Courts continue grappling with the application of California insurance law to COVID-19 business interruption claims. After three years of insurance claims and litigation, the California Supreme Court has agreed to provide guidance as to whether the actual or potential presence of SARS-CoV-2 on insured property can qualify as physical loss of or damage to property in Another Planet Entertainment, LLC v. Vigilant Insurance Company.
District court proceedings
Another Planet operates and promotes concerts, events, and festivals in California and Nevada. After its insurer denied coverage for business income losses incurred, Another Planet filed suit in California federal court seeking coverage under its “all-risk” property insurance policy.
In its amended complaint, Another Planet alleged that the virus was present or would have been present had it not closed its venues in compliance with government orders. The insured further alleged that droplets of the COVID-19 virus physically altered the air and property surfaces, constituting physical loss or damage and rendering the property unusable for its intended purpose and function. The pleading further asserted that minimizing the spread of COVID-19 requires physical alterations, including physical distancing, regular disinfection, air filtration, and installation of physical barriers.
Vigilant Insurance moved to dismiss on the basis that Another Planet had not sufficiently alleged direct physical loss or damage to property. On June 21, 2021, the District Court granted the insurer’s motion and dismissed the case with prejudice.
Ninth Circuit and California Supreme Court
Another Planet appealed to the Ninth Circuit, arguing it sufficiently alleged that SARS-CoV-2 was present in and around the insured properties and the district court’s dismissal was improper because those factual allegations should have been accepted as true.
The Ninth Circuit noted the split in authority among the California intermediate appellate courts regarding whether these allegations are sufficient to state a viable claim for direct physical loss or damage to property: United Talent Agency v. Vigilant Insurance Co. vs. Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Insurance Co. Given the conflicting decisions, the Ninth Circuit certified the following question to the California Supreme Court:
“Can the actual or potential presence of the COVID-19 virus on an insured’s premises constitute “direct physical loss or damage to property” for purposes of coverage under a commercial property insurance policy?“
On March 1, 2023, the California Supreme Court accepted review of the certified question.
Why this case is worth watching
The California Supreme Court has rejected previous opportunities to weigh in on COVID-19 insurance disputes. A ruling by the California high court that the actual or potential presence of SARS-CoV-2 is “direct physical loss or damage to property” would be a landmark decision for countless California policyholders.
With the stakes high in COVID-19 coverage cases, the California Supreme Court may continue providing direction on key issues. On February 7, 2023, the Ninth Circuit certified a different question to the state’s highest court in another COVID-19 coverage case. The certified question in French Laundry Partners, LP v. Hartford Fire Insurance Co. asks:
“Is the virus exclusion in French Laundry’s insurance policy unenforceable because enforcing it would render illusory a limited virus coverage provision allowing for the possibility of coverage for business losses and extra expenses allegedly caused by the presence and impacts of COVID-19 at an insured’s properties, including the loss of business due to a civil authority closure order?“
Only time will tell. State courts of last resort remain an important battleground for policyholders.