Smoke and Soot Constitute Direct Physical Loss

    The federal district court found that smoke and soot contamination rendered the property unfit for normal use, meeting the standard for "direct physical loss" under the policy language for recovery of business income. Bottega, LLC, et al. v. National Surety Corporation-Chicago, Il, 2025 U.S. Dist. LEXIS 5666 (N.D. Cal. Jan. 10, 2025). 

    Bottega, a restaurant in Northern California, held a policy issued by National Surety which provided for loss of Business Income due to the necessary suspension of operation. The policy provided, "The suspension must be caused by direct physical loss of or damage to property at the premises described in the Declarations."

    On October 8, 2017, a series of fires began in the area. The following day, the governor proclaimed a state of emergency closing various roads from approximately October 9 to 18, 2017, restricting access to the insured property. The fires did not reach the insured's property, but came very close. Bottega closed on October 9, 2017. The restaurant partially reopened the following day so that food could be provided and served to first responders. Bottega remained in operation throughout the fires except for the closure on October 16, 2017. 

    Bottega submitted a Property Loss Notice. National Surety paid $108,190 for business income lost. A year after the fire, a site inspection occurred. Smoke damage was found. Bottega then submitted to National Surety claims for smoke damage as well as lost business income. The claim was rejected by National Surety because operations were not suspended due to loss of or damage to insured property. 

    Bottega sued, contending they continued to experience business income losses for an extended period of time well beyond the two-week time period provided for under the Civil Authority provision of the policy. The parties cross-moved for summary judgment.

    The court noted that to trigger the Business Income Coverage provision, the insured had to establish (1) a suspension of operations (2) caused by (3) direct physical loss of or damage to the property (4) resulting from a Covered Cause of Loss. 

    The record established as an undisputed fact Bottega's operations were suspended within the meaning of the policy. Further, based on admissions from National Surety, the record established as a matter of undisputed fact that the fires caused direct physical loss and damage to Bottega. National Surety admitted: (1) the fires caused smoke, soot, and/or ash damage to the insured locations; (2) the fires caused a direct physical loss to the insured locations; and (3) the fires caused direct physical damage to the insured locations. These admissions conclusively established physical loss or damage to the insured property. 

    The summary judgment record also established as an undisputed fact the direct physical loss or damage resulted from a Covered Cause of Loss. 

    There was, however, a genuine dispute of fact as to the reason for Bottega's closure on October 9, 2017. Bottega argued the restaurant could not operate in its then condition as it was inundated with smoke, soot, ash, and char. National Surety contended that operations were suspended when access to the insured premises was prohibited by order of civil authority, as opposed to loss of or damage to insured property. 

    The court determined there was a genuine dispute of fact as to whether Bottega's closure was caused by smoke damage. Both motions for partial summary judgment were denied.