News & Insights

Litigation Attorney Salvatore Padula Breaks Down Trends in Insurance Coverage Litigation

After the pandemic and associated government regulations caused significant economic disruptions and losses across the nation, business owners’ efforts to obtain relief from the financial burden of the pandemic included seeking insurance coverage for their losses. Making claims for property losses is never a simple process, and COVID-19 raised a slew of new questions and challenges related to such coverage.

A common target of such efforts has been coverage under commercial property insurance policies for loss of income caused by physical loss or damage to the insured’s premises, and/or “Civil Authority” coverage to recover income lost as a result of COVID-19 related government shutdowns. Not surprisingly, insurers have resisted such claims. Business interruption coverage is often a subset of general property insurance policies. Typically, coverage under standard business interruption policies is only triggered by physical damage to insured property caused by a covered peril resulting in a quantifiable business interruption loss. Much of the dispute over business interruption coverage for COVID-19 losses has revolved around the interpretation of the “direct physical loss of or damage to” language of the insuring clause.

More than two years into the pandemic, courts are still assessing the extent to which coverage for COVID-19 claims are available under commercial property insurance policies. Nationally, relatively few cases have been litigated through appeal, and finding a through line between cases is complicated by variations between the applicable laws of differing jurisdictions, the paucity of controlling authority and the differing factual circumstances and contractual language at issue. Nevertheless, there appears to be a growing judicial skepticism toward insurance claims for COVID-19 related property damage and loss of income claims. With this in mind, both policyholders and carriers should note some emerging trends in insurance coverage litigation.

As of August 1, 2022, state and federal trial courts have granted motions to dismiss in 788[1] cases involving insurance claims for COVID-19 related loss of business income. Only 71 motions to dismiss have been denied. Similarly, courts granted defendant insurers summary judgment in 79 cases compared to 13 grants of summary judgment in favor of plaintiff policyholders. Only two cases have proceeded through trial, and the verdict in both cases was for the insurer. California courts have followed the national trend toward rejecting property insurance claims for business interruption caused by COVID-19. Three California appellate cases have addressed the question head on thus far, and all three were decided in favor of the defendant insurer.

In Inns-by-the-Sea v. California Mutual Ins. Co. (2021) 71 Cal.App.5th 688, the Fourth Appellate District upheld a successful demurrer to an insured’s complaint seeking coverage for loss of business income suffered by four hotels during a period of government-mandated closures ordered in response to the pandemic. Plaintiff sought coverage under the “direct physical loss or damage” clause in the policy, but the court concluded the complaint failed to plead any loss of income due to direct physical loss or damage to the insured property, noting the government shut-down order that caused the loss of income was issued in response to the presence of COVID-19 in San Mateo and Monterrey Counties generally and that the physical property insured by the policy remained unaffected by the pandemic. Plaintiff also contended that the “Civil Authority” clause afforded coverage as encompassing losses “caused by action of the civil authority that prohibits access to the described premises due to direct physical loss or damage to property, other than the described premises.” The court, however, held that the plain language of the policy required the “Civil Authority” be acting in response to property damage and that the orders in question were issued in response to the general presence of the virus.

In United Talent Agency v. Vigilant Insurance Company (2022) 77 Cal.App.5th 821, the Second Appellate District was presented with similar claims and similar contractual language to those in Inns-by-the-Sea. Plaintiff talent agency sued to establish coverage under both the “Business Income” and “Civil Authority” clauses of its policy. Both clauses required the loss be incurred as a result of “direct physical loss or damage” to property. The Court of Appeal upheld the trial court’s order sustaining defendant’s demurrer on the basis that the complaint failed to allege any direct physical damage to the property, holding that “temporary loss of use of the property due to pandemic-related closure orders, without more, does not constitute direct physical loss or damage.”

Musso & Frank Grill Co., Inc. v. Mitsui Sumitomo Ins. USA, Inc. (2022) 77 Cal.App.5th 753, presented a similar scenario as the two cases discussed above. The insured restaurant owner was denied coverage for a claim of lost income during the time business operations were suspended as a result of the government. The Second Appellate District upheld the trial court’s sustaining of defendant insurer’s demurrer, reaching the same conclusion the complaint failed to state a viable cause of action because the “Business Income” and “Civil Authority” provisions in the subject policy required direct physical loss. The Court of Appeal also held that even if the plaintiff could plead a direct physical loss, the policy contained a virus exclusion clause that would have prevented coverage.

Given this developing body of California precedent, it is increasingly clear that insureds asserting claims for loss of business income during periods of government-ordered shutdown face an uphill battle.  

The cases do, however, leave open the possibility that under the right circumstances, COVID-19 losses could be covered. Specifically, Inns-by-the-Sea considered a hypothetical situation in which a restaurant was forced to close, not as part of generalized stay at home orders designed to curb the spread of the virus but because the virus had been detected on the restaurant’s premises. Under such circumstances the court opined it might be possible for the restaurant to assert a viable claim for coverage of lost income during the period in which the restaurant conducted sanitization work. Prudent policyholders will recognize this is only dicta regarding a theory of coverage; as noted by the court in United Talent, “a hypothetical scenario is not a statement of California law.” Nonetheless, legal practitioners – and property owners – should remain vigilant as this area of insurance law continues to evolve – and as business litigation resulting from COVID-19 related causes escalates.

[1] Covid Coverage Litigation Tracker – An insurance law analytics tool (upenn.edu)

The article by Salvatore Padula was published in The Daily Journal here (subscription required).

About Crosbie Gliner Schiffman Southard & Swanson LLP (CGS3)

CGS3 is a new generation commercial real estate law firm with practice areas covering the full commercial real estate life cycle, including finance, acquisition/disposition, entity formation, tax, development, land use, leasing, distressed asset workouts and dispute resolution. Earning a reputation as one of California’s leading commercial real estate law firms, CGS3 has recruited some of the state’s top real estate attorneys from both large corporate firms and senior in-house positions. CGS3 is located at 12750 High Bluff Drive, Suite 250, San Diego, California 92130 and 10940 Wilshire Boulevard, Suite 2200, Los Angeles, California 90024. For more information, visit http://www.cgs3.com.