Recently, a California federal court issued a favorable decision for policyholders seeking coverage for losses arising from COVID-19 who paid significant premiums to purchase substantial coverage limits including “coverage for business interruption losses from a virus.”  Sunstone Hotel Investors, Inc. v. Endurance Am. Spec. Ins. Co., Case No. SACV 20-02185 (C.D. Cal., June 15, 2022).

The facts

In Sunstone Hotel Investors, Inc., the Boston Marriott Long Wharf (the “Marriott”) hosted a three-day conference in February 2020.  Following the event, the Boston Public Health Department informed the hotel that three attendees tested positive for COVID-19.  Sunstone, the operator of the Marriott, timely filed an initial notice of loss with Endurance under its environmental impairment liability policy for the losses stemming from the presence of COVID-19.

In exchange for the placement of the policy, Sunstone paid a significant premium for an aggregate maximum of $40 million limit of insurance to protect itself against all kinds of events, including $25 million for “business interruption losses from a virus.”

After receiving the notice, Endurance denied the claim in full.  Following the notice but prior to denial, the Boston public health authorities informed the Marriott that the City would force it to quarantine and close immediately if the hotel failed to suspend its operations.  The Marriott thereafter suspended its operations for a period of 14 days.  Prior to the hotel’s reopening date, the State of Massachusetts issued a governmental order mandating the closure of all non-essential businesses, which included the hotel.  The Marriott thus remained closed until July 7, 2020, when the State permitted it to reopen at limited capacity. 

The holding

Sunstone’s policy specifically included a provision for coverage stemming from “business interruption losses resulting from a virus.”  One question before the court was thus whether Sunstone’s losses “resulted” from the presence of COVID-19 or whether its losses arose from an intervening cause, as Endurance argued, the governmental order.  On summary judgment, Sunstone argued that coverage was triggered because it lost the use and functionality of its premises due to both attendees and personnel testing positive for COVID-19 as well as the subsequent actions and orders of state and local authorities requiring its closure. 

In response, and on its cross-motion for summary judgment, Endurance argued, among other things, that coverage was not triggered because Sunstone’s losses were caused by governmental orders alone and did not result from the presence of COVID-19.  The court rejected Endurance’s contentions noting they were based on a flawed assumption that COVID-19 would not have interrupted the insured’s hotel operations without the governmental order.  Indeed, the court opined that, even if Sunstone was not forced by the governmental orders to close, “it is likely that its operations would have been necessarily suspended anyway . . . as evidenced by the fact that even when Sunstone was able to resume limited operations after the Massachusetts Order was lifted it was not able to ‘resume normal operations.’”  “Simply put,” the Court added, “Endurance has not shown that the [governmental order] was an intervening circumstance causing [the hotel’s] closure under the terms of the Policy, rather than the virus itself.”  

In addition, the Court was also persuaded by the substantial premiums that Sunstone paid for the Policy, coupled with the $25 million of insurance provided “should a virus interrupt” its operations.  The Court opined that Endurance’s restrictive reading of the policy was “not what Sunstone or Endurance bargained for and neither party can reasonably expect [the] limitations [posed by Endurance] given the millions of dollars of insurance coverage the Policy provides.”

The takeaway

The decision points out that policyholders with non-standard coverage, including coverage for losses from the presence of a virus or communicable diseases, have strong arguments to obtain coverage for their COVID-19 business losses and should continue to push to obtain the coverage they paid substantial sums to obtain.  Indeed, as the court in Sunstone stated: “Unlike the policies presented to other courts which have found that no coverage exists for pandemic-related losses, this Court finds that Sunstone’s policy must be interpreted to encapsulate the very thing for which Sunstone seeks coverage.”