California Supreme Court Resolves Question on Coverage for COVID Business Shutdowns

The California Supreme Court resolved a question about insurance coverage for COVID-19 business shutdowns in the issue of a virus exclusion in a ruling that is consistent with the vast majority of courts nationwide: the presence of the virus on an insured’s premises does not establish direct physical loss or damage to property within the meaning of a commercial property insurance policy.

The question arose from a lawsuit filed against Vigilant Insurance Co. by Another Planet Entertainment, a company that owns California venues for concerts that had to be shut down during the pandemic. Another Planet filed suit against Vigilant after the insurer denied the concert promotor’s claim for its $23.9 million policy limit for business income lost because of the pandemic.

While federal courts have generally held that COVID-19 cannot cause a direct physical loss, the 9th Circuit noted that California appellate courts were split on the issue, so it turned to the Supreme Court for the final word.

The case saw amicus briefs pile up as the California high court mulled the issue, with breifs from nearly a dozen parties.

Attorneys for policyholders contended that the virus that causes COVID can cause a “loss” of property by making it unusable. Insurers countered that even “all-risk” property insurance policies do not cover intangible losses, there must be some tangible alteration.

The California Supreme Court ruling states:

“Under California law, direct physical loss or damage to property requires a distinct, demonstrable, physical alteration to property. The physical alteration need not be visible to the naked eye, nor must it be structural, but it must result in some injury to or impairment of the property as property.”

Another Planet attorneys argued that the COVID virus alters a property by bonding or interacting with it on a microscopic level, but they did not allege that any such alteration results in injury to the property itself. The property’s physical characteristics are not affected by the presence of the virus, the court ruled.

“Another Planet focuses on the virus’s risk to humans, and it alleges that the actual or potential presence of the virus rendered its properties unfit for their intended use,” the court ruled. “But the mere fact that a property cannot be used as intended is insufficient on its own to establish direct physical loss to property.”

The court also found that the fact that a business was forced to curtail operations due to pandemic-related public health orders do not constitute direct physical loss or damage to property.