Remember how people were told to wash their groceries when COVID-19 first disrupted normal living? All sorts of theories prompted all sorts of safety precautions. While understanding of the pandemic-causing virus has come a long way, no one, and definitely no court, has a firm understanding of exactly what business losses should be covered by typical property insurance policies.

One Venice, CA, hotel and the bar and restaurant on its policy filed an insurance claim based on physical damage to its premises due to COVID-19. They were denied coverage by their insurance company and filed suit against them. The Superior Court dismissed their case because of “serious questions” related to a claim for damaged “property that is unchanged to the naked eye.” A skeptical California appellate court, however, reinstated the lawsuit on July 19, because it did not want to eliminate a cause of action at the pleading stage due to its “improbability of success.”

A unanimous three-judge panel from Division Seven of California’s Second District Court of Appeals reversed the ruling of Los Angeles Superior Court Judge Craig D. Karlan and remanded the case with directions to vacate the sustained demurrer without leave to amend. The opinion was written by Presiding Justice Dennis M. Perluss with concurrences by Associate Justices John L. Segal and Gail Feuer.

Perluss began by discussing how the understanding of COVID has evolved to where we “now know how it spreads, how to protect against it and how to best treat those who have it.” But, he said, that doesn’t mean that a pleading that contains “facts sufficient to state a cause of action” should support a trial judge’s demurrer without leave to amend. That is what happened in Marina Pacific Hotel and Suites v. Fireman’s Fund Insurance Company. The plaintiff is Hotel Erwin and the restaurant/bar is named Larry’s.

Four months after the pandemic started, the plaintiff filed a claim with Fireman’s Fund, alleging that the virus had “physically transformed” part of its property. But, unlike an asbestos case, the insurance company refused to pay for virus losses, calling them “uncovered.” The trial court said that COVID-19 cannot cause direct physical loss or damage. They quoted other court decisions that said, “Common sense confirms that the pandemic impacts human health and human behavior, not physical structures.”

Despite the science being quite clear, the appellate court did not want to prevent the hotel owners from having their day in court. They said that Fireman’s denial “might be the correct outcome,” after a trial or even a summary judgment motion, but it is “error at this nascent phase of the case.”

In his opinion, Perluss first quoted the relevant part of the Hotel’s general property coverage policy. It says Fireman’s “will pay for direct physical loss or damage as well as business losses caused by or resulting from a covered cause of loss.” The common meaning of the term “physical property” clearly means fire, flood, or natural disaster. In addition, several precedents define direct physical loss as that caused by an “external force acting upon the insured property that causes a physical change in the condition of the property.” The hotel’s insurance policy also specifically excludes losses “resulting from mortality, death by natural causes, disease, sickness, or any condition of health, bacteria, or virus.”

Perluss reviewed the hotel’s causes of action and discussed the Superior Court’s rulings about them. The hotel’s first cause of action claimed it had “suffered physical loss” from the virus because it had caused “a distinct, demonstrable and physical alteration to property…by transforming the physical condition… causing the properties to remain in an unsafe and hazardous condition.” Plaintiff cited scientific journal articles that said the virus can be transferred from “both porous and nonporous surfaces,” to cause “demonstrable or physical alteration to property.” They added that they had to close after employees tested positive. As a result, they had to adopt a series of remedial and precautionary measures.

The appellate opinion, however, cited legal precedent that said harm from COVID-19 is “temporary such that there is no need for repairs or remediation.” The hotel’s second cause of action alleged that Fireman’s had breached “an implied covenant of good faith and fair dealing.”

At the Superior Court level, Fireman’s Fund demurred to all of plaintiff’s claims because no facts were alleged that showed “direct physical loss to covered property” as defined by the policy. Fireman’s added that “courts across the country had ruled that the pandemic does not equate to physical loss or damage.” They stressed that loss of use alone is not physical damage. They also argued that the hotel’s claims for damages were “expressly precluded” by sections of their policy that specifically excluded viruses. And “it is beyond dispute that COVID-19 is a virus.”

The appellate court explained the test for the legal sufficiency of a demurrer. It said they must “assume the truth of the properly pleaded factual allegations” and “must deem them to be true, however improbable they may be.”

In this case, Perluss said, the hotel “adequately alleged direct physical loss or damage in their covered property.” Also, he noted, because they must assume the truth of the hotel’s allegations, even if they are improbable, the insured have unquestionably pleaded direct physical loss.” They also properly alleged that the physical loss caused a “slowdown or cessation” in their business operations, which they say triggered their business operation coverage.

The court gave a short review of federal and state decisions that considered whether business losses from the pandemic are covered by commercial property insurance, noting that their decision would be “at odds” with almost all (but not all) other rulings. They said federal cases as well as state court decisions from other states are not binding. Unlike California law, federal court requires the existence of a “plausible claim.”

Their conclusion: because the hotel “adequately alleged losses covered by the Fireman’s Fund policy, they are entitled to an opportunity to present their case, at trial or in opposition to a motion for summary judgment.”

Everyone gets a day in court.