COVID Alone Probably Not Enough for Insurance Coverage of Business Losses
Since the U.S. Gross Domestic Product estimates that businesses lost approximately $14 trillion during the COVID-19 pandemic, it is wise for every business to review its current insurance policies to ensure coverage in case of another health disaster. A recent California Supreme Court case provides guidance about what would and would not be covered. It ruled that “…allegations of the actual or potential presence of COVID-19 on an insured’s premises do not, without more, establish direct physical loss or damage to property within the meaning of a commercial property insurance policy.” In essence, the court ruled that “property insurance is insurance of property.” (Italics in original)
In Another Planet Entertainment LLC v. Vigilant Insurance Company, the California Supreme Court resolved the conflict between several State cases that have reached different conclusions about what “conventional first party all-risk or open peril insurance” policy language means for COVID-19 coverage. In a unanimous 7-0 decision, authored by Chief Justice Patricia Guerrero on May 23, the Court ruled, “A property insurance policy does not cover a particular intended use; it covers the property itself.”
Another Planet, which operates live entertainment venues for concerts and festivals, had argued the virus “alter(ed) its property by bonding or interacting with it on a microscopic level” and leaving the virus on seats where it could infect those who attended its events. The Supreme Court disagreed and noted that the virus is transmitted from person to person and not from surfaces. could not show that COVID was the kind of contaminant that was “so lasting and persistent that the risk of harm is inextricably linked or connected to the property.”
Guerrero reviewed the legal history of the case that came to the Supreme Court after U.S. District Court Judge Vince Chhabria of the Northern District of California dismissed the case under the Federal Rule of Civil Procedure 12(b)(6) because Another Planet failed to state a claim. appealed to the Ninth Circuit, which stayed the case and sent a specific question to the California Supreme Court. The question was, “Can the actual or potential presence of the COVID-19 virus on an insured premises constitute “direct physical loss or damage to property for purposes of coverage under a commercial insurance policy?’
Another Planet argued that direct physical loss to property may be found anytime a property may not be used as intended. The company argued that government closures during the pandemic should result in losses covered by insurance. The Supreme Court was not persuaded by this argument either, writing, “…the requirement of a direct physical loss to property excludes impairments that are purely legal in nature…and not where the loss is caused by a government order.”
The Court explained that while most insurance policies do not clearly define the meaning of “direct physical loss or property damage,” the plain meaning of those words “require a distinct, demonstrable, physical alteration to property.” The loss need not be “visible to the naked eye, nor must it be structural, but it must result in some injury to or impairment of the property as property.”
The Supreme Court did make it clear that it was not deciding that a virus could never cause direct physical loss or damage, but the facts in Another Planet did not meet the required standard with its factual allegations. Its policy only covered two categories of coverage: building and personal property coverage and business income and extra expense coverage. Another Planet did cancel all its concerts, festivals and events that were scheduled to take place during the pandemic. It estimated business losses in excess of $20 million.
Guerrero next provided an overview of typical property insurance coverage, which comes from a contract that indemnifies policy owners against loss and returns them to where they would have been had the losses not occurred. The opinion reviewed the conflicting district court opinions that either agreed that the presence of a virus did or did not constitute physical damage or loss. It stated that it would support the plain or commonly understood meaning of what physical damage or loss requires. It noted that “physical” means “having material existence,” “direct” means “having a close, casual, or consequential relationship,” and “damage” is “loss or harm to property.”
Justice Guerrero wrote, “It is the effect (italics in original) of the change or alteration of the property that is determinative. If the change…causes harm or injury to the property itself, such a change may constitute direct physical damage to property. Conversely, if a change…does not cause any damage to the property, it does not constitute direct physical damage to property. Many physical forces, such as heat and cold, cause physical changes…to property, but these changes…do not necessarily cause physical damage.”
Guerrero went on to discuss the controversy about the meaning of “loss,” which has a broader meaning than the description of property. However, when the word “loss” is coupled with the word “physical,” the definition requires “some physicality.” She explained that a loss does not have to be physical alteration, but can be “so connected to the property that the property effectively becomes the source of its own loss or damage.” It could be an invisible substance or biological agent, but that was not the case with Another Planet.
In conclusion, the opinion stated, “… we answer the Ninth Circuit’s question as follows: No, the actual or potential presence of the COVID-19 virus on an insured’s premises generally does not constitute “direct physical loss or damage to property” for purposes of coverage under a commercial property insurance policy.”
Although California’s high court did not mention contract language, insurance contracts that specifically contain language that insures against “virus, epidemic, or pandemic,” have overcome problems that only contain the words “direct physical loss or property damage.” Businesses should review their current insurance policies and consider adding more specific wording that will protect against future health crises.
