Calif. Appellate Ct. Revives Suit Seeking Coverage for Income Lost During COVID Shutdown

By Jim Sams | October 3, 2023

A California appellate court ruled again Monday that the SARS-CoV-2 virus can cause direct physical loss or damage to property, notching a rare policyholder for a real estate business seeking coverage for business income lost because of the COVID-19 pandemic.

A panel of the 2nd District of the Court of Appeal reversed a decision by the Los Angeles County Superior Court to dismiss a breach-of-contract and bad faith lawsuit filed by JRK Property Holdings against 13 insurers that together provided business-interruption coverage for up to $250 million.

The panel ruled in an unpublished portion of its opinion that the COVID virus can cause a direct physical loss or damage, a finding that it has made in previous cases. A published portion of the ruling found that a pollution exclusion in the insurance policy did not bar coverage for a loss caused by viruses.

On the other hand, the panel upheld the Superior Court’s dismissal of complaints against two insurers — RSUI Indemnity Co. and Evanston Insurance Co. — that had pathogen exclusions in their policies. It remanded JRK’s lawsuit against its other 11 insurers back to the trial court.

JRK owned 100 hotel and residential properties in 22 states when the coronavirus forced a shutdown of nonessential businesses in early 2020. In May 2021, the company filed a lawsuit against its insurers after they failed to pay its claim for income lost because of those shutdowns, alleging breach of contract and bad faith.

JRK said in its civil complaint that it had 178 confirmed cases of COVID-19 at its residential properties. At least 60 of its residential properties had at least one positive test result from a resident. The company alleged “it was statistically” certain that the COVID virus was present on all of its properties.

While most state and federal courts have ruled that a virus cannot cause a direct physical loss or damage that is compensable under a commercial property insurance policy, California appellate courts have been divided on the question.

The 2nd District Court of Appeal ruled in several cases that SARS-CoV-2 can cause a direct physical loss or damage if it is physically present on a property. The panel cited previous 2nd District rulings that found the virus that causes COVID can cling to surfaces for up to 28 days and cannot be removed by simple cleaning.

“JRK similarly alleged the COVID-19 virus ‘hangs in the air and attaches to property for extended periods of time,” the opinion says. “Studies have shown that fomites—physical surfaces that promote infection—can become infectious on a whole range of surfaces, including stainless steel, wood, paper, plastic, glass, ceramic, cardboard, and cloth, many of which are used throughout JRK’s properties …”

The opinion notes that the California Supreme Court will eventually have the last word when it rules in three appeals that it has accepted for review. But in the meantime, the opinion says, JRK pleadings are sufficient to survive a motion to dismiss, called a demurrer in California. The appellate panel directed the 11 insurers whose dismissal motions were reversed to pay JRK’s legal costs on appeal.

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