Introduction
Judge Corley’s (N.D. Cal.) January 10, 2025 decision in Bottega, LLC v. National Surety Corporation provides guidance for commercial policyholders who have closed down their businesses due to wildfires, smoke, ash and soot that is especially timely given the ongoing wildfires in Southern California. The decision highlights the complexities of business interruption insurance claims, distinguishes between smoke damage and claims involving COVID-19 and makes clear the importance of establishing a clear causal connection between physical damage and the suspension of operations.
Summary
- Business Interruption Coverage Requires Physical Damage: For business interruption coverage to be triggered, there must be a direct physical loss or damage to the property.
- Smoke Damage is Physical Damage: Smoke damage constitutes direct physical loss or damage to the property. Analyzing court precedent, Judge Corley (N.D. Cal.) concluded that smoke causes physical contamination that can alter property.
- Causal Connection and Genuine Disputes of Fact: The court found that there were genuine disputes of fact regarding whether the smoke damage caused the suspension of operations, which precluded summary judgment for the insurer and policyholders.
Background
In Bottega, LLC v. National Surety Corporation, a restaurant, retail café, and catering company sought insurance coverage for business income losses due to the North Bay Fires in 2017.
The relevant coverage provision in the insurance policy states:
We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your operations during the period of restoration. The suspension must be caused by direct physical loss of or damage to property at the premises described in the Declarations. . .caused by or resulting from any Covered Cause of Loss.
The businesses alleged that smoke damage from the fires caused them to suspend operations. Their insurer, National Surety Corporation, disputed the claims, arguing that there was no causal connection between the smoke damage and the suspension of operations; rather, the business closure was due to other external factors such as finance and staffing shortages. This led to both parties filing cross-motions for partial summary judgment.
Distinguishing Smoke from Cases Involving COVID-19
To trigger coverage, the Court found there must be some physicality to the loss of property, such as a physical alteration, physical contamination, or physical destruction. Bottega, LLC v. Nat’l Sur. Corp., No. 21-cv-03614-JSC, 2025 U.S. Dist. LEXIS 5666, at *10 (N.D. Cal. Jan. 10, 2025) (citing Inns-by-the-Sea v. California Mut. Ins. Co., 71 Cal. App. 5th 688, 707, 286 Cal. Rptr. 3d 576 (2021)).
National Surety cited COVID-19 cases “reject[ing] the claim that the need to clean the business premises during and after the business closure met the plaintiff’s burden of showing physical loss or damage.” Id. at *11.
Judge Corley (N.D. Cal.) found this unpersuasive, and distinguished smoke from COVID-19 by noting that smoke causes physical contamination that can alter property, whereas COVID-19, according to the case law National Surety cited, can be disinfected and does not cause physical alteration. Specifically, the court stated:
[T]he presence of COVID-19 on Plaintiff’s property did not cause damage to the property necessitating rehabilitation or restoration efforts similar to those required to abate asbestos or remove poisonous fumes which permeate property. Instead, all that is required for Plaintiff to return to full working order is for the [government orders and restrictions to be lifted].
Id. at *12. The court compared smoke to asbestos and gases that physically alter property, emphasizing that smoke contamination can render a property uninhabitable or unable to be used as intended. Id. The court referenced Inns-by-the-Sea v. California Mutual Insurance Co., 71 Cal. App. 5th 688, 707, 703 (2021) recognizing that:
Contamination of a structure that seriously impairs or destroys its function may qualify as direct physical loss.
Id. at *11. Accordingly, the court explained that smoke, like asbestos and gases, can cause physical damage that necessitates significant cleaning and restoration efforts. Id. at *11-12. Thus, Judge Corley (N.D. Cal.) held “the summary judgment record establishes as an undisputed fact that the direct physical loss or damage resulted from a Covered Cause of Loss[,]” which includes “[s]moke causing sudden and accidental loss or damage.” Id. at *12-13.
Issues of Fact Precluding Summary Judgment
Though Judge Corley (N.D. Cal.) held that there is no dispute that the fires caused smoke damage to the policyholder’s property, the court identified several issues of fact that were sufficient to deny summary judgment for both parties:
Extent of Cleaning and Repairs: The record did not specify what cleaning was required to reopen Bottega and when that cleaning was completed. Id. at *18-19. This lack of detail created a genuine dispute about the reason for the closure on October 9, 2017.
Reason for Closure: There was conflicting evidence about whether the businesses closed due to smoke damage or other reasons such as lack of customers or general disorder following the fire. Id. at *16-18, *20. The owner testified that the restaurant closed because the “facility prevented customers from coming . . . because it smelled like an ashtray.” Id. at *14. The restaurant, however, re-opened on October 10, 2017 while the Public Safety Order was still in place. Id. This conflicting evidence created a genuine dispute of fact.
Financial and Staffing Issues: There was evidence suggesting that the closure was a business decision necessitated by finance and staffing shortages, not physical damage from smoke, soot, and ash. Id. at *20-21. The owner testified that he “didn’t have the money” to open the retail café and catering company at the same time as the restaurant. Id. at *20. This conflicting evidence also created a genuine dispute of fact. Id.
Key Takeaways
- Document Physical Damage Thoroughly: Under policies like the one in question, there must be a direct physical loss or damage to the property to trigger business interruption coverage. Considering that, immediately after the incident, take detailed images and photos of the damage. Smoke, ash, and soot damage may also constitute direct physical loss or damage to property. Maintain comprehensive records of all cleaning and repair activities, including dates, costs, and the extent of the work done. Reports from third-party experts might also be helpful to substantiate claims. If possible, avoid taking remediation actions without at least notifying the insurer and giving them an opportunity to inspect the premises and consent to the planned work.
- Establish a Clear Causal Connection: Under the Court’s ruling, there must be a clear causal connection between the physical loss or damage to property and the suspension of operations. If the loss or damage directly affected the ability to operate, such as making the environment unsafe or uninhabitable for customers and staff, then there may be a sufficient causal connection to claim business interruption coverage.
- Consider the Impact of External Factors: Bear in mind that other external factors, like road closures, government orders, finance issues or staffing issues might also cause or contribute to business interruptions. If external factors play a role, consider if and how they intersect with the physical damage to provide a comprehensive picture of the interruption’s causes. Consult with experienced coverage counsel to address these issues and how they should be presented to the insurer.