The Inns By The Sea v. California Mutual Insurance Company – Insurance

(December 2021) – In the Inns by the Sea v. California Mut. Ins. Co., 71 Cal. App.5th 688 (November 15, 2021), the California Fourth District Court of Appeals upheld the trial court’s dismissal of a lawsuit brought by The Inns by the Sea (“Inns”) against California Mutual Insurance Company (“California Mutual”). The inns lawsuit alleged that coverage was offered under a commercial property policy issued by California Mutual for lost business income suffered as a result of government orders requiring the closure of commercial businesses in order to stop the spread of the COVID-19 virus. California Mutual denied coverage of the inns claim due to lack of “direct physical loss or damage to covered property” insured under the policy. Following the denial of coverage, the Inns sued California Mutual for breach of contract and bad faith. In response to the lawsuit, California Mutual filed a claim arguing that business income and civil authority coverage was not granted to hostels under its policy. The trial court upheld California Mutual’s opposition without leave to change and dismissed the lawsuit.

Upholding the trial court’s order, the Court of Appeal ruled that the hostels’ claims did not involve direct physical loss or damage to the covered property. With regard to “direct physical damage”, the Court of Appeal gave the following reasons:

We turn first to the question of whether the suspension of Inn’s operations was caused by “direct physical damage … to” the property of Inn. (Emphasis added.) Inns contends that “the presence of COVID-19 clearly constitutes the required” damage “, as this indefinite term is reasonably understood, as its physical presence transforms property, especially indoor air and surfaces, d ‘a safe state to a condition which is dangerous and potentially fatal, dangerous and unfit for its intended use. “The words of the phrase” direct physical damage “all have commonly understood meanings.” Physical “is defined as” having a material existence; perceptible above all by the senses and subject to the laws of nature. ”(Merriam-Webster online dictionary (2021)
[as of Nov. 15, 2021], archived at.) “Direct” is defined as “proceeding from one point to another in time or space without deviation or interruption”, “coming immediately from a source” and “characterized by a logical, causal relationship or narrow consecutive. “(Identifier., [as of Nov. 15,
2021], archived at.) “Damage” is defined as “loss or damage resulting from damage caused to.” . . the property … ”(Id., [as
of Nov. 15, 2021], archived at.)

. . .

Based on the case law we cited above, it might be possible, in a hypothetical scenario, for an invisible air agent to cause an insured to suspend operations due to direct physical damage to property. However, the complaint here simply does not describe such a circumstance as it bases its allegations on the situation created by the orders, which did not target a particular business establishment due to the presence of COVID-19 at the premises of that specific business. . As one court explained, “It could be a different story if a business – which could have operated otherwise – were to close due to the presence of the virus in the establishment. For example, a restaurant could have to close for a week. if anyone in their kitchen tested positive for COVID-19, requiring that the entire facility be completely sanitized and left empty for a period of time. But as the complaint and the shutdown orders demonstrate … [the plaintiff s] the facilities would have remained closed, whether or not the virus was present in its facilities. “(Another Planet Entertainment, LLC v Vigilant Ins. Co. (NDCal., February 25, 2021, n ° 20-cv-07476-VC) 2021 WL 774141, atp. * 2.)

In sum, we conclude that despite Inn’s claim that the COVID-19 virus was present on its premises, it did not identify any direct physical damage to the property that led it to suspend its operations.

With regard to the “direct physical loss of property”, the Court of Appeal gave the following reasons:

We then turn to the question of whether, as Inns argues in the alternative, the scenario relied on in the complaint describes a suspension of operations caused by a “direct physical loss of” property. (Emphasis added.) According to Inns, regardless of the physical presence of the COVID-19 virus, it adequately pleaded direct physical loss by alleging “loss of use, function and value of its property “. on the premises did not constitute physical property damage within the meaning of the Policy, “a policyholder can reasonably expect that a claim will constitute physical loss where the insured property cannot perform as intended. (Emphasis added.) As will be explained, this argument fails because it reduces the coverage for “direct physical loss” to “loss of use” coverage. Case law, and police language as a whole, establish that the inability to use physical assets to generate business income, on its own, does not amount to a “” suspension” … caused. by the direct physical loss of property in the ordinary and popular sense of this expression.

. . .

With respect to policy wording, Business Income coverage applies when there is a suspension of operations caused by a “direct physical loss of” property. As many courts have observed, the words “direct” and “physical” exclude the argument that the coverage arises in a situation where the loss suffered by the policyholder arises solely from an inability to use the premises. physical to generate income, without any other physical impact on the property (see, for example, Isaac’s Deli, Inc. v. State Auto Property and Casualty Ins. Co. (EDPa., May 14, 2021, n ° 5: 20-cv-06165-JMG) F.Supp.Sd, [2021 WL 1945713, at p. *4]
[focusing on the fact that the terms ” ‘direct’ and
‘physical’ ” modify the word ” ‘loss,’
” “a natural reading suggests that the Policy
contemplates an explicit nexus between the purported loss and the
physical conditions of the covered premises”]; Image Dental, LLC v. Citizens Ins. America Company (NDI11., June 11, 2021, n ° 20-cv-02759) F.Supp.Sd, [2021 WL 2399988, at pp.
*4-*5] [in light of the terms “direct” and
“physical”, “[something physical must cause the loss
— that is, the reason for the deprivation must be physical in
nature. It is not enough if the deprivation involves something
physical.”].) As the Eighth Circuit Federal Court of Appeal convincingly explained, because the wording of the policy requires “direct physical loss” to trigger the coverage, “there must be some materiality to the loss. … of property – for example, physical alteration, physical contamination or physical destruction. … The policy cannot reasonably be interpreted as covering a simple loss of use when the property of the insured has not suffered any loss or physical damage. “(Oral surgeons, supra, 2 F.4th at p. 1144, emphasis added, citations omitted.) “The cases consistently conclude that there must be some tangible physical harm ….” (Kauai Watersports, Inc. v. Fireman’s Fund Ins. Co. (NDCal. 2020) 499 F.Supp.Sd 670, 677.)

The policy’s reference to the “restoration period” further supports our conclusion that mere loss of use, without any other physical impact on hostel ownership, is not sufficient to trigger business income coverage. The policy states that “We will pay for the actual loss of business income you suffer as a result of the necessary ‘suspension’ of your ‘operations’ during the ‘restoration period’. The “suspension” must be caused by direct physical loss of or damage to property at [Inns’] local . . . (Emphasis added.) Significantly, the “restoration period” is defined as ending on the earliest of the following dates: “(1) the date on which the property in the premises described is to be repaired, rebuilt or replaced with a reasonable speed and similar quality; or (2) The date on which the activity resumes in a new permanent location. “The focus of the police on repairing, rebuilding or replacing property (or moving it completely to a new location) is important because it implied that the “loss” or “damage” that gives rise to the business income coverage is of a physical nature which can be physically repaired, or if it is incapable of being physically repaired because it is is so heavily destroyed, requires a complete relocation to a new location.[that the policy provides coverage
until property ‘should be repaired, rebuilt or replaced’ or
until business resumes elsewhere assumes physical alteration of the
property, not mere loss of use.” (Oral Surgeons, supra, 2
F.4th at p. 1144, italics added.)

The Court of Appeal also rejected the Inns’ argument that
the absence of a virus exclusion in the California Mutual policy
rendered the policy ambiguous. The Court of Appeal noted that the
insuring agreements for the policy, both property loss and business
income unambiguously required direct physical loss of or damage
sustained by property.

Lastly, the Court of Appeal held that the Civil Authority
Coverage afforded by the California Mutual policy did not apply to
the Inns’ claim. The Court of Appeal reasoned as follows:

The Civil Authority coverage states: “We will pay for the
actual loss of Business Income you sustain and necessary Extra
Expense caused by action of civil authority that prohibits access
to the described premises due to direct physical loss of or damage
to property, other than at the described premises, caused by or
resulting from any Covered Cause of Loss.” Inns argues that
the Civil Authority coverage applies because the complaint
“alleged that the government orders were made in direct
response to the continued and increasing presence of the
coronavirus, a dangerous physical condition, on and around its
property.” Similarly, the complaint pleads, “[The Civil
Authority coverage applies because the Closure Orders were
‘actions] civil authorities which prohibits access to
[Plaintiffs] premises due to direct physical loss or damage
[other] property . . . caused by or resulting from the ‘COVID-19 coronavirus. “

Since Inns identifies the orders as “civil authority action” triggering civilian authority police coverage, we look to the orders to assess Inn’s claim that coverage applies here. . For the purposes of our analysis, we do not need and do not resolve the controversial question of whether the orders “prohibit[ ] access to hostels premises. Instead, as we will explain, we conclude that civil authority coverage does not apply because the plain language of the orders shows that they were not based on “direct physical loss or material damage ”to other premises.

The orders are very clear as to why they were issued. In both decrees, the first paragraph states: “This decree aims to ensure that the greatest number of people self-isolate in their place of residence as much as possible, while allowing essential services to continue, slow the spread of COVID-19 as much as possible. “

Elaborating on this preliminary explanation, the ordinance issued by Monterey County states:

“This order is issued on the basis of evidence of the occurrence of COVID-19 in the county and [surrounding areas], scientific evidence and best practices regarding the most effective approaches to slow the transmission of communicable diseases in general and COVID-19 in particular, and evidence that the age, condition and health of a party population in the county put him at risk of serious health complications, including death, from COVID-19. Due to the outbreak of the COVID-19 virus in the county, its potential for rapid spread in the community, and the World Health Organization declaring CO VID-19 a global pandemic, there is an emergency. health care throughout the county.

To make the problem worse, some people who contract the COVID-19 virus have no symptoms or have mild symptoms, which means they may not know they are carriers of the virus. Because even people without symptoms can transmit the disease, and because evidence shows the disease spreads easily, gatherings can lead to preventable transmission of the virus. Scientific evidence shows that at this stage of the emergency, it is essential to slow down the transmission of the virus as much as possible to protect the most vulnerable and prevent the health system from being overwhelmed. One proven way to slow transmission is to limit interactions between people as much as possible. By reducing the spread of the COVID-19 virus, this order helps preserve critical and limited health care capacities in the county. “

The order issued by San Mateo County contains almost identical wording. Through these statements, the orders make it clear that they were issued with the aim of preventing the spread of the COVID-19 virus. The orders do not provide any indication that they were issued “as a result of direct physical loss or damage to” property. Therefore, the ordinances did not give rise to the cover of the civil authority.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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Justin D. O'Neill