By Max H. Stern and Holden Benon
The first California state appellate decision on COVID-19 Business Interruption coverage is now in the books, and it’s one more victory for insurers. In The Inns by the Sea v. California Mutual Ins. Co., Case No. D079036 (Cal. Ct. App. 4th Dist., Div. 1, Nov. 15, 2021), the California Court of Appeal for the Fourth District found there was no coverage, notwithstanding the absence of a virus exclusion in the relevant policy. The court’s 36-page opinion provides a thorough and careful analysis of several important COVID-19-related business interruption issues, some highlights of which we summarize below.
Inns-by-the Sea operates lodges in the California coastal communities of Carmel and Half Moon Bay. In March of 2020, Inns closed its facilities in response to shutdown orders issued by Monterey and San Mateo counties. Then, Inns made a claim under its property insurance policy for its claimed loss of business income caused by the pandemic. (For more background on business interruption insurance, refer to one of our earlier blog posts on this topic.) Inns’ insurer denied coverage, and Inns filed suit in Monterey Superior Court.
The resulting appeal was heard by the Fourth Appellate District, Division 1, in San Diego (after a workload re-assignment). Notably, the court found that, even assuming Inns’ complaint described the presence of coronavirus on the property, there was a lack of causal connection between Inns’ suspension of its business and the alleged physical presence of virus. The court focused on the policy’s standard language that stated that the suspension of the insured’s operations “must be caused by direct physical loss of or damage to property at [Inns’] premises . . .” (Emphasis added.) The court observed that the county shutdown orders were not issued in response to any particular presence of the coronavirus on Inns’ premises; instead, they were issued to slow the spread of coronavirus that was present throughout Monterey and San Mateo Counties. Because Inns’ losses were caused by the counties’ shutdown orders, the court determined that the suspension of Inns’ operations was not caused by a direct physical loss or damage to property, and thus there was no coverage for its losses.
The court also held that 
the absence of a virus exclusion in the policy did not impact the meaning of “direct physical loss or damage to” property. Inns had argued that the fact that the insurer did not add a virus exclusion to its policy was evidence that the policy actually intended to provide coverage for virus losses, because the insurer did not “take advantage of more specific wording that was available to it.” The court rejected this argument, reciting the general principle that, under California law, coverage is defined first by the insuring clause, and when an occurrence is clearly not included within the coverage afforded by the insuring clause, it need not also be specifically excluded. The court also pointed to precedent from courts nationwide holding that the absence of an exclusion, standing alone, does not imply coverage.
As intermediate appellate court decisions from any District are binding on all California state trial courts, Inns by the Sea represents an important development in California COVID-19 Business Interruption coverage law and another addition to the increasing number of appellate rulings that favor insurers.