The pandemic may be over, but the legal cases deciding what business losses must be covered by insurance policies linger on.

Unfortunately for plaintiffs across the board, no matter what creative arguments they come up with, their cases nearly always fail due to express exclusions in the policy. One of the latest cases to fall in line is San Jose Sharks v. The Superior Court of Santa Clara County and the Factory Mutual Insurance Company (Factory Mutual), plaintiffs’ insurer and the real party in interest. The case pits the National Hockey League (NHL) and 19 of its teams against Factory Mutual and seeks coverage under their insurance policies for “physical loss or damage to property due to COVID-19.” They estimate their losses at $1 billion.

But the trial court denied them coverage. An opinion by Santa Clara Superior Court Judge Sunil R. Kulkarni struck all the NHL’s allegations except those covered by policy clauses related to business interruptions caused by communicable diseases. His ruling cited a 2022 opinion by the Fourth Circuit in United Talent Agency v Vigilant Insurance Company that “conclusively (held) that the presence of COVID-19 in the air and on surfaces is not physical loss or damage to property.”

The hockey plaintiffs then filed a writ of review that asked the appellate court to “interpret the terms of the operative insurance agreements.” In a 3-0 unanimous opinion authored by Justice Cynthia Lie, the California Court of Appeal for the Sixth District denied plaintiffs’ petition on December 21, concluding the trial court was correct when it determined “the policies’ contamination exclusion…unambiguously operates to exclude viral contamination”…so plaintiff’s cannot allege covered physical loss or damage to property (italics in original). Kulkarni’s opinion was not based on the exclusionary clause but on plaintiff’s failure to allege covered physical loss due to COVID-19.

Lie’s opinion was the same as Kulkarni’s but was reached by different reasoning. She began with a description of the policy at issue. It states that plaintiff’s properties including hockey arenas are insured “against ALL RISKS OF PHYSICAL LOSS OR DAMAGE” except as excluded (capitals in original). The policies excluded “contamination, and costs due to contamination,” including the inability to use or occupy the property or any cost of making the property safe or suitable for use or occupancy.

Justice Lie explained that the virus, which caused over 6.1 million deaths worldwide, was present in each of plaintiffs’ insured locations. Because of the “external peril” in the way the virus is transmitted through air and on surfaces, the NHL closed all its arenas in March 2020. Plaintiffs sued Factory Mutual for breach of contract; declaratory relief; and breach of the implied covenant of good faith and fair dealing. The insurance company demurred to the original complaint and moved to strike several of its allegations.

The 2022 ruling by Kulkarni overruled Factory Mutual’s demurrer, but granted their motion to strike because he concluded plaintiffs failed “to allege covered physical loss or damage to property due to COVID-19.” The Sixth Circuit then issued an order to show cause regarding whether the trial court “was appropriately deferential to plaintiff’s factual allegations.”

After reviewing the material, Lie affirmed Kulkarni’s finding that there were causes of action under a $1 million policy clause that related to business interruptions caused by communicable diseases. Nonetheless, she said she “read the contamination exclusion as excluding from coverage the physical loss or damage caused by viral contamination.”

Lie then turned to the insurance policy’s language, explaining that they contain two elements: coverage provisions and exclusionary provisions. She focused on Factory Mutual’s exclusionary provision that denied coverage for losses due to “contamination, and any cost due to contamination including the inability to occupy property or any cost of making property safe or suitable for occupancy.”

The policy defines contamination as “any condition of property due to the actual or suspected presence of . . . virus . . . .” Lie said, “There is no dispute that the risk of physical loss or damage on which plaintiffs rely constitutes contamination within the meaning of the policy; plaintiffs dispute only whether earnings lost due to such damage are excluded.” She found they were and also found the contract to be “unambiguous.”

In conclusion, Lie wrote, “Having concluded that physical damage consisting of viral contamination is subject to the contamination exclusion, it, once again, follows that viral contamination is not “physical damage of the type insured.” Her reasoning, while different from the trial court’s, affirmed Kulkarni’s ruling. Both found that “plaintiffs cannot allege covered physical loss or damage to property,” which differs from the NHL’s claimed $1 billion in losses caused by a hockey season without hockey from March through June.