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Ninth Circuit Wants Additional Input on COVID Coverage
Asks California Supreme Court Whether One Provision in Insurance Policy Renders Exclusion Unenforceable; Already Has Question Pending As to Whether Presence of Virus on Property Amounts to Physical Damage
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals, which already has one question in the California Supreme Court’s hopper as to the applicability of insurance policies to harm caused to businesses by the COVID-19 pandemic, yesterday added another query, suggesting that the state’s high court might “gain some efficiencies” by responding to both inquiries.
Yesterday, a three-judge panel asked whether an exclusion in a Hartford Fire Insurance Company policy for damage caused by “[p]resence, growth, proliferation, spread or any activity of...virus” is enforceable in light of reference in another part of the policy to “limited coverage” for harm precipitated by “Fungus, Wet Rot, Dry Rot, Bacteria and Virus.” The insured, French Laundry Partners, LP, which operates two restaurants in Napa County, insists there is liability under the policies, and is seeking the reversal of an April 27, 2021 order by Magistrate Judge Jacqueline Scott Corley dismissing its action with prejudice.
Corley wrote:
“While the Court acknowledges the havoc that the COVID-19 pandemic and consequent shelter-in-place orders have caused businesses throughout this country and the world, the Court cannot read an ambiguity into an insurance contract where none exists. Because Plaintiff previously filed an amended complaint, and because the Virus Exclusion bars coverage here as a matter of law, leave to amend would be futile.”
Wording of Question
A Ninth Circuit panel—composed of Circuit Judges Consuelo M. Callahan, Ryan D. Nelson, and Holly A. Thomas—certified to the California Supreme Court this question:
“Is 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?”
The panel commented:
“In California, and indeed nationwide, a multitude of COVID-19-related insurance cases are moving through the judicial process. Courts at both the state and federal level are grappling with the application of California insurance contract interpretation law to coverage for losses from business shutdowns due to government closure orders in response to COVID-19. While both state and federal courts have published opinions providing some guidance, there remains much uncertainty as to how California law applies in many scenarios (such as the scenario presented in this case).
“The prevalence of and uncertainty surrounding COVID-19 insurance litigation is underscored by our certification to the Supreme Court of California on December 28, 2022. in another case asking whether the actual or potential presence of the COVID-19 virus can constitute ‘direct physical loss or damage to property’ for the purposes of coverage under an insurance policy….We believe the Supreme Court of California may gain some efficiencies through concurrent consideration of our certification in this case.”
Earlier Query
That case is Another Planet Entertainment LLC v. Vigilant Insurance Company. The question posed in that case is: “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?”
An insurer’s motion to dismiss was granted without leave to amend on June 21, 2021 by District Court Judge Vince Chhabria of the Northern District of California, who ruled that the insured, Another Planet, “does not have a claim for loss of business income because the closure orders-and not virus’s alleged presence at Another Planet’s facilities-caused it to shut down.”
The certification order in that case—signed by Circuit Judges Carlos T. Bea, Sandra S. Ikuta, and Morgan Christen—notes that case law in California had held that coverage does not exist, but uncertainty was injected by the July 13 decision by Div. Seven of this district’s Court of Appeal in Marina Pacific Hotel & Suites, LLC et al. v. Fireman’s Fund Insurance Company.
Perluss’s Opinion
In Marina Pacific, Presiding Justice Dennis M. Perluss said that Los Angeles Superior Court Judge Craig D. Karlan had “sustained Fireman’s Fund’s demurrer to the insureds’ first amended complaint without leave to amend and dismissed the lawsuit, ruling the COVID-19 virus cannot cause direct physical loss or damage to property for purposes of insurance coverage,” declaring:
“That might be the correct outcome following a trial or even a motion for summary judgment. It was error at this nascent phase of the case.”
He explained:
“[T]he insureds alleged in their first amended complaint COVID-19…not only lives on surfaces but also bonds to surfaces through physicochemical reactions involving cells and surface proteins, which transform the physical condition of the property….
“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….”
Supreme Court review was not sought in that case.
On Oct. 1, 2021, the Ninth Circuit reached the conclusion in Mudpie, Inc. v. Travelers Casualty Insurance Company “that California courts would construe the phrase ‘physical loss of or damage to’ as requiring an insured to allege physical alteration of its property.” In light of Marina Pacific, it sought the state high court’s input.
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