. App. LEXIS 1278 (La. Ct. App. Aug. 8, 2022).

    Cajun Conti LLC d/b/a Oceana Grill was one of the first insureds to file a lawsuit after denial of its business interruption claim caused by the pandemic. Oceana suspended operations to comply with government shut-down orders. It eventually reopened, but with reduced capacity to curtail the spread of COVID-19 particles on the premises. In addition to reducing its capacity, Oceana decontaminated its restaurant to clean surfaces of the viral particles.

    Lloyd's denied coverage because there was no "direct physical loss or damage." Oceana filed suit. After a bench trial, the court denied Oceana's petition for declaratory judgment. The court of appeals found the policy to be ambiguous and capable of more than one reasonable interpretation in regards to lost business income. The ambiguity was construed in Oceana's favor and the trial court judgment was reversed. Lloyd's now sought a rehearing.

    The court noted that the policy provided coverage for the insured's "period of restoration" following "direct physical loss of or damage to the property" due to a suspension of business operations. "Suspension" was defined in the policy as a cessation or slowdown of business activities. In defining "suspension" to include a slowdown of business activities, this provision did not appear to require that the property be completely uninhabitable or unusable in order for coverage to prevail. 

    There was also an ambiguity in the policy. Lloyd's position that the insured must fully lose use of the property was one reasonable interpretation. However, another equally reasonable interpretation was that a covered loss was the inability to fully utilize the property, as argued by Oceana. 

    The motion for rehearing raised no new issues and the court did not err in reversing the trial court's judgment.

    

Hawaii Federal District Court Remands COVID-19 Business Interruption Case to State Court

    The federal district court for the district of Hawaii determined the insured's COVID-19 claims were novel and undecided by Hawaii state courts and remanded the case. Hawaii Theatre Center v. Am. Ins. Co., 2022 U.S. Dist. LEXIS 152836 (D. Haw. Aug. 25, 2022). 

    The Theatre sought coverage under its commercial property policy for business losses caused by the COVID-19 pandemic. American Insurance denied the claim. The Theatre filed suit in state court seeking a declaratory judgment on the coverage issues. American Insurance removed the case to federal court and the Theatre sought a remand because the case involved a determination of novel and important issues of insurance law not yet addressed by Hawaii courts. American Insurance countered that many federal courts had addressed similar issues and that no other relevant factors supported remand.

    The court determined that it had subject matter jurisdiction based upon diversity, but had discretion in deciding whether to grant jurisdiction in a declaratory relief action based on diversity. The court's discretion was governed by the factors in Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942). 

    In apply the factors, the court found there was no parallel state proceeding. However, the state law issues were novel and unsettled, having yet to be decided by Hawaii courts. If the court retained jurisdiction, it would be required to determine whether the Theatre's alleged losses and damages from COVID-19 constituted "direct physical loss of or damage to property" as contemplated by the policy. Nevertheless, American Insurance urged the court to retain jurisdiction and denied the issues because other district courts had done so when faced with similar arguments about the novelty of the COVID-19 pandemic. The cases cited by American Insurance, however, did not demonstrate that courts regularly rejected requests to remand cases addressing novel and unsettled issues related to the pandemic. Some of the courts exercised jurisdiction because non-declaratory relief claims were joined, and in other cases, the courts did not conduct a Brillhart analysis. 

   Finally, the court found there was no compelling federal interest, forum shopping or duplicative litigation in state court.

    Consequently, the court granted the Theatre's motion for remand.

    

    

    

COVID-19 Claim with Multiple Occurrences Prevails on Summary Judgment

    The federal district court found there were multiple occurrences of property damage under a disease contamination provision in the policy. Dental Express, LLC v. Massachusetts Bay Ins. Co., 2022 U.S. Dist. LEXIS 119701 (N.D. Ill. July 7, 2022). 

    Dental Express operated seventy-three dental offices across nine states and the District of Columbia. All of the practices were covered by a policy issued by Massachusetts Bay. When the pandemic struck, state and local authorities nationwide issued executive orders suspending the operations of nonessential businesses. Dental Express suspended its operations to comply with these orders and consequently lost business income. It filed claims with Massachusetts Bay.

    The policy's disease contamination provision provided,

We will pay the actual covered loss of "business income" or "extra expensive" you sustain due to the necessary "suspension" or delay of your "operations" during the "period of Restoration." The "suspension" must be caused by a disease contamination event declared by the National Center for Disease Control, or the applicable city, county or state Department of Health.

Coverage applied "on an 'occurrence' basis" and limited a claim to $25,000 per occurrence. 

    Massachusetts Bay agreed Dental Express was entitled to coverage, but only for $25,000 for all office closures because there was a single occurrence. Dental Express filed suit, arguing that, with several different executive orders, each qualified as an occurrence as set forth in the policy. 

    The court determined that the executive orders were the operative event, not the pandemic itself. Illinois followed a cause-based rule for policies that were premised liability on a per-occurrence basis. Therefore, the number of occurrences was determined by referring to the cause or causes of the damages.

    The policy here defined "a series of similar, related acts" as a single occurrence. Each of the claimed losses was the result of a separate and intervening human act - specifically, executive orders issued separately by a number of different state or local governmental authorities. Therefore, Dental Express' losses qualified as multiple occurrences. Dental Express was entitled to summary judgment on liability on its breach of contract claims. 

Washington Federal District Court Grants Stay of COVID-19 Coverage Action

    To await a decision from the Washington Supreme Court, the federal district court stayed the COVID-19 coverage action pending before it. Reckless Enter. v. First Mercury Ins. Co., 2022 U.S. Dist. LEXIS 120832 (W.D. Wash. July 8, 2022). 

    Plaintiff owned and operated a restaurant that lost income during the height of the COVID-19 pandemic after the governor issued shut-down orders. Plaintiff tendered a claim for loss of income during the pandemic under its policy with First Mercury. The claim was denied because COVID-19-related losses did not constitute direct physical loss or damage.

    The federal district court had previously issued its decision in Nguyen v. Travelers Cas. Ins. Co. of Am., 2021 WL 2184878 (W.D. Wash. May 28, 2021), where it denied coverage for a COVID-19 loss of income matter because such losses did not constitute "direct physical loss of or damage to property." Nevertheless, Plaintiff moved to stay this current case until the Washington Supreme Court ruled in Hill & Stout PLLC v. Mutual of Emumclaw Ins. Co. which, involved identical policy language. First Mercury opposed the motion claiming it was "based on the remote possibility that the Washington Supreme Court colud issue a decision diametrically opposed to the prior decision of this Court, the Ninth Circuit, every other state and federal appellate court, hundreds of state and federal courts across the country and the basic tenets of contract interpretation."

    The court granted the motion for stay. It would not be in the interest of judicial economy for this court to predict how the Washington Supreme Court would rule when very soon the court would issue its ruling. First Mercury would not be prejudiced by a stay. The Washington Supreme Court had already held oral argument in Hill & Stout and presumably would issue a ruling shortly. 

Allegations that COVID-19 Virus Lives on Surfaces Adequately Alleges Direct Physical Loss or Damage

    The California Court of Appeal reversed the trial court's granting of the insurer's demurrer and found the insured adequately pled a claim of direct physical loss or damage due to the presence of COVID-19. Mariana Pacific Hotel & Suites, LLC v. Fireman's Fund Ins. Co., 2022 Cal. App. LEXIS 608 (Cal. Ct. App. July 13, 2022).

    Fireman's Fund issued a general property policy to the Hotel which provided coverage for direct physical loss or damage to the insured property. Business interruption coverage was extended for the actual loss of business income due to the necessary suspension of operations during the period of restoration arising from direct physical loss or damage to covered property. 

    The Hotel's first amended complaint alleged, on information and belief, that "the presence of COVID-19 on property, including on and within Insured Properties, caused and continues to cause physical loss and/or damage to property by causing, among other things, a distinct, demonstrable or physical alteration to property."

    The first amended complaint further alleged, "A study by the Virology Journal showed that COVID-19 can survive on surfaces up to 28 days, serving as a vehicle for transmission during that time span." The Hotel alleged that COVID-19 had been present in and before March 2020 on a variety of physical objects in the insured properties, including furniture, countertops, walls, bedding, appliances and food and other packaged items, as well as in the air. By government order, the Hotel had to be evacuated, decontaminated, or disinfected and one employee was ordered by the Department of Health to evaluate the hotel and quarintine. The physical loss or damage to property required the closure or suspension of operations at the Hotel. 

    Fireman's Fund demurred to the first amended complaint, arguing the Hotel had failed to allege facts showing direct physical loss or damage to covered property. Fireman's Fund pointed out that courts across the country had ruled the pandemic did not equate to physical loss or damage and argued loss of use alone did not constitute direct physical loss or damage.

    The trial court granted Fireman's Fund's demurrer. The court relied on MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co., 187 Cal. App. j4th 766 (2010), which held "accidental direct physical loss required 'an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so." The court explained, "[W]here the property has simply been rendered unusable based on a virus, rather than an external force, the loss of use of the property in a typical manner is not a 'directly physical loss' contemplated by the insurance policy."

    On appeal, the Hotel pointed to prior cases in which the Court of Appeal held a home had suffered physical loss or damage when the land underlying the home slid away, leaving the home standing on the edge of a newly formed cliff. In another case under a third-party liability policy, the existence of asbestos fibers on surfaces in a building constituted property damage. 

    The Hotel pleaded direct physical loss or damage to covered property within the definition articulated in MRI Healthcare - a distinct, demonstrable, physical alteration of the property. The Court of Appeal agreed. The firs amended complaint adequately alleged direct physical loss or damage within the MRI Healthcare definition. The court did not have to decided whether direct physical loss or damage could be shown without evidence of a physical alteration in the insured property. 

    The court recognized its conclusion was at odds with almost all decision considering whether business losses from the pandemic were covered. Federal case law, however, was not binding on the court. Further, the pleading rules were different in federal court when evaluating a trial court order sustaining a demurrer. To survive a motion to dismiss under the Federal Rules of Civil Procedure, "a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662 (2009). Under California law, however, the plausibility of the insureds' allegations had no role in deciding a demurrer which required the court to deem as true, however improbable, facts alleged in a pleading. 

    Further, many prior cases, including Inns-by-the-Sea v. California Mutual Ins. Co., 71 Cal. App. 5th 688 (2021, involved allegations of loss of use of insured property as a result of government-ordered closures to limit the spread of COVID-19, rather than a claim the presence of the virus on the insured premises caused physical damage to covered property, which in turn led to business losses. 

    Because the insureds adequately alleged losses covered by Fireman's Fund's policy, they were entitled to an opportunity to present their case, at trial or in opposition to a motion for summary judgment. 

COVID-19 Business Interruption Claim under Environmental Policy Survives

    The court determined there was coverage for business interruption due to COVID-19 under an Environmental policy. Sunstone Hotel Investors, Inc. v. Endurance American Spec. Ins. Co., 2022 U.S. Dist. LEXIS 11147 (C.D. Cal. June 15, 2022).

    Sunstone was a real estate investment trust that had an interest in 20 hotel properties with 10,000 guest rooms across the United States. In 2017, Sunstone purchased a "Site Environmental Impairment Liability Coverage" policy from Endurance. The policy provided $25,000,000 of coverage for business interruption losses caused by a biological agent. Coverage D provided that Endurance would pay "the Insureds' Business Interruption Losses and Extra Expenses during the Interruption Period that directly results from . . . Biological Agent Conditions  . . ." There was no dispute that COVID-19 was a Biological Agent, but the parties disagreed on coverage provided under Coverage D. 

    From February 24 to 27, 2020, one of Sunstone's hotels in Boston hosted the Biogen Conference. On March 5, 2020, Sunstone was informed by the Boston Public Health Department (BPHD) that three attendees of the conference tested positive for COVID-19. The next day, Sunstone gave notice to Endurance. Between March 6, 2020 and March 14, 2020, portions of the hotel were cleaned. On March 11, 2020, BPHD informed the hotel that it must be closed. The hotel agreed to suspend its operations for 14 days.

    Before the hotel could reopen, on March 23, 2020, the State of Massachusetts issued an order requiring the closure of all non-essential businesses in the state. The hotel remained closed until July 7, 2020, at which point it reopened in a limited capacity. 

    Sunstone filed a claim with Endurance on March 5, 2020. Endurance denied the claim. Sunstone filed suit and cross-motions for summary judgment were filed.

    Coverage D provided that Endurance would pay for Business Interruption Losses during the Interruption Period that "directly result from . . . Biological Agent Conditions. . ." Endurance argued that any Business Interruption Losses that may have been sustained after March 23, 2020 were due to the Massachusetts Order, not a Biological Agent Condition.

    Endurance relied upon cases discussing "damage to property" policies. But the policy here did not require physical damage or physical loss of use. Instead, the coverage was designed to address viruses and other biological agents that interrupted the hotel's operations.     

    The Massachusetts Order may not have been issued solely to stop the spread of the virus disseminating from the hotel, but it was issued to prevent future super-spreader events like the Biogen conference which took place at the hotel. The Order was designed, at least in part, to prevent the virus's spread because of the hotel's operations. 

    Next, Endurance argued the the Interruption Period ended as soon as the Massachusetts Order took effect on March 24, 2020. Sunstone countered that the Interruption Period lasted until March 2021, or for one year - the maximum duration of the Interruption Period under the Policy. Due to an ambiguity in the policy and Sunstone's objectively reasonable expectations, the court concluded that as long as the virus was a source of the hotel's Business Interruption Losses, the Interruption Period continued, ending no later than March 2021. 

    Finally, Endurance raised an exclusion under Coverage D providing that "the Interruption Period will be deemed to have ended even if operations cannot resume . . . for regulatory reasons." Endurance argued that the Massachusetts Order was regulatory and even if the hotel was initially closed to address the presence of the virus, the hotel's operations remained suspended after March 26, 2020 solely because of the Massachusetts Order. Endurance had not shown, however, that the Massachusetts Order was the actual reason there was interruption to the hotel's operations. There was no question that the virus itself interrupted the hotel's operations because even if the State had allowed the hotel to operate at full capacity, the hotel could not have done so. 

    Therefore, Endurance's motion for summary judgment was denied. Sunstone's motion with respect to how to interpret the provision governing the ending of the Interruption Period was granted. The court denied Sunstone's motion that the court make the factual determination that the Interruption Period ended in March 2021. Further discovery was required to decide this issue.