In Another Planet Entertainment, LLC v. Vigilant Insurance Co., the Supreme Court today substantially curtails, but does not shut the door to, many businesses’ ability to recover insurance benefits for losses sustained during the COVID pandemic.
Answering a question posed by the Ninth Circuit, the court’s unanimous opinion by Chief Justice Patricia Guerrero holds that insurance coverage based on “direct physical loss or damage” to the insured property, an insurance term common to many commercial policies, requires more than just “allegations of the actual or potential presence of COVID-19 on an insured’s premises.” There must be “a distinct, demonstrable, physical alteration to property,” whether or not “visible to the naked eye”; “some injury to or impairment of the property as property,” the court concludes.
The court finds insufficient the plaintiff business’s allegations that “the COVID-19 virus alters property by bonding or interacting with it on a microscopic level.” This is because the alleged “alteration [doesn’t] result[ ] in injury to or impairment of the property itself. Its relevant physical characteristics are unaffected by the presence of the COVID-19 virus.”
The court says its holding is “consistent with the vast majority of courts nationwide.”
The court does allow, however, that there could be “rare situations” where “a property may suffer direct physical loss where it is not damaged in a conventional sense.” The court gives an example: speaking of “a chemical contaminant or noxious odor,” the court says “an invisible substance or biological agent may, in some cases, be sufficiently harmful and persistent to cause a distinct, demonstrable, physical alteration to property.” But it’s not enough if “the substance or biological agent can be easily cleaned or removed from the property”; instead there must be “ ‘saturation, ingraining, or infiltration of a substance into the materials of a building or persistent pollution of a premises requiring active remediation efforts.’ ” Further leaving room for future successful insurance claims, the justices also say, “we cannot and do not in this proceeding determine that the COVID-19 virus can never cause direct physical loss or damage to property.”
The court disapproves — “to the extent they are inconsistent with [today’s] opinion” — the Sixth District Court of Appeal’s opinion in San Jose Sharks, LLC v. Superior Court (2023) 98 Cal.App.5th 158, review denied (see here), and three Second District, Division Seven, opinions — JRK Property Holdings, Inc. v. Colony Ins. Co. (2023) 96 Cal.App.5th 1, which is a grant-and-hold for today’s decision (see here); Shusha, Inc. v. Century-National Ins. Co. (2022) 87 Cal.App.5th 250, another grant-and-hold for today’s decision (see here); and Marina Pacific Hotel and Suites, LLC v. Fireman’s Fund Ins. Co. (2022) 81 Cal.App.5th 96 (no petition for review filed).
The court also disapproves the Fourth District, Division Three, decision in Coast Restaurant Group, Inc. v. Amguard Ins. Co. (2023) 90 Cal.App.5th 332 “to the extent it holds that pandemic-related government health orders regulating the use of property may cause direct physical loss to property.” Despite the disapproved portion of its opinion, Division Three — like the Sixth District did in San Jose Sharks — ruled for the insurance company, concluding policy exclusions defeated the claim as a matter of law. There was no petition for review in Coast Restaurant, but the court denied a depublication request by the American Property Casualty Insurance Association. (See here.)
[July 23 update: After the opinion became final, the Ninth Circuit in an unpublished memorandum yesterday ruled against the insured. Although “recogniz[ing] that the California Supreme Court’s response does not categorically preclude coverage for property damage and other losses caused by the COVID-19 virus,” the federal panel said the “Supreme Court’s response resolves this appeal in favor of [the insurance carrier].”]