Review of 2022 California insurance decisions

California appellate courts addressed several key insurance issues in 2022. The most significant may be a recent decision by the California Supreme Court.

In Yahoo Inc. v. National Union Fire Insurance Co., 14 Cal. 5th 58 (2022), the court addressed whether language in a general liability policy covering injuries "arising out of ... [o]ral or written publication, in any manner, of material that violates a person's right of privacy" covers right-of-seclusion violations alleged under the Telephone Consumer Protection Act of 1991. The court held that it does.

In doing so, the court restated the rules governing insurance policy interpretation. It noted: "Courts will favor an interpretation that gives meaning to each word in a contract over an interpretation that makes part of the writing redundant."

The court then explained that when the standard rules of interpretation do not resolve an ambiguity, "'we interpret [the language] to protect "the objectively reasonable expectations of the insured."'" The court held that if there is an argument that language is ambiguous, then a court "'must first attempt to determine whether coverage is consistent with the insured's objectively reasonable expectations.'" If the language is still deemed to be ambiguous, then "unresolvable ambiguities" are to be interpreted "in favor of the insured."

The court also addressed what happens when the insured is "sophisticated" and bargains over the terms of coverage. The court held that "even in the case of a manuscript endorsement, ambiguities should be resolved in favor of coverage when the specific ambiguous language 'is adopted verbatim from standard form policies used throughout the United States.'"

California courts of appeal addressed a coverage issue being addressed by hundreds of courts across the country: Whether property insurance policies protecting against business income losses cover losses associated with the COVID-19 pandemic. At this point there are five published California court of appeal decisions. While the courts seemingly agreed that the closure and stay-at-home orders alone do not trigger coverage under property insurance policies, they differed whether coverage is afforded when the insured alleged that the presence of SARS-CoV-2 on its premises caused losses.

In Inns by the Sea v. California Mutual Insurance Co., 71 Cal. App. 5th 688 (2021), review denied (March 9, 2022), the court rejected coverage for losses caused by civil authority orders. But it recognized that coverage might be available if SARS-Cov-2 was present on insured property: "[I]t could be possible, in a hypothetical scenario, that an invisible airborne agent would cause a policyholder to suspend operations because of direct physical damage to property. However, the complaint here simply does not describe such a circumstance because it bases its allegations on the situation created by the Orders."

In Musso & Frank Grill Co. v. Mitsui Sumitomo Insurance USA Inc., 77 Cal. App. 5th 753 (2022), review denied, the court said: "At this point, there is no real dispute. Under California law, a business interruption policy that covers physical loss and damages does not provide coverage for losses incurred by reason of the COVID-19 pandemic." But it did so as to an insured that alleged its losses resulted from the orders of civil authorities.

In United Talent Agency v. Vigilant Insurance Co., 77 Cal. App. 5th 821 (2022), depubl'n denied, the court held: "[T]he presence or potential presence of the virus does not constitute direct physical damage or loss." It also rejected the Inns hypothetical.

In Marina Pacific Hotel & Suites, LLC v. Fireman's Fund Insurance Co., 81 Cal. App. 5th 96 (2022), the court held that there could be coverage if SARS-CoV-2 were present on insured premises because "the insureds have unquestionably pleaded direct physical loss or damage to covered property ... --a distinct, demonstrable, physical alteration of the property ..."

In disagreeing with the United court, the Marina court explained: "[T]he insureds alleged [SARS-CoV-2] not only lives on surfaces but also bonds to surfaces through physicochemical reactions involving cells and surface proteins, which transform the physical condition of the property. ...As a direct result, the insureds were required to close or suspend operations in whole or in part at various times and incurred extra expense as they adopted measures to restore and remediate the air and surfaces at the insured properties." See also Susha Inc. v. Century-Nat'l Ins. Co., Case No. B313907 (Cal. Ct. App. Dec. 14, 2022) (unpublished) (following Marina).

Finally, in Amy's Kitchen, Inc. v. Fireman's Fund Insurance Co., 83 Cal. App. 5th 1062 (2022), the court addressed coverage for costs an insured incurred to clean, disinfect, and test its facilities for the presence of SARS-CoV-2. Unlike the policies in the other cases, here the policy had communicable disease coverage and loss avoidance and mitigation extensions. These provisions obligated the insurer to pay for "direct physical loss or damage to Property Insured caused by or resulting from a covered communicable disease event at a location." The court held that "the need to clean or disinfect infected or potentially infected covered property constitutes 'direct physical loss or damage' of that property within the meaning of the policy."

All the published COVID-19 coverage decisions were rendered before the California Supreme Court's decision in Yahoo. Thus, it remains to be seen how courts will address COVID-19 coverage cases going forward.