COVID-19 Claim with Communicable Disease Extension Survives Demurrer

    The California Court of Appeal reversed the trial court’s issuance of a demurrer to allow the COVID-19 claim to go forward. Saddle Ranch Sunset v. Fireman’s Fund Ins. Co., 2023 Cal. App. Unpub. LEXIS 3599 (Cal. Ct. App. June 22, 2023). 

    Saddle Ranch owned restaurants in California and Arizona. Saddle Ranch held a policy with Fireman’s Fund that included a communicable disease coverage extension. The policy promised,

We will pay for direct physical loss or damage to Property Insured caused by or resulting from a covered communicable disease event at a location including the following necessary costs incurred to:

. . . 

     (c) Mitigate, contain, remediate, treat, clean, detoxify, disinfect, neutralise, cleanup, remove, dispose of, test for, Monitor, and assess the effect of the communicable disease.

The policy defined “communicable disease” as “any disease, bacteria, or virus that may be transmitted directly or indirectly from human or animal to a human.”

    Saddle Ranch tendered its claim to Fireman’s Fund. Government shut downs caused Saddle Ranch hundred of thousand of dollars in lost business income. Fireman’s Fund denied the claim because Saddle Ranch had not suffered direct physical loss or damage. 

    Saddle Ranch filed suit. The trial court found the policy required a “direct physical loss” and held the communicable disease extension did not apply to a pandemic situation.

    On appeal, Saddle Ranch pointed out that the communicable disease coverage extension indicated that direct physical loss or damage included COVID-19 contamination that required cleaning, disinfection, or other remediation at the insured property. The court found that in reading the phrase “direct physical loss or damage” as it appeared in the extension could lead a reasonable person to assume that the phrase included costs incurred to mitigate, containe, remediate, etc. The only plausible interpretation of subparagraph (c) of the extension was that the need to clean or disinfect infected or potentially infected covered property constituted a “direct physical loss or damage” of that property within the meaning of the policy. 

    Here, Saddle Ranch alleged the existence of a global COVID-19 outbreak. Fairly read, Saddle Ranch alleged that a public health authority had ordered that its locations be evacuated, or at minimum, decontaminated and disinfected due to the outbreak of a communicable disease at their restaurants. Therefore, Saddle Ranch pled sufficient facts to show the existence of a communicable disease event. 

    The judgment was reversed and the case remanded.