Judicial Council of California Issues Opinion in Another Planet Entertainment Vs. Vigilant Insurance Case

SACRAMENTO, California, May 24 -- The Judicial Council of California issued the following opinion (No. S277893) on May 23, 2024.

Here are excerpts:

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In the Supreme Court of California

ANOTHER PLANET ENTERTAINMENT, LLC, Plaintiff and Appellant, v. VIGILANT INSURANCE COMPANY, Defendant and Respondent.

Chief Justice Guerrero authored the opinion of the Court, in which Justices Corrigan, Liu, Kruger, Groban, Jenkins, and Evans concurred.

Opinion of the Court by Guerrero, C. J.

At the outset of the COVID-19 pandemic, and for some time thereafter, many businesses were forced to curtail their operations or close entirely. Some of these businesses sought coverage for their financial losses from their commercial property insurers under conventional first-party "all risk" or "open peril" insurance policies. These policies generally predicate coverage on "direct physical loss or damage" to the insured property or nearby property. State and federal courts across the country have considered whether conventional property insurance policies provide coverage for pandemic-related losses, including whether the COVID-19 virus satisfies the threshold requirement of direct physical loss or damage to property. California courts have reached different conclusions on this issue, and in this case we accepted a request by the United States Court of Appeals for the Ninth Circuit to clarify California law in this area. (Cal. Rules of Court, rule 8.548.)

The Ninth Circuit posed the following question: "Can 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 Entertainment, LLC v. Vigilant Insurance Co. (2022) 56 F.4th 730, 734 (Another Planet).)

The question arises in the context of a civil lawsuit filed by Another Planet Entertainment, LLC (Another Planet) against its property insurer, Vigilant Insurance Company (Vigilant). Another Planet operates venues for live entertainment. It suffered pandemic-related business losses when its venues closed, and Vigilant denied Another Planet's subsequent claim for insurance coverage. Another Planet filed suit in federal district court, alleging that the actual or potential presence of the COVID-19 virus at its venues or nearby properties caused direct physical loss or damage to property and triggered coverage under its insurance policy. The district court granted Vigilant's motion to dismiss for failure to state a claim, and Another Planet appealed. According to the Ninth Circuit, the issue on appeal "is whether [Another Planet's] allegations, if taken as true, were sufficient to show 'direct physical loss or damage to property' as defined by California law." (Another Planet, supra, 56 F.4th at p. 731.) Because the Ninth Circuit concluded that resolution of this question of California law could determine the outcome of the case pending before it, the Ninth Circuit certified the question to this court.

We conclude, consistent with the vast majority of courts nationwide, that allegations of the actual or potential presence of COVID-19 on an insured's premises do not, without more, establish direct physical loss or damage to property within the meaning of a commercial property insurance policy. Under California law, direct physical loss or damage to property requires a distinct, demonstrable, physical alteration to property. The physical alteration need not be visible to the naked eye, nor must it be structural, but it must result in some injury to or impairment of the property as property.

The factual allegations of Another Planet's complaint, which we accept as true for purposes of this proceeding, do not satisfy this standard. While Another Planet alleges that the COVID-19 virus alters property by bonding or interacting with it on a microscopic level, Another Planet does not allege that any such alteration results in injury to or impairment of the property itself. Its relevant physical characteristics are unaffected by the presence of the COVID-19 virus.

Another Planet focuses on the virus's risk to humans, and it alleges that the actual or potential presence of the virus rendered its properties unfit for their intended use. But the mere fact that a property cannot be used as intended is insufficient on its own to establish direct physical loss to property. Similarly, the fact that a business was forced to curtail its operations, in whole or in part, based on pandemic-related government public health orders is likewise insufficient. The restrictions of a government public health order are legal, i.e., intangible, in nature. They do not constitute direct physical loss or damage to property.

In rare situations, a property may suffer direct physical loss where it is not damaged in a conventional sense, including where a chemical contaminant or noxious odor infiltrates the property and renders it effectively unusable or uninhabitable. In such a case, the contaminant or odor may cause direct physical loss, but only where the source of the property's unusability or uninhabitability is sufficiently connected to the property itself. This situation may arise when the effect of the contaminant or odor is so lasting and persistent that the risk of harm is inextricably linked or connected to the property. Another Planet's allegations regarding the effect of the COVID19 virus on property fail to meet this standard as well.

While we conclude Another Planet's allegations are insufficient, and it appears that such allegations represent the most common allegations in support of pandemic-related property insurance coverage, we cannot and do not in this proceeding determine that the COVID-19 virus can never cause direct physical loss or damage to property. Our contemplation of the virus and the affected property is necessarily limited by Another Planet's factual allegations. Nonetheless, given the prevalence of similar circumstances, we answer the Ninth Circuit's question as follows: No, the actual or potential presence of COVID-19 on an insured's premises generally does not constitute direct physical loss or damage to property within the meaning of a commercial property insurance policy under California law.

I. FACTUAL AND PROCEDURAL BACKGROUND

"Because this matter is presently on appeal from a dismissal under Federal Rules of Civil Procedure, rule 12(b)(6) (28 U.S.C.), we recite the facts as alleged in the operative complaint. [Citation.] The question at this stage of the litigation is the legal sufficiency of the pleadings. We treat the factual allegations as true for purposes of addressing the certified question[]." (Kuciemba v. Victory Woodworks, Inc.(2023) 14 Cal.5th 993, 1004.)

Another Planet is an independent operator and promoter of live entertainment (including concerts, festivals, and events) at several venues in California and Nevada. It purchased a commercial property insurance policy from Vigilant. The policy provided for two main categories of coverage: (1) building and personal property coverage and (2) business income and extra expense coverage.

Under the first category, Vigilant promised, "We will pay for direct physical loss or damage to [a building or personal property] caused by or resulting from a peril not otherwise excluded . . . ." It also promised, "We will pay the reasonable and necessary costs you incur to protect [the building and personal property] at the premises shown in the Declarations from imminent direct physical loss or damage caused by or resulting from a peril not otherwise excluded . . . ." The policy defined "[b]uilding" as "a structure," "building components," "completed additions," and "alterations and repairs to the structure." It excluded "land, water or air, either inside or outside of a structure."

Under the second category of coverage, Vigilant promised, "We will pay for the actual: [Sect.] business income loss you incur due to the actual impairment of your operations; and [Sect.] extra expense you incur due to the actual or potential impairment of your operations, [Sect.] during the period of restoration . . . . [Sect.] This actual or potential impairment of operations must be caused by or result from direct physical loss or damage by a covered peril to property, unless otherwise stated."

The policy defined the "[p]eriod of restoration" as "the period of time that, for business income, begins: [Sect.] A. immediately after the time of direct physical loss or damage by a covered peril to property; or [Sect.] B. on the date operations would have begun if the direct physical loss or damage had not occurred, when loss or damage [to new buildings, alterations, or personal property] delays the start of operations . . . ." Similarly, for extra expense, the period of restoration begins "immediately after the time of direct physical loss or damage by a covered peril to property." The policy provided that the period of restoration "will continue until your operations are restored, with reasonable speed, to the level which would generate the business income amount that would have existed if no direct physical loss or damage occurred, including the time required to: [Sect.] . . . repair or replace the property." The outside limit on the length of the period of restoration was "the applicable number of days shown as Extended Period in the Declaration, beginning on the date that," as relevant here, "the lost or damaged property is actually repaired or replaced and your operations are restored."

Within this second category, the policy also covered lost income and extra expenses incurred as a result of certain governmental actions. Vigilant promised, "We will pay for the actual: [business income loss or extra expense] you incur due to the actual impairment of your operations, directly caused by the prohibition of access to [your premises or a dependent business premises] by a civil authority. [Sect.] This prohibition of access by a civil authority must be the direct result of direct physical loss or damage to property away from such premises or such dependent business premises by a covered peril, provided such property is within [either one mile or the miles specified in the policy's declaration] from such premises or dependent business premises, whichever is greater."

In early 2020, the COVID-19 virus became a widespread concern in the United States. The virus -- technically SARSCoV-2, which causes the COVID-19 respiratory illness -- is highly contagious and potentially fatal. The virus is a physical substance. It primarily spreads from person to person via airborne respiratory droplets or aerosols containing the virus.

According to Another Planet, indoor and outdoor air is normally composed of various gaseous elements and particles.

The introduction of respiratory droplets or aerosols containing the COVID-19 virus changes the composition of the affected air through the addition of such droplets or aerosols. Respiratory droplets with the COVID-19 virus can also settle on the surfaces of real and personal property. The droplets attach to these surfaces and, in Another Planet's view, physically alter them. The virus can remain in the air or on surfaces for hours or days. Although it is not a primary mode of transmission, a person can contract COVID-19 by touching a surface on which the COVID19 virus has been deposited. Another Planet alleges that the presence of the droplets containing the COVID-19 virus "requires steps to be taken to minimize their spread, such as physical distancing, regular disinfection, air filtration, and further physical alterations, such as installation of physical barriers restricting the movement of the aerosolized droplets." Another Planet asserts there is evidence that remedial measures "cannot be assured to eliminate or exclude" the COVID-19 virus from its premises.

Another Planet further alleges that the COVID-19 virus was present at its properties, "or would have been present but for its efforts to reduce, prevent, or otherwise mitigate its presence on its properties." It maintains that the presence or potential presence of the COVID-19 virus caused a "distinct, demonstrable, physical alteration to property," and its presence or potential presence prevented or impaired the use of Another Planet's property. Another Planet's properties were "unsafe and unusable." Given the danger of the COVID-19 virus, "no 'rational persons would be content' to be in a venue likely to cause them to contract COVID-19." Another Planet alleged the only way to prevent the presence of the COVID-19 virus was to close its venues completely.

State and local authorities recognized the public health risk of the COVID-19 virus and imposed restrictions on individuals and businesses, including Another Planet. Public health orders "prohibited or limited the use and operations of Another Planet's insured locations." Another Planet was forced to cancel all events scheduled for its venues and could not use its insured locations for their intended purpose. It alleges it suffered losses in excess of $20 million.

In May 2020, Another Planet submitted an insurance claim to Vigilant for direct physical loss or damage to its properties and consequent economic losses. Vigilant denied coverage. It maintained that Another Planet had not shown "physical loss or damage that would implicate coverage in this matter."

Another Planet filed a complaint and, later, a first amended complaint against Vigilant in federal district court. It alleged causes of action for breach of contract, tortious breach of the implied covenant of good faith and fair dealing, and various forms of fraud. It also sought declaratory relief. Vigilant moved to dismiss the first amended complaint for failure to allege facts sufficient to state a claim upon which relief can be granted. (Fed. Rules Civ.Proc., rule 12(b)(6), 28 U.S.C.) Vigilant primarily argued that Another Planet had not alleged direct physical loss or damage to property, which was required to trigger coverage under any theory advanced by Another Planet.

The district court granted Vigilant's motion to dismiss. It found that "Another Planet does not have a claim for loss of business income because the closure orders [by state and local public health authorities] -- and not [the] virus's alleged presence at Another Planet's facilities -- caused it to shut down." The district court also rejected Another Planet's attempt to tie the closure orders to direct physical loss or damage to property. It explained, "[T]hose closure orders were not passed as a direct result of property damage at nearby properties." There was no suggestion that the "closure orders were passed 'as a direct result' of the virus having caused actual property damage at buildings close to Another Planet's facilities (or anyone else's facilities for that matter)." (Fn. omitted.)

Another Planet appealed. After briefing and oral argument, the Ninth Circuit issued a written order certifying a question of law to this court. (Another Planet, supra, 56 F.4th 730.) The order identified "conflicting decisions" of the lower California courts "regarding whether allegations like Another Planet's suffice to state a viable claim for 'direct physical loss or damage to property.' " (Id. at p. 733.) The order stated that the resolution of this conflict was potentially dispositive of Another Planet's appeal "because if the allegation of the presence or potential presence of the COVID-19 virus is sufficient to show 'direct physical loss or damage to property,' the district court erred in dismissing Another Planet's complaint for failure to state a claim, and we would remand to the district court for further proceedings. Alternatively, if the allegation is not sufficient, we would affirm the district court." (Id. at p. 734.) As noted, we agreed to answer the Ninth Circuit's question, and these proceedings followed.

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Original text here: https://www.courts.ca.gov/opinions/documents/S277893.PDF