A California appellate court broke from its sister jurisdictions — as well as state and federal courts across the nation — and ruled that a hotel owner’s lawsuit seeking coverage for a COVID-19 shutdown may proceed.
In an opinion released Wednesday, the California 2nd Appellate District panel chided other courts for dismissing similar claims before hearing any evidence submitted by policyholders. The panel said rules that govern California state courts, unlike US district courts, don’t allow judges to dismiss cases based on their personal assessment of how likely a case is to prevail.
“We acknowledge it might be more efficient if trial courts could dismiss lawsuits at the pleading stage based on the judges’ common sense and understanding of common experience rather than waiting to actually receive evidence to determine whether the plaintiff’s factual allegations can be proved,” the opinion written by Presiding Justice Dennis M. Perluss says. “But that is not how the civil justice system works in this state.”
The decision reversed a ruling by the Los Angeles County Superior Court that dismissed a lawsuit against Fireman’s Fund Insurance Co. filed by the owner of the Marina Pacific Hotel and Suites in Venice. The appellate court noted that the policy purchased by the owner included coverage for communicable diseases, which is not the case in many of the hundreds of insurance disputes that have been dismissed at preliminary stages, called a demurrer in California.
However, the opinion specifically disputed a ruling by another 2nd Appellate District panel that found the coronavirus cannot cause a direct physical loss or damage and sustained the dismissal of a lawsuit filed by United Talent against Vigilant Insurance Co.
“We are not authorized to disregard those allegations when evaluating a demurrer, as the court did in United Talent, based on a general belief that surface cleaning may be the only remediation necessary to restore contaminated property to its original, safe-for-use condition,” the opinion says.
Three other California appellate panels have affirmed the dismissal of COVID-19 business-interruption lawsuits, as have appellate courts in nine states and state supreme courts in Iowa, Massachusetts, and Wisconsin, according to a litigation tracker maintained by the University of Pennsylvania.
Until now, the Louisiana 4th Circuit Court of Appeals had issued the only appellate court ruling in favor of a policyholder. In a 3-2 decision, it reversed the trial court and granted a declaratory judgment finding that a Lloyd’s of London syndicate owes business-interruption coverage to a New Orleans restaurant owned by Cajun Conti. That decision has been appealed.
The business that owns the Marina Pacific, Hotel Erwin, Venice Windward and Larry’s restaurant argued that the communicable disease coverage included in the Fireman’s Fund coverage requires coverage for income lost because of public health orders that required closure of all non-essential California businesses in March 2020. The appellate court did not decide that the owner is correct, only that it is premature to dismiss the claim.
The opinion takes issue with a common finding by the dozens of appellate courts that have heard similar claims; that the coronavirus cannot cause a direct physical loss or damage. The panel said the policy issued to the hotels’ owner specifically calls for coverage for any direct physical loss or damage caused by a “communicable disease event.”
“This language explicitly contemplates that a communicable disease, such as a virus, can cause damage or destruction to property and that such damage constitutes direct physical loss or damage as defined in the policy,” the opinion says.
The plaintiff submitted evidence that SARS-CoV-2 can adhere to surfaces and survive up to 28 days. Also, multiple employees at Hotel Erwin tested positive for COVID-19 and public health officials ordered that the premises be “evacuated, decontaminated or disinfected,” the opinion says.
Mark Friedlander, director of the Insurance Information Institute, said the appellate court’s ruling does not mark any trend. Courts continue to rule against policyholders in COVID-related business-interruption claims “nearly 100% of the time because there is no ‘physical loss present.'”
“About a third of U.S. businesses carry business-interruption coverage,” he said in an email. “These policies are not generally priced to provide communicable disease coverage. Even if a policy includes some form of a communicable disease rider, which is extremely rare, a claim may be denied if losses are not proven to be directly linked to physical damage.”
Plaintiffs’ attorneys are hoping that appellate courts will turn the tide in favor of policyholders.
The attorney who won the nation’s only appellate court victory in a COVID-19 business-interruption case, John Houghtaling III in New Orleans, said his client bought a “deluxe policy” that did not exclude viruses for coverage.
Houghtaling said insurers allow coverage communicable diseases in two ways: Some include riders in policies that explicitly call for coverage of communicable diseases, as was the case for the Venice hotel group. Others simply omit from the policy the virus exclusion that the Insurance Service Office created in 2006 after the first coronavirus outbreak, caused by SARS-CoV-1.
Houghtaling said insurers continue to make the disingenuous argument that their policies never were intended to cover a pandemic, when in fact they submitted rate filings to insurance commissioners so they could charge extra for communicable disease coverage. That effort came after the Insurance Service Officer persuaded insurance regulators to approve its standard-form virus exclusion, he said.
“That’s why this is so frustrating that a lot of these cases have been thrown out by the courts without allowing us to do discovery,” he said.
About the photo: A bartender pours a pint at Hotel Erwin, one of the properties that filed a business-interruption claim for COVID-19 losses. Photo courtesy of Hotel Erwin.
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