Earlier today, the Supreme Court of California issued a long-awaited opinion answering an insurance coverage question that had been certified to it by the Ninth Circuit Court of Appeals in Another Planet Entertainment, LLC v. Vigilant Ins. Co. (Cal. May 23, 2024, No. S277893) 2024 WL 2339132: "Can the actual or potential presence of the COVID-19 virus on an insured's premises constitute 'direct physical loss or damage to property' for purposes of coverage under a commercial property insurance policy?" (Another Planet Entertainment, LLC v. Vigilant Insurance Co. (2022) 56 F.4th 730, 734.)
"[T]he question [arose] in the context of a civil lawsuit filed by Another Planet Entertainment, LLC (Another Planet) against its property insurer, Vigilant Insurance Company (Vigilant). Another Planet operates venues for live entertainment. It suffered pandemic-related business losses when its venues closed, and Vigilant denied Another Planet's subsequent claim for insurance coverage. Another Planet filed suit in federal district court, alleging that the actual or potential presence of the COVID-19 virus at its venues or nearby properties caused direct physical loss or damage to property and triggered coverage under its insurance policy. The district court granted Vigilant's motion to dismiss for failure to state a claim, and Another Planet appealed. According to the Ninth Circuit, the issue on appeal "[was] whether [Another Planet's] allegations, if taken as true, were sufficient to show 'direct physical loss or damage to property' as defined by California law.' (Another Planet, supra, 56 F.4th at p. 731.) Because the Ninth Circuit concluded that resolution of this question of California law could determine the outcome of the case pending before it, the Ninth Circuit certified the question to [the Supreme Court of California.]" (Another Planet, 2024 WL 2339132, at *1.)
The Supreme Court "conclude[d], consistent with the vast majority of courts nationwide, that allegations of the actual or potential presence of COVID-19 on an insured's premises do not, without more, establish direct physical loss or damage to property within the meaning of a commercial property insurance policy. Under California law, direct physical loss or damage to property requires a distinct, demonstrable, physical alteration to property. 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." (Ibid.) The Supreme Court noted that "the mere fact that a property cannot be used as intended is insufficient on its own to establish direct physical loss to property. Similarly, the fact that a business was forced to curtail its operations, in whole or in part, based on pandemic-related government public health orders is likewise insufficient. The restrictions of a government public health order are legal, i.e., intangible, in nature. They do not constitute direct physical loss or damage to property." (Id. at *2).
The Court went on to explain, "In rare situations, a property may suffer direct physical loss where it is not damaged in a conventional sense, including where a chemical contaminant or noxious odor infiltrates the property and renders it effectively unusable or uninhabitable. In such a case, the contaminant or odor may cause direct physical loss, but only where the source of the property's unusability or uninhabitability is sufficiently connected to the property itself. This situation may arise when the effect of the contaminant or odor is so lasting and persistent that the risk of harm is inextricably linked or connected to the property. Another Planet's allegations regarding the effect of the COVID-19 virus on property fail to meet this standard as well." (Ibid.)
The Court also explained that "[w]hile we conclude Another Planet's allegations are insufficient, and it appears that such allegations represent the most common allegations in support of pandemic-related property insurance coverage, we cannot and do not in this proceeding determine that the COVID-19 virus can never cause direct physical loss or damage to property. Our contemplation of the virus and the affected property is necessarily limited by Another Planet's factual allegations. Nonetheless, given the prevalence of similar circumstances, we answer the Ninth Circuit's question as follows: No, the actual or potential presence of COVID-19 on an insured's premises generally does not constitute direct physical loss or damage to property within the meaning of a commercial property insurance policy under California law." (Ibid.)
Lastly, the Court explicitly "disapprove[d] San Jose Sharks, LLC v. Superior Court, supra, 98 Cal.App.5th 158; JRK Property Holdings, Inc. v. Colony Ins. Co., supra, 96 Cal.App.5th 1, review granted; Shusha, Inc. v. Century-National Ins. Co., supra, 87 Cal.App.5th 250, review granted; and Marina Pacific Hotel & Suites, LLC v. Fireman's Fund Ins. Co., supra, 81 Cal.App.5th 96, to the extent they are inconsistent with this opinion." (Id. at *23).
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