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California Appellate Court Rules for Policyholders on COVID Coverage Appeal

On July 13, 2022, the California Second District Court of Appeal issued a published decision reversing a trial court’s dismissal of a policyholder’s COVID-19 coverage claim. In Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Insurance Company, the Court took two remarkable steps in the context of nationwide COVID-19 litigation. First, the Court recognized that courts must accept as true properly alleged facts when deciding a pleading challenge. Second, the Court did not merely recite the long-established rules of construction for insurance policies that apply in California and most states; rather, it followed those rules by engaging with the actual policy language.

These two steps should be commonplace, as they are required by legal standards across the country. But in COVID-19 litigation, trial courts and other appellate courts have repeatedly erred by making factual determinations on pleadings motions, even to the point of ignoring scientists and opining that virus disinfecting and transmission science is a matter of spray cleaners and “common sense.”

Key Findings
First, the Court found that the policyholders had adequately alleged that the COVID-19 virus caused direct physical loss or damage, noting the insured alleged that they were required to “dispose of property damaged by COVID-19 and limit operations at the Insured Properties.” The Court credited as true the complaint allegations that the virus lives on surfaces and was continually reintroduced because of the nature of the pandemic. The Court stated that “the insureds expressly alleged disinfecting affected objects does not repair or remediate the actual physical alteration to property caused by the virus; and the trial court did not take judicial notice of the effectiveness of cleaning as a proposition ‘not reasonably subject to dispute’ pursuant to Evidence Code section 452, subdivisions (g) or (h).”

Second, the Court distinguished two other California appellate decisions rejecting COVID-19 claims (Inns-by-the-Sea and Musso & Frank) because those other decisions addressed complaints that were based on the impact of government closure and quarantine orders and lacked allegations of physical loss or damage.

Third, in a direct disagreement with another panel of the same Second District Court of Appeal, the Court decided it could not find as a matter of law that the COVID-19 virus does not cause loss of or damage to property: “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.” This last point results in a direct conflict between two panels of the same appellate court, setting the stage for potential resolution by the California Supreme Court.

A final, tantalizing issue arose, but was not decided. The policyholder argued that a 1995 appellate decision, MRI Healthcare, was incorrectly decided. That decision held that to establish “direct physical loss or damage” there must be a “distinct, demonstrable, physical alteration” of the property. The MRI court made this finding by relying on extensive quotations from a treatise that contended that this requirement was “widely held,” when in fact it was an invention of an insurance industry author that had no basis in fact or law. Last year, a Policyholder Pulse post and associated law journal article also called out the error in that treatise. The Marina Pacific court noted the issue in detail but concluded that the pleading before it satisfied even the MRI formulation, so that it did not need to decide whether MRI was wrongly decided.

Marina Pacific stands as the first California Court of Appeal decision finding in favor of the policyholder on a COVID-19 business interruption claim. More will follow.


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