Ninth Circuit Finds Thread That May Save COVID-19 Claim

    The Ninth Circuit affirmed in part, denied in part, the district court's granting of the insurer's motion to dismiss the insureds' COVID-19 claim. Worthy Hotels, Inc., et al. v. Fireman's Fund Ins. Co., 2024 U.S. App. LEXIS 11747 (9th Cir. May 15, 2024).

    A group of hotels and restaurants sought reimbursement from Fireman's Fund for business losses incurred because of the risk or presence of COVID-19 on their properties. The district court applying Washington law granted Fireman's Funds' motion to dismiss all claims and denied the insureds' motion for leave to amend.

    The Ninth Circuit held the district court properly granted Fireman's Funds' motion to dismiss concerning all claims which included the triggering language "direct physical loss or damage" to property. The Washington Supreme Court had recently interpreted "direct physical loss" to require that the "property has been physically destroyed or that one is deprived of the property in that the property is no longer in their physical possession." The Washington Supreme Court further held that to establish physical loss or damage under the policy, something physically must happen to the property. 

    Here, the insureds failed to show a physical loss because they continued using their properties while the virus or its risk was present. 

    One clause in the policies, however, did not contain any language about "direct physical loss or damage". The Crisis Event provision required a "necessary suspension" to trigger coverage. The "necessary suspension" had to result from a "necessary closure of the covered premises." The district court determined the insureds could not sufficiently allege it suffered a necessary closure or suspension because it offered small take-out menus from selected locations for shortened hours. But given the lack of binding precedent on this question, the Ninth Circuit could not say that no further allegations could cure the defects in the Crisis Event claim.

    Therefore, the district court's denial of leave to amend for the Crisis Event provision was reversed.