Narrowly Construing COVID-19 Business Interruption Insurance Coverage
Narrowly Construing COVID-19 Business Interruption Insurance Coverage
By David A. Gauntlett*
A 4th District, Division 1, California Court of Appeals panel, in The Inns by The Sea v. California Mutual Ins. Co.[1], decided that civil authority coverage cannot be implicated because “bodily injury” or “property damage” was not the triggering event, but rather the authority’s announcement of a shutdown in mid-March of 2020. In so concluding, the court ignored the fact that the claims of “bodily injury” or “property damage” were caused by the airborne virus which contaminates physical surfaces in the premises and surrounding property. The court’s analysis emphasizing the non-event essential espouses that the egg came into life, full force, without the chicken.
State Courts Have Determined That “Physical Injury” Need Not Arise
A number of state law cases nationwide have determined that “physical injury” need not arise to trigger COVID-19 coverage. For example, in in P.F. Chang’s China Bistro, Inc. v. Certain Underwriters at Lloyd’s of London[2], a California Superior Court rejected the insurers’ argument that the coronavirus cannot cause “direct physical loss of or damage to property” but is a mere economic loss. The court reasoned that:
“The requirement of “physical loss of or damage to” property has been met in one or more ways… (i) the actual or potential presence of virus in the air…in the vicinity of P.F. Chang’s restaurants or other qualifying buildings; (ii) the necessity of modifying physical behaviors through the use of social distancing…, in order to reduce or minimize the potential for viral transmission; (iii) government orders requiring that physical spaces such as P.F. Chang’s dining rooms be shut-down; and/or (iv) the need to mitigate the threat or actual physical presence of virus on door-handles, tables, silverware, surfaces, in heating and air conditioning systems and any other of the multitude of places virus has or could be found.”[3]
The court applied a broad interpretation of the policy language “any physical loss of…property” to include restricted access to physical property and implicate coverage.[4]
In those state court decisions that were not modified or rejected by State Court of Appeals, contamination claims, like those presumed to arise in The Inns by The Sea, were held to trigger coverage. For example, a Pennsylvania Superior Court, in SWB Yankees, LLC v. CNA Fin. Corp.[5], rejected the insurers’ arguments to deny coverage on two grounds. First, the court determined that in stopping business operations due to the “continuous presence of the coronavirus” rendering its covered property “unsafe” and “unfit for its intended use”, the plaintiff adequately alleged “physical loss or damage” to its property for purposes of business interruption coverage. Second, the court reasoned that while the policy had 30 exclusions including those addressing “contaminants”, “pollutants”, “fungi” and “microbes”, none of which included an exclusion for losses caused by a “virus” and if the insurers, as the sole drafters of the policy” intended to exclude coverage for “viruses” it would have addressed it.
The Inns by The Sea Analysis is Inconsistent with California Coverage Law Principles.
The Inns by The Sea court’s ruling flowed from the premise that the alleged presence of COVID-19 in proximity to The Inns was not the “cause” for which The Inns premises were deemed unsuitable for their intended purpose, but rather the Civil Order. Acknowledging that an airborne agent could cause an insured to suspend operations because of direct physical damage to property[6] and that “case law supports the view that in certain circumstances an invisible substance or biological agent might give rise to coverage because it causes a policyholder to suspend operations due to direct physical loss of or damage to property,”[7] the court determined, nonetheless, that the insurance coverage complaint it reviewed did not adequately assert these claims.
The court reasoned that:
“Inns cannot reasonably allege that the presence of the COVID-19 virus on its premises is what caused the premises to be uninhabitable or unsuitable for their intended purpose. As we have discussed, although Inns loosely states that the Orders were issued “in direct response to the continued and increasing presence of the coronavirus on [Inns'] property and/or around its premises,” a review of the actual text of the Orders reveal that they were issued because the COVID-19 virus was present throughout San Mateo and Monterey Counties, not because of any particular presence of the virus on Inns' premises.”[8]
Civil Authority Orders do not, however, necessarily encompass presumptive findings of “direct physical loss of” or “damage to property” within the premises limiting the policy’s coverage to express stated findings in a legislative intent finding regarding other premises too narrowly construe the limiting elements of the policy coverage which as a policy limitation must be narrowly interpreted against the insurer as the drafter of the policy. The court views one inference from the legislative statement that the pronouncement’s goal was “to limit the transmission among people to the greatest extent practicable.”[9] That goal, however, is fully consistent with concerns about contamination at “other premises” locations in Monterey County that the shutdown order impacted to trigger coverage for The Inns by The Sea. A California court, in XI Specialty Ins. Co. v. AIG Specialty Ins. Co.[10], criticized an equally overbroad construction of a limitation on coverage in a policy exclusion and emphasized, “we do not rewrite any provision of a contract…for any purpose.”[11]
Here, a narrow construction of the policy limitation, “off premises” condition would fit it met and the coverage not inconsistent with the language of the county shutdown order.[12] The court, in XI Specialty, distinguished the fact scenario, in Acceptance Ins. Co. v Syufy Enter, to explain the connection between the work environment and the job to be “more than incidental, in that [the employee] could not have done the job without passing through the hatch.”[13] Similarly, here, the shutdown order presumes “off premises” contamination based on the reasons for the shutdown order making “bodily injury” or “property damage” “more than incidental” as employees and customers would inherently risk exposure and transmission by interacting within the premise.
The court’s rationale for excluding the presence of COVID-19 at the premises as a “cause” of the suspension of operations because the Civil Orders were a superseding cause is incorrect as it fails to take into account the governing doctrine of reasonable expectations. Under applicable California law, this rationale violates the well-established broad coverage-narrow exclusion principle. As explained, in XI Specialty, in interpreting the narrow scope of the “arising out of” policy exclusion, the court stated that “[u]nder California law, ‘policy exclusions are strictly construed’” against the insured[14]. The presence of COVID-19 infected individuals in the community evidences “bodily injury” and their viral transmissions, including by airborne means, are evident factors that did not render these coverage triggering events incidental to the Civil Authority order as the court’s narrowly emphasize about the county ordinances. Recitals are not a superseding cause, but, instead, evidence ambiguity that must be resolved in the insured’s favor, consistent with the insured’s reasonable expectations.[15]
Conclusion
The evolving debate on insurance coverage for COVID-19 injury has now progressed to appellate courts nationwide. The State supreme courts have yet to weigh in on these issues. Nonetheless, a deadline looms for many policyholders as the two-year statute of limitation embedded in many standard issued Property policies that require “suits” from the first civil shutdown orders in mid-March 2020 will approach in 2022. Capitalizing on thoughtful briefing nationwide, policyholder coverage counsel is formulating attacks on decisions that will more thoroughly address pertinent issues to address the array of Court of Appeal tortious conclusions.
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* David A. Gauntlett is a principal of Gauntlett & Associates. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] The Inns by The Sea v. California Mutual Ins. Co., 2021 Cal. App. LEXIS 956 (Cal. November 15, 2021)
[2] P.F. Chang’s China Bistro v. Certain Underwriters at Lloyd’s of London, 2021 Cal. Super. LEXIS 1180 (Feb. 4, 2021)
[3] Id. at *2
[4] See also, Ungarean v. CNA, 2021 Pa. Dist. & Cnty. Dec. LEXIS 2, *17-18 (March 22, 2021) (In interpreting the policy language “direct physical loss of… property” to implicate coverage for the insured, the court concluded that “[the] shutdown orders and COVID-19 directly impacted the way businesses used physical space… [and] the spread of COVID-19 and social distancing measures caused Plaintiff…to physically limit the use of property.”)
[5] SWB Yankees, LLC v. CNA Fin. Corp., Case No. 2020-CV-2155 (Common Pleas Pa. August 5, 2021)
[6] Id. at *23 (“Perhaps the restaurant could successfully allege that the virus created physical loss or damage in the same way some chemical contaminant might have.”)
[7] Id. at *34, fn.21
[8] Id. at *20-21
[9] Id. at *37
[10] XI Specialty Ins. Co. v. AIG Specialty Ins. Co., 2021 U. S. Dist. LEXIS 143270 (C. D. Cal. 2021)
[11] Id. at *58 (citing Cf. Rosen v. State Farm Gen. Ins. Co., 30 Cal. 4th 1070, 1073 (2003))
[12] Id. at *60
[13] Id. at *56
[14] Id. at *53
[15] Id. at *61 (citing Safeco Ins. Co. v. Robert S., 26 Cal. 4th 758, 763 (2001))