California Appellate Court Reverses and Remands Denial of COVID-19 Claim

    The California Court of Appeal reversed the trial court’s dismissal of the insured’s COVID-19 claim seeking coverage under communicalbe disease provisions. Amy’s Kitchen, Inc. v. Fireman’s Fund Ins. Co., 2022 Cal. App. LEXIS 836 (Oct. 4, 2022).    

    Amy’s employed over 2,500 people to manufacture organic and vegetarian meals at facilities in California, Oregon and Idaho. Amy’s commercial property policy provided coverage for communicable disease and for loss avoidance and mitigation.

    The communicable disease coverage provided that Fireman’s “will pay for direct physical loss or damage to Property Insured casued by . . . a covered  communicable disease event at a location, including costs to mitigate, contain, remediate, . . . the effects of the communicabl disease.” The policy defined “communicable disease event” as one in which “a public health authority has orderd that a location be evacuated, decontaminated, or disinfected due to the outbreak of a communicable disease at such location.” The loss avoidance or mitigation coverage extension stated that Fireman’s would pay “necessary expenses you incur to protect, avoid, or significantly mitigate potential covered loss or damage . . .” 

    After coverage was denied, Amy’s filed a complaint alleging that it incurred costs to mitigate and test for the effects of the coronavirus at insured locations and to avoid or mitigate potential coronavirus-related losses threatening its locations. Staff of Amy’s tested positive for COVID-19. The virus allegedly caused “direct physical loss or damage” by altering the physical condition of the locations’ air and surfaces that made them unsafe absent precautionary measures. The complaint further alleged that Amy’s had to sanitize its facilities to comply with public health orders.

    Fireman’s filed a demurrer to the complaint. The trial court sustained the demurrer without leave to amend because Amy’s failed to allege “direct phaysical loss or damage” to its property. 

    On appeal, Fireman’s argued that “direct physical loss or damage” did not include costs to mitigate or clean the communcable disease unless the communicable disease event physically altered the property. “Physical alteration” did not appear anywhere in the policy. Fireman’s relied upon numerous decisions from other jurisdictions construing the phrase “direct physical loss or damage” as used in very different policy provisions regarding business interruption, civil authroity, etc. None of these decisions focused on the reasonable interpretation of a communicable disease extension in which coverage was triggered by a communicable disease event causing costs to be incurred to mitigate effects of the communicable disease. The only plausible interpretaion of the provision in this policy was that the need to clean or disinfect infected or potentially infected covered property constituted “direct physical loss or damage” of that property within the meaning of the policy.

    However, the provision only applied if a public health authority ordered decontamination “due to the outbreak of a communicable disease a such location.” Here, Amy’s pleading did not adequately allege a basis for coverage. Thus, Fireman’s demurrer was propertly sustained.

    The trial court denied leave to amend, however, based not on the failure to allege a location-specific order, but solely on the incorrectly perceived inability to allege “direct physical loss or damage.” Therefore, the judgment of dismissal was reversed and the matter was remanded with direction to sustain Fireman’s demurrer with leave to amend.