In a decision consistent with the majority of courts across the nation, the California Supreme Court resolved the question of coverage for business closures due to COVID-19 with a virus exclusion, meaning that the presence of the virus on an insured’s premises does not establish direct physical loss or damage to property within the meaning of a commercial property insurance policy.
The question arose in response to a lawsuit filed by Another Planet Entertainment, the owner of several music concert venues in California that were forced to close during the pandemic, against Vigilant Insurance Co. Another Planet filed suit against Vigilant after the insurer denied the concert promoter's claim for $23.9 million in insurance limits for lost business revenue due to the pandemic.
While federal courts have generally held that COVID-19 cannot cause direct physical loss, the Ninth Circuit noted that California appellate courts are divided on the issue.
In the absence of clear precedent, the Ninth Circuit Court of Appeals turned to the Supreme Court for final decision.
The case has seen a pile of amicus briefs filed by nearly a dozen groups, including Major League Baseball, the Los Angeles Lakers and Ross Stores, as the California Superior Court considers the scope of coronavirus shutdowns.
Lawyers for the policyholders argued that the virus that causes COVID-19 could cause a “loss” by rendering property unusable. Insurers countered that there must be some tangible alteration because even “all-risk” property policies do not cover intangible losses.
A California Supreme Court decision handed down last week stated:
“Under California law, direct physical loss or damage to property requires a clear and demonstrable physical change to the property. The physical change does not have to be visible to the naked eye, nor does it have to be a structural change, but it must result in some injury or damage to the property as property.”
Another Planet's lawyers argued that the COVID virus changes real property by binding to or interacting with the property at a microscopic level, but they did not argue that such changes damage the property itself. The physical characteristics of the property are not affected by the presence of the virus, the court ruled.
“Another Planet focuses on the risk the virus poses to humans and argues that the actual or potential presence of the virus has rendered the property unfit for its intended use,” the court ruled. “However, the mere fact that the property cannot be used for its intended use is insufficient to establish direct physical loss to the property.”
The court also found that the fact that a business was forced to reduce operations due to pandemic-related public health orders did not amount to direct physical loss or damage to property.
Related:
Topics California COVID-19
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