By judgment of 13 July 2022, the Seventh Division of the Second Appellate District of the Court of Appeal of California ruled in favor of a policyholder in a COVID-related business interruption case, thus departing from the well-established trend of rejecting policyholders’ claims on the grounds that COVID is incapable of producing direct physical losses.

The case was bought before Court by the owners of hotels and restaurants who had stipulated a commercial property insurance policy with Fireman’s Fund Insurance Company. They alleged that the COVID-19 virus was present on, and had physically transformed, portions of their properties, causing “direct physical loss or damage” within the meaning of the policy. The Court of first instance rejected their claims stating – in line with case law on the matter – that “where the property has simply been rendered unusable based on a virus, rather than an external force, the loss of use of the property in a typical manner is not a ‘direct physical loss’ contemplated by the insurance policy. To the contrary, the fact that the virus ‘can survive on surfaces up to 28 days, serving as a vehicle for transmission during that time span’, shows that any harm is temporary such that there is no need for any repairs or remediation”. On this basis, the Court held that insureds had failed to set forth a cause of action for breach of contract and dismissed their claims.

The appellate Court disagreed. The Court held that plaintiffs had adequately alleged that the COVID-19 virus caused direct physical loss or damage. Notably, they claimed that COVID-19 not only lives on surfaces but also bonds to surfaces through physicochemical reactions involving cells and surface proteins, which transform the physical condition of the property. Because of the nature of the pandemic, the virus was continually reintroduced to surfaces at plaintiffs’ locations and they were required to “dispose of property damaged by COVID-19 and limit operations at the Insured Properties”. Because the insureds adequately alleged losses covered by Fireman's Fund's policy – the Court said – they are at least entitled to an opportunity to present their case, at trial or in opposition to a motion for summary judgment.

Full text of the decision available at en