Coast Restaurant Group, Inc. operates the Cedar Creek Inn, a restaurant in North Orange County, which offers a variety of fine food, an extensive wine list and craft beer, and live musical performances from Tuesday through Saturday.

It obtained business interruption insurance from AmGUARD Insurance Company, covering the period from March 30, 2019 to March 30, 2021. Business interruption insurance “protects against the loss of income and other losses caused by an interruption to the normal operations of the business.”

On March 17, 2020, the Orange County health officer issued an order that, among other things, “prohibited restaurants from serving food on their premises and prohibited all gatherings of people.” The next day, the county health officer issued an amended health order and guidance requiring “[a]ll restaurants and other business establishments that serve food shall close all onsite [sic] dining.”

The Restaurant submitted a claim for its business income loss. The was denied by AmGUARD Insurance Company.

Coast Restaurant Group subsequently filed a lawsuit against their carrier. The First Amended Complant (FAC) asserted that the restaurant “did not lose any business income as a result of virus contamination,” but rather its “losses of business income were caused by, and a direct result of, government stay-at-home orders in California.” The Restaurant attached a copy of the insurance policy and also attached the governmental orders restricting on-site gatherings at restaurants to its FAC.

The carrier demurred to the FAC. contending that the insurance policy does not cover “losses arising from the COVID-19 virus, including government[al] directives issued in response to the virus.”

Separately, respondent contended that appellant did not allege any “direct physical loss or damage to” the covered property because governmental orders limiting the use of respondent’s property do not amount to “direct physical loss of or damage to property.” Respondent further asserted the “Ordinance or Law” exclusion precludes coverage for “losses arising from government-imposed use restrictions.”

The trial court sustained the demurrer without leave to amend. The Court of Appeal affirmed in the published case of Coast Restaurant Group, Inc. v. AmGUARD Insurance Company – G061040 (April 2023).

In essence, the Court of Appeal concluded that Coast Restaurant has shown there is potential coverage under the policy, but AmGUARD Insurance Company has shown that an exclusion in the policy applies to preclude coverage as a matter of law.

While physical alteration to covered property could trigger coverage under a “physical loss or damage” insuring provision, that is not the only possible trigger for coverage. Deprivation or dispossession also would trigger coverage, even if the property has not been physically altered.

However, under the ordinance or law exclusion, “loss or damage caused directly or indirectly by . . . enforcement of any ordinance or law . . . [that regulates] the construction, use or repair of any property” are not covered.

The governmental orders at issue clearly regulate the use of covered property by prohibiting on-site dining. Accordingly, the ordinance or law exclusion would apply to preclude coverage.

In the alternative, the virus exclusion applies to deny Coast Restaurant Group coverage for its business income loss. The policy does not cover “loss or damage caused directly or indirectly by” “[a]ny virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

Thus the Court of Appeal concluded that, at a minimum, COVID-19 triggered the governmental orders and it “indirectly” caused appellant’s business income loss. The virus exclusion thus applies here.