State high court asked to rule on business interruption dispute

A hotel operator asked the California Supreme Court to let it bypass appellate court to receive an immediate ruling on an open question at the heart of over 1,000 similar lawsuits across the country: What constitutes physical loss or damage in a coronavirus-related business interruption insurance suit?

"We thought the combination of the legal issues, the business and human factors, and frankly the effect on the court is so substantial that it warranted the California Supreme Court, at least having the opportunity to weigh in," the plaintiff's counsel, Scott P. DeVries Hunton Andrews Kurth LLP, said in an interview Tuesday.

Filed in the state high court Friday, his petition asks the court to review, on an expedited basis, an August ruling by a Monterey judge, dismissing petitioner's business interruption coverage lawsuit against California Mutual Insurance Co. The appeal is pending before the 6th District Court of Appeal in San Jose. The Inns by the Sea v. California Mutual Insurance Co., is believed to be the first business interruption insurance case to reach a decision.

Representing Mutual Insurance, Ryan Z. Keller of Hayes Scott Bonino Ellingson Guslani Simonson & Clause LLP, said Tuesday he plans to oppose the motion, and expects to argue that the petition should go through the normal judicial process.

"Regardless of the forum, we think that there will be a finding that there is no direct physical loss, that this is a situation where they closed because of the shelter in place orders, not because of property damage, not because they have a tangible alteration to property," Zeller said.

Over 1,000 business interruption lawsuits have been filed against insurance companies in the U.S. since the pandemic hit in March and governments ordered businesses to close and workers and customers to remain at home.

With businesses continuing to close and no federally backed insurance product available to specifically cover COVID-19, business owners and insurers have been forced to litigate over whether existing business interruption insurance should cover losses due to the virus.

Although not all disputed policies are the same, judges are being asked to address a few common questions in motions to dismiss: Do government closures trigger coverage? What constitutes "physical loss or damage" to property? Do any virus exclusions apply?

So far, more suits than not have been dismissed.

Insurers have almost unanimously denied every claim, arguing that COVID-19 does not constitute "direct physical loss or damage" because the virus does not, like a fire or flood, physically alter or tangibly destroy the property. Plaintiffs' arguments have differed in some key places depending on the policy at issue.

DeVries argues the discussion surrounding the physical loss question should not be whether there is physical loss or not but rather could policyholders reasonably expect their policies to cover the virus. The Inns by the Sea v. California Mutual Insurance Co., 20CV001274 (Monterey Sup. Ct., filed Aug 4, 2020)

The petition asked, "Could a policyholder reasonably expect the standard form 'physical loss of or damage to' provision in an 'all risk' property insurance policy to cover business interruption losses caused by COVID-19 (and the governmental orders resulting therefrom) because COVID-19 has caused the loss of safe and intended use of insured property?"