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Fireman’s Fund issued its commercial property insurance policy for the period July 1, 2019 to July 1, 2020 to provide coverage for Hotel Erwin and Larry’s (a restaurant adjacent to the hotel) in Venice Beach.

The policy’s general property coverage provision states, “[W]e will pay for direct physical loss or damage to [the insured property] caused by or resulting from a covered cause of loss during the Policy Period.”

A claim was filed under this policy for the COVID-19 related physical loss or damage to property which the insureds claimed required the closure or suspension of operations at Hotel Erwin and Larry’s. Fireman’s Fund refused to pay for any loss under the policy.

The owners sued Fireman’s Fund Insurance Company alleging the COVID-19 virus was present on, and had physically transformed, portions of the insured properties – “direct physical loss or damage” within the meaning of Fireman’s Fund’s first-party commercial property insurance policy.

The trial court sustained Fireman’s Fund’s demurrer to the insureds’ first amended complaint without leave to amend and dismissed the lawsuit, ruling the COVID-19 virus cannot cause direct physical loss or damage to property for purposes of insurance coverage. The Court of Appeal reversed the dismissal in the published case of Marina Pacific Hotel and Suites v Fireman’s Fund Insurance Company – B316501 (July 2022)

Fireman’s Fund argued that courts across the country had ruled the pandemic does not equate to physical loss or damage and argued loss of use alone does not constitute direct physical loss or damage required by the policy language.

Plaintiffs argued that cases from California (e.g., Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th [involving asbestos fibers]) and across the country have refused to dismiss similar lawsuits at the pleading stage.

The Court of Appeal agreed with the plaintiffs. The insureds specifically alleged they were required to “dispose of property damaged by COVID-19 and limit operations at the Insured Properties.”

The court concluded that “the insureds have unquestionably pleaded direct physical loss or damage to covered property within the definition articulated in MRI Healthcare – a distinct, demonstrable, physical alteration of the property” (MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co. (2010) 187 Cal.App.4th 766)

They also “adequately alleged that physical loss or damage caused a slowdown in, or cessation of, the operation of the insureds’ business while the covered property was restored or remediated, thereby triggering their business interruption (“business income and extra expense”) coverage.”

The court went on to add that “We recognize this conclusion is at odds with almost all (but not all) decisions considering whether business losses from the pandemic are covered by the business owners’ first person commercial property insurance.