Amy's Kitchen, Inc. v. Fireman's Fund Ins. Co.

83 Cal.App.5th 1062

299 Cal.Rptr.3d 885

AMY'S KITCHEN, INC., Plaintiff and Appellant,

v.FIREMAN'S FUND INSURANCE COMPANY, Defendant and Respondent.

A163767

Court of Appeal, First District, Division 4, California.

Filed October 4, 2022

Counsel for Plaintiff and Appellant Amy's Kitchen, Inc.: Michael L. Resch, Steven E. Rich, Ashley Park, LOWENSTEIN SANDLER LLP, Andrew M. Reidy (Pro Hac Vice), Andrew Bisbas.

COVINGTON & BURLING LLP, Rani Gupta, Palo Alto, David B. Goodwin, San Francisco, Sabrina T. McGraw, for United Policyholders as Amicus Curiae on behalf of Plaintiff and Appellant.

Counsel for Defendant and Respondent Fireman's Fund Insurance Company: DLA PIPER LLP, John P. Phillips, San Francisco, Brett Solberg (Pro Hac Vice).

POLLAK, P. J.

Amy's Kitchen, Inc. (Amy's) sued Fireman's Fund Insurance Company (Fireman's) after the insurer denied Amy's claim for costs incurred to clean, disinfect, and test its facilities for the coronavirus that causes COVID-19. Amy's claim was made under a policy with both communicable disease coverage and loss avoidance and mitigation extensions. The trial court sustained without leave to amend Fireman's demurrer to Amy's initial complaint. We conclude that the trial court correctly sustained the demurrer, but for the wrong reason, and that it wrongly denied Amy's leave to amend.

Factual and Procedural History¹

Amy's employs over 2,500 people to manufacture organic and vegetarian meals at facilities in California, Oregon, and Idaho and to oversee its operations from headquarters in Petaluma. It purchased a comprehensive property insurance policy from Fireman's for a one-year period ending in July 2020. The policy includes coverage extensions for communicable disease and for loss avoidance and mitigation.

The communicable disease coverage extension states that Fireman's "will pay for direct physical loss or damage to Property Insured caused by or resulting from a covered communicable disease event at a location including the following necessary costs incurred to: [¶] ... mitigate, contain, remediate, treat, clean, detoxify, disinfect, neutralize, cleanup, remove, dispose of, test for, monitor, and assess the effects [of] the communicable disease." The policy defines "communicable disease event" as one in which "a public health authority has ordered that a location be evacuated, decontaminated, or disinfected due to the outbreak of a communicable disease at such location."² (Boldface omitted.) The loss avoidance or mitigation coverage extension states that Fireman's will pay "necessary expense you incur to protect, avoid, or significantly mitigate potential covered loss or damage that is actually and imminently threatening Property Insured." (Boldface omitted.)

The complaint alleges that Amy's incurred costs "to mitigate, contain, clean, disinfect, monitor, and test for the effects of" the coronavirus at insured locations, and to avoid or mitigate potential coronavirus-related losses threatening those locations. The costs were for the purchase of temperature-screening equipment to test for COVID, protective shields to prevent transmission on assembly lines, masks and goggles, cleaning supplies, and "hero pay."

The coronavirus was present at covered locations because "people with confirmed cases of COVID-19 were on Amy's premises," breathing the virus into the air and touching surfaces. The virus allegedly caused "direct physical loss or damage" by altering the physical condition of the locations’ air and surfaces in ways that made them unsafe, absent precautionary measures. As a result, Amy's incurred costs "to mitigate, contain, clean, disinfect, monitor and test for" the virus.

The complaint further alleges that Amy's was obliged to sanitize its facilities to comply with public health orders. "In response to COVID-19 outbreaks, including at and/or near Amy's facilities, public health authorities in each of the jurisdictions began issuing multiple civil orders requiring implementation of various [measures] to continue operating," and also began "ordering locations to be decontaminated or disinfected." Amy's complied.

The complaint alleges as an "example" that, "on March 31, 2020, the Health Officer of the County of Sonoma issued Order No. C19-05, which mandated various require[d safety measures] for all essential businesses[,] including Amy's." The complaint lists measures mandated by the order, including capacity limits, social distancing, signage, and availability of hand sanitizer. The pleading alleges that public health authorities issued similar orders in each jurisdiction in which Amy's has facilities, citing statewide orders and guidelines from Oregon and Idaho. As a result, Amy's "incurred necessary costs to mitigate, contain, remediate, treat, clean, detoxify, disinfect, neutralize, cleanup, remove, dispose of, test for, monitor, and/or assess the effects of coronavirus and COVID-19." The complaint alleges that authorities issued the cited general orders "[i]n response to COVID-19 outbreaks, including at and/or near Amy's facilities."

Amy's submitted a claim to Fireman's, which the insurer denied in May 2020, stating there was no "direct physical damage to the covered property." Amy's informed Fireman's of "confirmed cases of COVID-19 on its premises" and cited "civil authority orders ... [that] set forth obligations to disinfect and decontaminate," but Fireman's refused to submit the dispute to mediation. Amy's filed suit in March 2021, asserting causes of action for breach of contract, declaratory relief, and bad faith.

Fireman's demurred. The court issued a tentative ruling "invit[ing] argument on coverage under the communicable disease provision." Noting that Amy's "has not alleged that any public health authority issued an order specifically evacuating [its] premises in order to decontaminate or disinfect a known outbreak," but that "shutdown orders resulted in [Amy's] locations being closed and then modified to address the virus," the tentative ruling asked, "Is a general community-wide order under these circumstances sufficient to amount to a communicable disease event [as defined by the policy]?" The court also asked the parties to address whether Amy's had adequately alleged "direct physical loss or damage to the property" by alleging that it incurred costs "to mitigate, clean, disinfect, and monitor the effects of the virus."

At the hearing, Amy's appeared through its general counsel, who stated that he was "responsible for interacting with the counties [about] COVID and keeping our 2,500 employees safe." While insisting that "we have alleged specific orders as to Amy's [from] appropriate agencies that resulted in us doing the decontamination, the cleaning and other such work," he added, "we're happy, if necessary, to go into further detail to amend the complaint." Representing that he had "had specific calls with the county" and has "correspondence and communications where in response to our location, they directed us to clean, disinfect and do other such steps," he offered "to amend and include further information on that point."

After the hearing, the court issued an order sustaining the demurrer without leave to amend, asserting that Amy's had failed to allege "direct physical loss or damage to Property Insured" as required by the communicable disease extension. The court held it did not need to decide if Amy's had adequately alleged a "communicable disease event" and that the claim under the loss avoidance or mitigation extension also failed. The court reasoned that any potential loss or damage Amy's had incurred costs to avoid could not be a "potential covered loss or damage" because no potential COVID-related harm could amount to "direct physical loss or damage."

The court denied leave to amend, noting that Amy's had not "presented any specific facts it could allege to cure the defects addressed above." Following the entry of a judgment of dismissal, Amy's timely filed a notice of appeal.

Discussion

We review de novo an order sustaining a demurrer, assessing whether the complaint states a cause of action. ( Minton v. Dignity Health , supra , 39 Cal.App.5th at p. 1161, 252 Cal.Rptr.3d 616.) We accept all properly pleaded material facts, but not contentions, deductions, or conclusions of fact or law. ( Ibid. ) "We affirm if any ground offered in support of the demurrer was well taken but find error if the plaintiff has stated a cause of action under any possible legal theory. [Citation.] We are not bound by the trial court's stated reasons ...; we review the ruling, not its rationale." ( Mendoza v. Town of Ross (2005) 128 Cal.App.4th 625, 631, 27 Cal.Rptr.3d 452.) If, as here, the trial court sustained the demurrer without leave to amend, we decide if there is a reasonable possibility that amendment could cure the defect. ( Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.)

In Inns-by-the-Sea v. California Mutual Ins. Co. (2021) 71 Cal.App.5th 688, 286 Cal.Rptr.3d 576 ( Inns ), a recent case involving COVID-related insurance claims, the Fourth Appellate District summarized several relevant principles: " ‘While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply.’ [Citation.] ‘... "Our goal in construing insurance contracts, as with contracts generally, is to give effect to the parties’ mutual intentions." ’ [Citation.] ‘ "Such intent is to be inferred, if possible, solely from the written provisions of the contract. [Citation.] The ‘clear and explicit’ meaning of these provisions, interpreted in their ‘ordinary and popular sense,’ unless ‘used by the parties in a technical sense or a special meaning is given to them by usage’ [citation], controls judicial interpretation. [Citation.]" ’ [Citation.] ‘ " ‘If contractual language is clear and explicit, it governs.’ " ’ [Citation.] [¶] ‘ "If the terms are ambiguous [i.e., susceptible of more than one reasonable...