On October 4, the California First Appellate District in Amy’s Kitchen, Inc. v. Fireman’s Fund Insurance Company, 2022 Cal. App. LEXIS 836, reversed a trial court’s order granting the insurer’s demurrer in a COVID-19 property damage claim, and remanded to allow the policyholder to amend its allegations of loss under a communicable disease coverage extension. In so doing, the court applied correctly the pleading standards in California, and a process of careful evaluation of the policy language in context, existing physical loss or damage law in California, ultimately applying the clear language in the policy in a common sense manner. The Amy’s Kitchen decision is important because it interpreted the policy in the way a reasonable layperson would read its language, focusing on the actual policy language, not terms of art defined by case law.
The facts
Amy’s employs more than 2,500 people to manufacture meals at facilities in California, Oregon and Idaho. As alleged in Amy’s complaint, COVID-19 was present at Amy’s locations because some of Amy’s employees had confirmed cases, prompting Amy’s to take measures to mitigate, contain, clean, disinfect, monitor and test for COVID-19. Public health orders also required Amy’s to implement various measures, including decontamination, disinfection and sanitization of its facilities to continue operating.
Fireman’s issued Amy’s a comprehensive property insurance policy, which included coverage extensions for communicable disease and loss avoidance and mitigation. The communicable disease coverage extension provided that Fireman’s “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: . . . mitigate, contain, remediate, treat, clean, detoxify, disinfect, neutralize, cleanup, remove, dispose of, test for, monitor, and assess the effects [of] the communicable disease.” A communicable disease event is one where “a public health authority has ordered that a location be evacuated, decontaminated, or disinfected due to the outbreak of a communicable disease at such location.” The loss avoidance or mitigation coverage extension states that Fireman’s will pay “necessary expense you incur to protect, avoid, or significantly mitigate potential covered loss or damage that is actually and imminently threatening Property Insured.”
The opinion
The court analyzed the policy language, noting, as many courts have over the past two years, that the policy did not define the phrase “direct physical loss or damage.” Fireman’s argued that physical loss or damage required “physical alteration,” but the court noted that term did not appear anywhere in the text of the policy, and that Fireman’s contention relied on cases construing the phrase used in very different policy provisions (specifically, business income, extra expense or civil authority provisions covering lost income). As the court noted, none of the decisions cited by Fireman’s focused on a communicable disease extension with the same trigger that required a showing of loss incurred to “(c) Mitigate, contain, remediate, treat, clean, detoxify, disinfect, neutralize, cleanup, remove, dispose of, test for, monitor, and assess the effects [of] the communicable disease.”
As the court further noted, requiring a showing of physical alteration to trigger the communicable disease extension “would render subparagraph (c) illusory—both redundant and meaningless,” noting that subparagraphs (a) and (b) require physical alteration because the property must be torn out, repaired or replaced, but to construe subparagraph (c), which requires mitigation, disinfection and the like, as applying only where physical alteration occurred, the provision would have no possible application not covered by subparagraphs (a) and (b). Accordingly, the court found that the only plausible interpretation of the communicable disease extension is that the need to clean or disinfect infected or potentially infected surfaces is “direct physical loss or damage.” By finding that (c) constituted direct physical loss or damage, the court refused to impose the judicially-created notion that direct physical loss or damage requires “physical alteration” in every circumstance.
The court held that the trial court erred in granting Fireman’s demurrer without leave to amend on the ground that Amy’s could not allege COVID-19 caused direct physical loss or damage under the policy. This conclusion is important because insurers have relied extensively on this argument in case after case, a position courts have been too quick to accept. While the court concluded Amy’s pleading was deficient, it remanded to allow Amy’s to allege location-specific public health authority orders required it to decontaminate or disinfect its premises due to the outbreak of a communicable disease at those premises.
Takeaways
While this case applies in specific circumstances – with coverage extensions for communicable disease that include similar definitions—it is an important step in the right direction, and further reflects the way courts should construe policy language in COVID-19 property damage cases. Rather than reading terms of art defined by case law into policies, courts should read policies the way they would be read by laypeople, who have no knowledge of the terms of art or cases that might apply.