California Court Dismisses COVID-19 Business Income Loss Suit

By: Gina Foran

Last week, Judge Birotte Jr. of the Central District of California dismissed a declaratory relief and bad faith action against Travelers Indemnity Company of Connecticut seeking coverage for COVID-19 business income losses. Plaintiff, a Los Angeles-based restaurant significantly impacted by COVID-19, held a policy with Travelers that it alleged provided coverage for COVID-19 losses.

The policy contained three relevant provisions: (1) Civil Authority Coverage; (2) Business Income and Extra Expense Coverage; and (3) a Virus Exclusion. Under both the Civil Authority Coverage section and the Business Income and Extra Expense Coverage section, the insured was entitled to coverage if there were “direct physical loss of or damage to property…” Additionally, the Virus Exclusion provided that Travelers would not pay for “loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

In the suit, the insured argued: (1) that the government-mandated shutdown created Civil Authority coverage; (2) it was entitled to coverage because the shutdown order caused “physical loss” of its property; and (3) the Virus Exclusion was inapplicable because the physical loss resulted from the government shutdown order, and not the coronavirus. Travelers argued that the insured was not entitled to coverage under either the Civil Authority or Business Income and Extra Expense Coverage sections and that, in any event, the Virus Exclusion definitively barred coverage for the insured’s claim.

The court first held that plaintiff failed to show that there was coverage under either the Civil Authority or Business Income and Extra Expense provisions. Quoting extensively from Central District Judge Steven Wilson’s opinion in a similar case, the court reasoned that “[u]nder California law, losses from inability to use property do not amount to ‘direct physical loss of or damage to property’ within the ordinary and popular meaning of that phrase. Physical loss or damage occurs only when property undergoes a ‘distinct, demonstrable, physical alteration.'” Detrimental economic impact was insufficient. Judge Wilson likened the insured’s argument in that case to arguments that loss of use of an MRI machine equated to a direct physical loss and purchasing counterfeit wine amounted to physical loss. Disagreeing with such assertions, Judge Wilson concluded that there was no alleged physical alteration or damage to the property and, instead, only alleged interference with the use or value of property. While plaintiff in that case “appeared to suggest” that its business hardship resulted from the physical action of COVID-19, a virus that may stay on surfaces for up to 28 days, Judge Wilson concluded that plaintiff did not allege that the virus infected or stayed on the surfaces of its property.

Based on Judge Wilson’s reasoning, Judge Birotte similarly concluded that the insured did not suffer directly physical loss of its property. Judge Birotte also reasoned that the insured maintained access to the premises even after the shutdown order was issued.

Finally, even if the insured could show that the insuring agreement was triggered, the court held that the Virus Exclusion conclusively barred coverage for the claim, as it “clearly and unequivocally exempted ‘loss or damage caused by or resulting from any virus.'”