Answering Certified Question, California Supreme Court Finds No Coverage for COVID-19 Claims
Finally weighing in on whether the presence of COVID-19 constitutes direct physical loss or damage to property, the California Supreme Court answered a certified question from the Ninth Circuit by determining there was no coverage under California law. Another Planet Entertainment, LLC v. Vigilant Ins. Co., 2024 Cal. LEXIS 2738 (Cal. May 23, 2024).
Another Planet operated venues for live entertainment. It suffered pandemic-related business losses when its venues closed. It alleged it suffered losses in excess of $20 million. Another Planet submitted a claim to Vigilant for direct physical loss or damage to its properties and consequent economic losses. Vigilant denied coverage contending Another Planet had not shown "physical loss or damage that would implicate coverage."
Another Planet sued. The federal district court granted Vigilant's motion to dismiss. On appeal, the Ninth Circuit certified the following question to the California Supreme Court: "Can the actual or potential presence of the COVID-19 virus on an insured's premises constitute 'directly physical loss or damage to property' for purposes of coverage under a commercial property insurance policy."
The California Supreme Court focused in the meaning of "direct physical loss or damage." Starting with "direct physical damage to property," the threshold requirement for coverage was that the insured property had sustained physical loss or damage. Thus, for direct physical damage to property to occur, the property itself had to have been physically harmed or impaired.
The change or alteration of property did not have to be visible to the naked eye to constitute direct physical damage to property. Instead, it was the effect of the change or alteration that was determinative. If the change or alteration caused harm or injury to the property itself, such a change or alteration could constitute direct physical damage to property. Conversely, if a change or alteration did not cause any damage or harm to the property, it did not constitute direct physical damage to property.
Turning to "direct physical loss to property," the Court noted that the pairing of the word "physical" with "loss" demonstrated there must be some physicality to the loss of property, e.g., a physical alteration, physical contamination, or physical destruction. The Court agreed that an invisible substance or biological agent could, in some cases, be sufficiently harmful and persistent to cause a distinct, demonstrable, physical alteration to property. But harm should not be found where the substance or biological agent could be easily cleaned or removed from the property. The property itself had to suffer a direct physical loss, i.e., it had to be so negatively affected that it was rendered effectively unusable or uninhabitable.
Finally, the requirement of a direct physical loss to property did not cover situations where there was a loss of use of property due to a government shutdown order and no direct physical loss; a government order as opposed to a physical condition related to the property caused the deprivation. Where the deprivation of property was caused by a government order, rather than a physical event, no direct physical loss to property occurred.
While not deciding whether the COVID-19 virus could ever constitute direct physical loss or damage to property, the Court concluded Another Planet's allegations were insufficient to meet the definition of direct physical loss or damage to property under California law. Another Planet primarily contended that the COVID-19 virus caused direct physical damage to property by physically altering surfaces where it landed and attached. These allegations did not explain how the property was damaged or harmed by the presence of the COVID-19 virus. They did not allege any injury or impairment to property caused by the COVID-19 virus. An insured had to allege, and later prove, that the alteration caused physical harm to the property. The alteration of property itself was not enough.
To the extent Another Plant claimed it was the physical presence of the virus that caused its property to become unusable, it failed to allege that the virus caused a distinct, demonstrable, physical alteration to property. Where a substance was alleged to cause harm to humans, rather than property, it must still alter the property itself in a lasting and persistent manner.
Therefore, the California Supreme Court answered the certified 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.
