The California Supreme Court has ruled that COVID-19 does not cause direct physical loss or damage to property in relation to insurance coverage, aligning with most court decisions nationwide.
“The actual or potential presence of the COVID-19 virus on an insured’s premises generally does not constitute ‘direct physical loss or damage to property’ for purposes of coverage under a commercial property insurance policy,” the court stated.
The court noted that while it cannot determine that the COVID-19 virus can never cause direct physical damage to property, its assessment is limited to the allegations put forth by Another Planet LLC, which reflect “the most common allegations in support of pandemic-related property insurance coverage.”
Another Planet’s lawsuit alleged fraud, breach of contract, and bad faith after Vigilant denied coverage. The complaint stated that the virus could remain active on property for up to 28 days, rendering it unusable and constituting physical loss or damage.
A district court dismissed the complaint, agreeing with Vigilant’s argument that Another Planet failed to show that its property was damaged.
Subsequently, the California Second District Court of Appeal ruled that the plaintiff, Marina Pacific Hotel & Suites, “unquestionably” pleaded direct physical damage.
When Another Planet appealed the district court’s decision to the 9th US Circuit Court of Appeals, the appeals court referred the case to the California Supreme Court to resolve the split in the lower courts.
“Under California law, direct physical loss or damage to property requires a distinct, demonstrable, physical alteration to property,” the court said. “The physical alteration need not be visible to the naked eye, nor must it be structural, but it must result in some injury to or impairment of the property as property.”
The court concluded that Another Planet’s allegations, while potentially true, did not meet this standard.
Although the business argued that the virus rendered its property unfit for use, the court noted that the business curtailed operations due to government public health orders, which are legal.
The court added that a property might suffer direct physical loss in the case of a chemical contaminant or noxious odor infiltrating the property, but that was not the situation in this case.
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