Appellate Law Update

October 2022: APPELLATE LAW UPDATE

The following published decision may be of interest to attorneys practicing insurance law:

CALIFORNIA COURT OF APPEAL

Trial court erred in denying leave to amend in connection with dismissal of COVID-19 business interruption coverage suit where policy covered losses due to communicable disease events.
Amy’s Kitchen, Inc. v. Fireman’s Fund Insurance Company (2022) __ Cal.App.5th ___.

Amy’s Kitchen obtained a comprehensive property insurance policy from Fireman’s Fund that included coverage extensions for communicable disease, loss avoidance, and mitigation. The communicable disease coverage extension stated that Fireman’s Fund would pay for “direct physical loss or damage [to the premises] . . . caused by or resulting from a covered communicable disease event,” defined as an event in which public health authorities mandate decontamination, evacuation, or disinfection of infected premises. The loss avoidance and mitigation coverage extension also required Fireman’s Fund to pay “necessary expense” that the insured paid to “protect, avoid, or significantly mitigate potential covered loss or damage” that threatened Amy’s. After Amy’s confirmed several COVID-19 cases on its premises and incurred costs to clean, disinfect, and mitigate the contamination, as required by the county health authorities, it sought coverage from Fireman’s Fund.  Fireman’s Fund denied coverage.  In the subsequent coverage suit, the trial court sustained Fireman’s Fund’s demurrer without leave to amend, reasoning that Amy’s failed to allege “direct physical loss or damage to Property.”

The California Court of Appeal, (First Dist., Div. Four) reversed.  The language of Fireman’s Fund’s policy here differed from the language analyzed in the prior cases holding that COVID-19 business closures did not involve “direct physical loss of or damage to property.”  In the context of a policy that extended to cover costs incurred to remediate a premises affected by a communicable disease event, a lay person would read “direct physical loss of or damage” to the premises to include the presence of a communicable disease that required mitigation measures.  While Amy’s complaint did not allege a specific public health authority order requiring remediation or decontamination of its premises, the trial court should have allowed leave to amend on that issue.

See also Tarrar Enterprises, Inc. v. Associated Indemnity Corp. (2022) __ Cal.App.5th __ [First Dis., Div. Two] [Trial court erred in denying leave to amend COVID-19 business interruption coverage suit to permit insured to allege “physical loss of or damage to property” under Marina Pacific Hotel & Suits, LLC v. Fireman’s Fund Ins. Co. (2022) 81 Cal.App.5th 96].

This e-Bulletin was prepared by Emily V. Cuatto, Certified Appellate Specialist and Partner of Horvitz & Levy LLP. Ms. Cuatto is a member of the Insurance Law Standing Committee of the Business Law Section of the California Lawyers Association.