California Court of Appeal Again Reverses Dismissal of COVID-19, Business Interruption Claim

    Consistent with its prior decision in Marina Pacific Hotel and Suites, LLC v. Fireman’s Fund Ins. Co., 81 Cal. App. 5th 96 (2022), the California Court of Appeal again reversed the lower court’s dismissal by demurrer of the insured’s business interruption claim due to the presence of COVID-19. Shusha, Inc. v. Century-Nat’l Ins. Co., 2022 Cal. App. Unpub. LEXIS 7667 (Cal. Ct. App. Dec. 14, 2022). 

    La Cava was a restaurant that shut its business down on or around March 16, 2020 due to government orders relating to the pandemic. When Centry-National denied coverage for loss of business income, La Cava filed suit. The complaint alleged that La Cava suffered physical loss of or damage to its dining rooms and other property “caused by the actual presence of virus droplets in the air and on the surfaces in the vicinity of and in its restaurant” and “in the form of virus matter present on walls, floors, tables, chairs, silverware, dishes and other surfaces.”

    Century-National filed a demurer arguing that under California law, the phrase “direct physical loss or damage to property” in a policy required a physical alteration of the insured property. Further, La Cava did not and could not allege its loss of business income was attributable to any physical alteration of La Cava’s property by the COVID-19 virus. The trial court sustained Century-National’s demurrer without leave to amend. La Cava appealed. 

    The appellate court noted that at the time the trial court sustained the demurrer, no California appellate court had addressed whether business losses caused by the COVID-19 pandemic were covered by commercial property policies. Since the granting of the demurrer, however, multiple California appellate courts had addressed this question but with differing results. 

    Relying on its prior decision in Marina Pacific, the appellate court found that the allegations were sufficient to survive the demurrer. The complaint alleged health authorities and medical scientists advised that the virus “can remain on smooth surfaces for at least 28 days,” and it “adheres to, attaches to and alters the surfaces of the property and surfaces it comes into contact with.” “Cleaning of surfaces alone is insufficient,” and safe operations would require “substantial physical alterations, systems changes to facilities and new protocols for air circulation, disinfection, and disease prevention.”

    The complaint further alleged that because routine cleaning was insufficient, “the presence of droplets containing coronavirus at La Cava led to its closure and constituted covered physical damage to La Cava’s premises.” As a result, La Cava lost business revenues and incurred substantial costs to mitigate the damage by reconfiguring its property and increasing its sanitization procedures.

    The trial court found these allegations were not sufficient as a matter of law, relying on federal decisions ruling out the possibility of covered losses and the absence of authority supporting La Cava’s position. The appellate court disagreed with the trial court’s reasoning that La Cava could not show the COVID-19 virus permanently damaged surfaces because “it is well-known that SARS-CoV-2 surface contamination is ephemeral, and La Cava has not presented the Court with any authority holding that an ephemeral, pathogenic surface contamination qualifies as ‘damage to’ property under this or similar policies.” 

    Because La Cava sufficiently pleaded direct physical loss or damage to its property caused by the COVID-19 virus to trigger coverage, the trial court erred in sustaining the demurrer to the causes of action for breach of contract and declaratory judgment.

    The court also found that La Cava adequately alleged a cause of action for bad faith based on Century-National’s summary denial of its claim. The complaint alleged Century-National “undertook no steps to determine whether the virus had caused physical damage to the La Cava premises,” and “without engaging in any legitimate, true, meaningful, or thorough investigation,” it summarily denied the claim. Century-National responded that its denial was based on a disputed interpretation of the policy and was therefore not in bad faith.

    At the pleading stage, however, denial of coverage just three weeks after La Cava tendered its claim and in the earlier days of understanding of the novel COVID-19 virus, could not be deemed as a matter of law to have been made in good faith with reasonable grounds. At the time of the denial, it was settled law that environmental contamination that resulted in physical damage – such as smoke, ammonia, door, or asbestos –  could trigger business income coverage. As alleged, Century-National did not take any steps to determine whether COVID-19 caused physical damage to the La Cava premises before denying coverage.