Ninth Circuit Asks California Supreme Court to Clarify COVID-19-related Insurance Issue

Ninth Circuit Asks California Supreme Court to Clarify COVID-19-related Insurance Issue

Case: Another Planet Entertainment, LLC v. Vigilant Insurance Company, Case/Docket No. 21-16093

Ninth Circuit Panel Composition: Bea (Bush); Christen (Obama); and Ikuta (Bush)

Result: Ninth Circuit certifies question to the California Supreme Court.

Summary:

The Ninth Circuit recently grappled with a California insurance case involving claims made during the COVID-19 pandemic, specifically the extent to which insurance companies are required to provide coverage for losses sustained during the pandemic. But because of a circuit split in the California appellate courts, the panel sought guidance from the California Supreme Court: does 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, an event promoter and venue operator that owns venues in California and Nevada, sued Vigilant Insurance Company for breach of contract, bad faith, and fraud when the insurance company denied coverage for business income losses Another Planet sustained following government closure mandates during the COVID-19 pandemic. Alleging that the COVID-19 virus was present on the premises before the mandates were issued or would have been present had they not closed their venues in compliance with the mandates, Another Planet sought coverage under multiple provisions of its commercial property insurance policy that required “direct physical loss or damage to property” to trigger coverage.

The threshold issue in this case is whether Another Planet’s allegations were sufficient to show “direct physical loss or damage to property” under the definition of California law. The district court allowed Another Planet to amend their initial Complaint once, but ultimately dismissed the Complaint, ruling that it “seemed unknowable” whether the COVID-19 virus was actually present on the premises of Another Planet’s venues.

On appeal, the Ninth Circuit looked to California law to interpret the policy at hand. But because the California Supreme Court had yet to consider the issue, the Ninth Circuit sought guidance from the state’s intermediate appellate courts.

Yet, in this case, two different divisions of the Second District of the California Court of Appeal have issued conflicting decisions related to allegations similar to Another Planet’s, and whether those allegations constitute a viable claim for “direct physical loss or damage to property.”

Two months after the district court’s dismissal of Another Planet’s Complaint, Division 4 of the Second District of the California Court of Appeal decided United Talent Agency v. Vigilant Insurance Co. The claims for coverage under insurance provisions in that case were identical to those in Another Planet’s policy. The Court of Appeal held that the trial court properly sustained Vigilant’s demurrer and concluded that United Talent Agency didn’t establish “that the presence of the virus constitutes physical damage to insured property.” In sustaining the demurrer, the trial court reasoned that the presence of COVID-19 is only a “short lived” contamination that can be fixed with simple cleaning and doesn’t constitute direct physical loss or damage.

Three months after the decision in United Talent Agency, Division 7 of the Second District of the California Court of Appeal concluded differently in Marina Pacific Hotel & Suites LLC v. Fireman’s Fund Insurance Co. There, the Court held even if the allegations are improbable, assuming they are true and absent judicially noticed facts that irrefutably contradict them, Marina Pacific properly pled direct physical loss or damage to a covered property.

The Marina Pacific Court acknowledged that United Talent Agency was not distinguishable, but maintained that the court there improperly disregarded United Talent’s factual allegations as improbable.

In its appeal, Another Planet pointed to this split in authority and urged the Ninth Circuitto adopt the holding in Marina Pacific, because United Talent Agency misapplied California law by making factual conclusions that were contrary to those alleged in the operative complaint. Disagreeing, Vigilant argued that the panel should follow United Talent Agency because Marina Pacific “gave short shrift” to the court’s ability to “consider common-sense realties at the demurrer stage.”

The question at hand—whether the actual presence or potential presence of the COVID-19 virus is sufficient to show “direct physical loss or damage to property”—now rests with the California Supreme Court.

The answer to the aforementioned question could determine the outcome of this matter and have significant implications for both insurers and insurees with respect to claims brought pursuant to COVID-19-related issues.