Deciding body (English)
Type of body
Type of Court (material scope)
Type of jurisdiction
Type of Court (territorial scope)
Further areas addressed
Outcome of the decision
The Plaintiff, an insured company, sought coverage for its lost business income resulting from the COVID-19 pandemic under a policy issued for its inns. The trial court has sustained the insurer's demurrer without leave to amend.
The Court of Appeals has affirmed the trial court's order, arguing that business income insurance coverage was not triggered because the policy used the phrase “direct physical loss of or damage to property”. It considered that the insured did not establish that its suspension of operations was caused by direct physical damage to the property, despite the allegation that COVID-19 was present on its premises, or by direct physical loss of property, despite the allegation that the property could not function as intended. Therefore, the claim of the Plaintiff was rejected.
Facts of the case
The Plaintiff operates five lodging facilities in California. On January 9, 2020, it renewed its commercial insurance policy with the insurance company, which included commercial property insurance covering each of its five lodging facilities. In March 2020, the COVID-19 pandemic resulted in government orders restricting the movement of citizens and the operation of businesses. On March 24, 2020, the Plaintiff made a claim to the insurance company under its commercial property insurance coverage for the loss of business income caused by the pandemic. On the same day, the insurer denied coverage, stating that “[l]oss of business due to reasons other than covered physical damage is beyond the scope of the insurance policy.” On April 20, 2020, the Plaintiff filed the instant lawsuit against the insurance company in Monterey County Superior Court. The complaint pled causes of action for:
- declaratory relief,
- breach of contract,
- breach of the implied covenant of good faith and fair dealing, and
- bad faith denial of insurance coverage,
all of which were based on the allegation that the Policy provided coverage for its loss of business income due to the pandemic.
Type of measure challenged
Measures, actions, remedies claimed
- Declaratory relief
- Breach of contract
- Breach of the implied covenant of good faith and fair dealing
- Bad faith denial of insurance coverage
Individual / collective enforcement
Nature of the parties
Type of procedure
Reasoning of the deciding body
The Court has argued that the policy used the phrase “direct physical loss of or damage to property,” and the insured did not establish that its suspension of operations was caused by direct physical damage to the property, despite the allegation that COVID-19 was present on its premises, or by direct physical loss of property, despite the allegation that the property could not function as intended. It has stated that the absence of a virus exclusion in the policy did not impact the meaning of “direct physical loss of or damage to” property. Furthermore, the Court has argued that the policy's civil authority coverage was not triggered because county stay-at-home and closure orders were issued to prevent the spread of COVID-19, not due to direct physical loss of or damage to any property.
The Court has also argued that although insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply. It has stated that the Court's goal in construing insurance contracts, as with contracts generally, is to give effect to the parties’ mutual intentions. Such intent is to be inferred, if possible, solely from the written provisions of the contract.
Finally, the Court has pointed out that the insured has the burden of establishing that a claim, unless specifically excluded, is within the basic coverage, while the insurer has the burden of establishing that a specific exclusion applies.
Conclusions of the deciding body
The Court has concluded that despite an insured's allegation that COVID-19 was present on the premises of its inns, it did not identify any direct physical damage to property that caused it to suspend its operations. Therefore, the business income coverage was not triggered. It has concluded that in the context of first party property insurance, mere loss of use of physical property to generate business income, without any other physical impact on the property, does not give rise to coverage for direct physical loss. It has stated that the requirement that the loss be physical excludes alleged losses that are intangible and precludes any claim against the property insurer when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, or physical alteration of the property. The Court has concluded that “under this rule, operations are not what is insured the building and the personal property in or on the building are.”
Regarding the arguments of the Plaintiff concerning a possible amendment of the claim with more scientific information about how COVID-19 is transmitted and how it can persist on surfaces and in the air, the Court concluded that it still would not state a claim for relief under either the business income or civil authority coverage provisions.
The Court has further concluded that the scenario pled in the complaint does not state a claim because (1) Inns' suspension of operations was caused by the orders, not by any physical damage to property, and (2) mere loss of use of real property to generate income does not give rise to coverage. Finally, it has stated that specific scientific information would not solve the fundamental problem that the orders were issued to prevent the spread of COVID-19 rather than due to any.
Therefore, the Court has rejected the appeal and sustained that the trial court did not abuse its discretion in sustaining the demurrer without leave to amend.