Courts at the state and federal levels continue grappling with the application of California insurance law to COVID-19 business interruption claims. Much uncertainty remains as to how California law applies in a number of scenarios presented by the pandemic.
After three years of insurance claims and litigation, the California Supreme Court has agreed to provide guidance on one of the main arguments that insurers make when rejecting COVID-19 business interruption claims. In Another Planet Entertainment, LLC v. Vigilant Insurance Co., the state’s highest court will address the question of whether under California law the actual or potential presence of SARS-CoV-2 on insured property can qualify as physical loss of or damage to property.
District court proceedings
Another Planet operates and promotes concerts, events, and festivals in California and Nevada. After its insurer denied coverage for business income losses incurred, Another Planet filed suit in California federal court seeking coverage under several provisions of its “all-risk” property insurance policy that require “direct physical loss or damage to property” to trigger coverage.
In its amended complaint, Another Planet alleged that the virus was present or would have been present had it not closed its venues in compliance with government orders. The insured further alleged that aerosolized droplets of the COVID-19 virus physically alter the air in which they are present and property surfaces to which they attach, constituting physical loss or damage.
Another Planet also claimed that the presence of the droplets can render property unusable for its intended purpose and function, qualifying as physical loss or damage. The pleading further asserted that minimizing the spread of COVID-19 requires physical alterations, including physical distancing, regular disinfection, air filtration, and installation of physical barriers.
Insurer’s motion to dismiss granted
Vigilant Insurance moved to dismiss the amended complaint on the basis that Another Planet had not sufficiently alleged direct physical loss or damage to property. On June 21, 2021, the District Court granted the insurer’s motion and dismissed the case with prejudice.
On the physical loss or damage issue, the court concluded as follows: “[i]t is difficult to understand how Another Planet can allege with a straight face that the virus was actually present on its facilities’ surfaces at the time of the shutdowns. That seems unknowable.”
9th Circuit appeal
Another Planet appealed to the 9th U.S. Circuit Court of Appeals, arguing that it sufficiently alleged that SARS-CoV-2 was present in and around the insured properties and that the District Court’s dismissal was improper because those factual allegations should have been accepted as true.
The 9th Circuit noted the split in authority among the California intermediate appellate courts regarding whether allegations like Another Planet’s are sufficient to state a viable claim for direct physical loss or damage to property: United Talent Agency v. Vigilant Insurance Co. and Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Insurance Co.Given the conflicting decisions, the 9th Circuit certified the following question to the California Supreme 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?
California Supreme Court accepts review
On March 1, 2023, the California high court accepted review of the certified question.
The outcome of the California Supreme Court’s review is likely to take one of the following forms: (1) the actual or potential presence of SARS-CoV-2 is “direct physical loss or damage to property”; (2) the actual or potential presence of SARS-CoV-2 is not “direct physical loss or damage to property”; (3) the actual or potential presence of SARS-CoV-2 is “direct physical loss or damage to property” and the Plaintiff has satisfied its requirements at the pleading stage; or (4) the actual or potential presence of SARS-CoV-2 is “direct physical loss or damage to property” but the Plaintiff has not satisfied its requirements at the pleading stage.
Why this appeal is worth watching
The California Supreme Court has rejected previous opportunities to weigh in on COVID-19 insurance disputes. A ruling by the final arbiter of California law that the actual or potential presence of SARS-CoV-2 is “direct physical loss or damage to property” would be a landmark decision for countless California policyholders.
More clarity from the California Supreme Court may be on the horizon
With the stakes high in COVID-19 coverage cases, the California Supreme Court may agree to continue providing direction on key issues. On Feb. 7, 2023, the 9th Circuit certified a different question to the state’s highest court in another COVID-19 business interruption case.
The certified question in French Laundry Partners, LP v. Hartford Fire Insurance Co. asks, “[i]s the virus exclusion in French Laundry’s insurance policy unenforceable because enforcing it would render illusory a limited virus coverage provision allowing for the possibility of coverage for business losses and extra expenses allegedly caused by the presence and impacts of COVID-19 at an insured’s properties, including the loss of business due to a civil authority closure order?” Only time will tell.
Other states expected to issue guidance
State courts of last resort remain an important battleground for policyholders. Only a small minority of the highest state appellate courts have spoken, including Vermont, Washington, Iowa, Oklahoma, Maryland, the District of Columbia, Wisconsin, Ohio, South Carolina, Massachusetts, Connecticut and Louisiana. New York’s and New Jersey’s highest courts have accepted review of the Another Planet issue, and briefing is ongoing.
Appeals are also pending before the Nevada and Pennsylvania Supreme Courts. Policyholders are well-advised to keep an eye on activity at the state level, as the high courts continue providing clarity for COVID-19 coverage cases.
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