Another Planet Entm't v. Vigilant Ins. Co.

548 P.3d 303

320 Cal.Rptr.3d 843

ANOTHER PLANET ENTERTAINMENT, LLC, Plaintiff and Appellant,

v.VIGILANT INSURANCE COMPANY, Defendant and Respondent.

S277893

Supreme Court, of California.

May 23, 2024

Ninth Circuit, 21-16093, Northern District of California, 3:20-cv-07476-VC.

Pasich, Kirk Pasich, Nathan M. Davis, Arianna M. Young and Kayla M. Robinson for Plaintiff and Appellant.

Hunton Andrews Kurth, Scott P. DeVries, San Francisco, Yosef Y. Itkin, Los Angeles, Lorelie S. Masters and Michael S. Levine for United Policyholders as Amicus Curiae on behalf of Plaintiff and Appellant.

Covington & Burling, Sabrina T. McGraw and Rani Gupta, Palo Alto, for Major League Baseball and National Hockey League as Amici Curiae on behalf of Plaintiff and Appellant.

Covington & Burling, Thomas Martecchini, David B. Goodwin, Christine S. Haskett, San Francisco, and Billie T. H. Mandelbaum for Ross Stores, Inc., as Amicus Curiae on behalf of Plaintiff and Appellant.

Reed Smith, John N. Ellison, Richard P. Lewis, Jr., Katherine J. Ellena and Kathryn M. Bayes, Los Angeles, for California Pizza Kitchen, Inc., French Laundry Partners, LP, KRM, Inc., and Yountville Food Emporium, LLC, as Amici Curiae on behalf of Plaintiff and Appellant.

Latham & Watkins, Brook B. Roberts, John M. Wilson and Corey D. McGehee, San Diego, for San Manuel Band of Mission Indians and San Manuel Entertainment Authority as Amici Curiae on behalf of Plaintiff and Appellant.

Roxborough, Pomerance, Nye & Adreani, Nicholas P. Roxborough, Woodland Hills, Vincent S. Gannuscio and Joseph C. Gjonola for the Santa Ynez Band of Chumash Mission Indians of the Santa Ynez Reservation of California as Amicus Curiae on behalf of Plaintiff and Appellant.

Clyde & Co US, Susan Koehler Sullivan, Douglas J. Collodel, Gretchen S. Carner, Brett C. Safford, Los Angeles; O’Melveny & Myers, Jonathan D. Hacker and Jenya Godina for Defendant and Respondent.

Pacific Law Partners, Clarke B. Holland, David B.A. Demo, Emeryville, and Andrew P. Collier for Oregon Mutual Insurance Company as Amicus Curiae on behalf of Defendant and Respondent.

Crowell & Moring and Mark D. Plevin, San Francisco, for American Property Casualty Insurance Association and National Association of Mutual Insurance Companies as

Amici Curiae on behalf of Defendant and Respondent.

Lewis Brisbois Bisgaard & Smith, Raul L. Martinez, Los Angeles, and Elise D. Klein for California Fair Plan Association as Amicus Curiae on behalf of Defendant and Respondent.

Jamie Ostroff and Shari Covington for California Medical Association as Amicus Curiae.

Proskauer Rose, Kyle A. Casazza, Los Angeles, and Christina H. Kroll for The Los Angeles Lakers, Inc., as Amicus Curiae.

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.

[1] 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 COVID-19 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, 310 Cal.Rptr.3d 97, 531 P.3d 924.)

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...