Page 1
C.A. Restores Suit Against Insurer for COVID-19 Losses
P.J. Perluss Acknowledges That Decision Is Contrary to Those of Federal Courts and Courts of Other States but
Declares That Plaintiffs Pled ‘Physical Damage’ to Premises Caused by Virus, Satisfying Pleading Requirement
By a MetNews Staff Writer
The Court of Appeal for this district yesterday reinstated a lawsuit against an insurer that declined to honor a claim by a beachfront hotel and an adjacent restaurant in Venice asserting physical damage to the premises caused by the COVID-19 virus altering physical surfaces, with the court expressing skepticism that the action will succeed but proclaiming the impropriety of axing causes of action at the pleading stage based on improbability.
“We recognize this conclusion is at odds with almost all (but not all) decisions considering whether business losses from the pandemic are covered by the business owners’ first person commercial property insurance,” Presiding Justice Dennis M. Perluss of Div. Seven wrote.
However, he pointed out, federal decisions and those of courts in other states are not binding and, as to federal cases, they can be differentiated based on the permissibility of District Court judges dismissing actions based on implausibility of the allegations while California Superior Court judges, in acting on demurrers, must assume the truth of the allegations, even if “improbable.”
Physical Loss, Damage
The opinion reverses a judgment of dismissal by Los Angeles Superior Court Judge Craig D. Karlan which followed his sustaining demurrers without leave to amend in to the first amended complaint (“FAC”) in an action against Fireman’s Fund Insurance Company. The owners of Hotel Erwin and Larry’s Bar and Restaurant contended that there was “direct physical loss or damage” to the properties, covered by their policy.
They asserted:
“Both porous and nonporous surfaces or objects can harbor COVID-19 and serve as vehicles of transmission. Once this occurs, the transfer of COVID-19 may and does readily occur between inanimate and animate objects, or vice versa.”
They added that the virus not only “lives on surfaces” but “actually bonds and/or adheres to such objects through physico-chemical reactions involving, inter alia, cells and surface proteins,” thus causing “a distinct, demonstrable or physical alteration to property.”
2010 Opinion
In sustaining demurrers, Karlan relied on a 2010 Court of Appeal opinion by then-Justice Madeleine Flier (now retired) of this district’s Div. Eight in MRI Healthcare Center of Glendale. Inc. v. State Farm General Insurance Co. Flier wrote:
“In modern policies, ‘physical loss or damage’ is typically the trigger for coverage. Clearly, this threshold is met when an item of tangible property has been ‘physically altered’ by perils such as fire or water. However, serious questions crop up in instances when the structure of the property itself is unchanged to the naked eye and the insured claims its usefulness for its normal purposes has been destroyed or reduced. That the loss needs to be ‘physical,’ given the ordinary meaning of the term, is widely held to exclude alleged losses that are intangible or incorporeal, and, thereby, to preclude any claim against the property insurer when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property.”
Karlan wrote:
“Here, there is no basis for concluding there was ‘direct physical loss or damage’ to any property as a result of COVID-19 based on the allegations of the FAC. Plaintiffs allege the presence of COVID-19 on property causes physical loss and damage because it exists in an unsafe and hazardous condition, and it transforms the physical condition to render the property unsafe and hazardous…, but this does not track the definition set forth in MRI Healthcare…which requires a physical alteration of the property in the plain sense of the words: that is, where 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 ‘direct physical loss’ contemplated by the insurance policy.”
Perluss’s Opinion
In yesterday’s opinion, Perluss said:
“For more than two years our understanding of COVID-19, the infectious disease caused by the SARS-CoV-2 virus and its many variants, has evolved. Today we think we know how it spreads, how to protect against it and how best to treat those who have it. Perhaps we do. But even so, when a pleading alleges facts sufficient to constitute a cause of action, what we think we know—beliefs not yet appropriately subject to judicial notice— has never been a proper basis for concluding, as a matter of law, those alleged facts cannot be true and, on that ground, sustaining a demurrer without leave to amend. Yet that is precisely what occurred here.”
Noting the allegations that the virus invades and physically alters property, he declared:
“Assuming, as we must, the truth of those allegations, even if improbable, absent judicially noticed facts irrefutably contradicting them, the insureds have unquestionably pleaded direct physical loss or damage to covered property within the definition articulated in MRI Healthcare—a distinct, demonstrable, physical alteration of the property….They also adequately alleged that physical loss or damage caused a slowdown in, or cessation of, the operation of the insureds’ business while the covered property was restored or remediated, thereby triggering their business interruption (‘business income and extra expense’) coverage.”
Mortality, Disease Exclusion
The insurer also relied on this exclusion:
“Regardless of how the cause of loss occurs, we will not pay for direct physical loss, damage, or expense caused by or resulting from the following causes of loss:...[¶] h. Mortality and Disease [¶] Mortality, death by natural causes, disease, sickness, any condition of health, bacteria, or virus.”
Karlan ruled:
“This provision expressly excludes coverage of any direct physical loss or damage resulting from a virus; it is beyond dispute that COVID-19 is a virus.”
Viewing it differently, Perluss reasoned:
“[T]he most reasonable interpretation of this language is that it precludes coverage for losses related to death from any of the listed causes—that is, it excludes losses resulting from a death caused by a virus or other disease, and not more broadly any otherwise covered losses resulting from a virus or a disease. At the very least, the language is ambiguous. Absent extrinsic evidence of the parties’ expectations—hardly surprising given the preliminary stage of the proceedings—the exclusion must be interpreted narrowly, at least for now.”
The case is Marina Pacific Hotel and Suites v. Fireman’s Fund Insurance, 2022 S.O.S. 3028.
David P. Schack, Matthew B. O’Hanlon and Jonathan J. Boustani of the Century City firm of Barnes & Thornburg represented the plaintiffs. John P. Phillips, Joseph Davison and Brett Solberg of various offices of DLA Piper acted for Fireman’s.
Copyright 2022, Metropolitan News Company