California hotel owner seeks insurance proceeds for physical loss caused by COVID-19

In a recent case, the insured parties sued the insurer under a policy with communicable disease coverage. They alleged that various public health authorities ordered that the covered properties be evacuated, decontaminated, or disinfected after numerous employees tested COVID-19-positive.

In Marina Pacific Hotel and Suites, LLC, et al. v. Fireman's Fund Insurance Company, Fireman’s Fund Insurance Company issued a commercial property insurance policy covering a hotel in Venice Beach and a restaurant adjacent to it.

Read more: Does having COVID-19 in company's premises constitute loss for insurance purposes?

In July 2020, the insured parties, who were the owners of the hotel and restaurant, sued the insurance company. The owners made the following allegations:

• COVID-19 not only lives on surfaces but also bonds to them in a way that transforms the properties’ physical condition;
• The virus was present on and continually reintroduced to the surfaces throughout the insured properties, including the hotel lobby, kitchens, employee break room, service elevator, and parking garage;
• The virus was also on their food, bedding, fixtures, tables, chairs, and countertops;
• The insured parties had to wholly or partially close or suspend operations at various times;
• They had to dispose of property damaged by COVID-19;
• They incurred extra expenses for measures to restore and to remediate the air and surfaces of the covered properties.

The insured parties also claimed that, when multiple employees tested COVID-19-positive, public health authorities ordered the hotel’s evacuation, decontamination, or disinfection. The Los Angeles County Department of Health’s Environmental Health Division ordered one specific employee to quarantine.

The insurer filed a demurrer. The trial court sustained the demurrer and dismissed the insured parties’ complaint. It found that COVID-19 could not cause direct physical loss or damage to property for the purposes of insurance coverage.

The California Court of Appeal for the Second District reversed this judgment and remanded the case for the trial court to issue a new order overruling the insurance company’s demurrer. The insured parties should have the opportunity to present their case, the appellate court said.

According to the appellate court, the insured parties sufficiently alleged the following:

• The COVID-19 virus caused direct physical loss or damage – consisting of a distinct, demonstrable, and physical alteration – to the covered properties;
• The loss or damage caused their business to slow down or to cease as they worked to restore or to remediate the covered properties and triggered their business interruption coverage;
• The insurer breached the contract.

Based on the insurance policy’s language for communicable disease coverage, a disease like COVID-19 could cause damage or destruction to property, which would amount to direct physical loss or damage as defined by the policy, the appellate court ruled.

While previous court decisions have dismissed lawsuits seeking coverage for business losses due to COVID-19, those cases claimed loss of use of covered properties because of government-ordered closures relating to the pandemic, the appellate court said. On the other hand, the insured parties in this case alleged that the presence of the virus caused physical damage to covered property, which led to business losses.