Apple Annie, LLC v. Or. Mut. Ins. Co.

82 Cal.App.5th 919

298 Cal.Rptr.3d 886

APPLE ANNIE, LLC, Plaintiff and Appellant,

v.OREGON MUTUAL INSURANCE COMPANY, Defendant and Respondent.

A163300

Court of Appeal, First District, Division 2, California.

Filed September 2, 2022

Attorney for Plaintiff and Appellant, Apple Annie, LLC: Shernoff Bidart Echeverria; Michael J. Bidart, Ricardo Echeverria, Steven Schuetze, Reid Ehrlich-Quinn, Claremont; Hess Bower Adams-Hess, PC; Randy M. Hess, Campbell

Attorney for Defendant and Respondent, Oregon Mutual Insurance Company: Pacific Law Partners, LLP; Clarke Holland, David. B.A. Demo, Andrew P. Collier, Emeryville.

Richman, Acting P. J.

The COVID pandemic and ensuing lockdown have generated a host of legal issues. One of the most momentous, in terms of the potential monetary liability, is whether businesses ordered by government decree to close or suspend operations could get compensation under the business income coverage of the standard comprehensive commercial liability policy. The issue has generated opinions from different Courts of Appeal, all of which have held that the issue comes down to whether the insured can allege it suffered "direct physical loss of or damage to [the insured] property." Having lost in the trial court, the insured here tells us "this appeal can be viewed as a referendum on whether [those] decisions were correctly decided." We conclude that they were, add our agreement with the other cases, and thus affirm the judgment on the pleadings for the insurer.

BACKGROUND

At all relevant times, plaintiff Apple Annie, LLC, operated restaurants in Marin, San Francisco, and Santa Barbara counties. Defendant Oregon Mutual Insurance Company issued Apple Annie a comprehensive commercial liability and property insurance policy that, as relevant here, promised in general to "pay for direct physical loss of or damage to Covered Property at the [insured] premises," and in particular to "pay for the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration.^{[1 ]}. The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss." The policy did not define "direct physical loss of or damage."

The policy included two provisions that will have only glancing provisions relevant to our analysis and conclusion.²

According to Apple Annie's complaint, in March 2020, first the Marin and San Francisco Departments of Public Health, and then the Governor, issued "Shelter in Place orders,"³ which Apple Annie alleged "caused [it] to suspend business operations at all its locations, which resulted in an immediate loss of business income."⁴ Oregon Mutual denied Apple Annie's claim for its "business income loss."

Apple Annie's action for breach of contract damages ended when the trial court granted Oregon Mutual's motion for judgment on the pleadings and entered a judgment in its favor.

DISCUSSION

Apple Annie's opening brief was filed on November 16, 2021. It deployed cogent reasoning and analyzed a veritable mountain of authorities—published and unpublished, state and federal—on the issue of coverage.

The very same day, November 16, Division One of the Fourth District Court of Appeal filed its opinion in Inns-by-the-Sea v. California Mutual Ins. Co . (2021) 71 Cal.App.5th 688, 286 Cal.Rptr.3d 576 (review denied Mar, 9, 2022, S272450) ( Inns-by-the-Sea ). Noting that "hundreds of merit-based rulings have been issued in both state and federal courts," the court then summarized: "The overwhelming majority of federal district court cases find no possibility of coverage under commercial property insurance policies for a business's pandemic-related loss of income [citations], along with each federal appellate court to consider the issue [citations], including the Ninth Circuit applying California law ( Mudpie, Inc. v. Travelers Casualty Ins. Co. of America (9th Cir. 2021) 15 F.4th 885 )."⁵ ( Id. at p. 692, fn. 1, 286 Cal.Rptr.3d 576.)

After a comprehensive survey of the subject, the court concluded that a business that closed pursuant to a government shut-down order had not suffered "direct physical ... damage to" the business's property. This was a matter of plain English:

"The words in the phrase ‘direct physical damage’ all have commonly understood meanings. ‘Physical’ is defined as ‘having material existence: perceptible especially through the senses and subject to the laws of nature.’ [Citation.] ‘Direct’ is defined as ‘proceeding from one point to another in time or space without deviation or interruption,’ ‘stemming immediately from a source,’ and ‘characterized by close logical, causal, or consequential relationship.’ [Citations.] ‘Damage’ is defined as ‘loss or harm resulting from injury to ... property ....’ " ( Inns-by-the-Sea , supra , 71 Cal.App.5th 688, 699–700, 286 Cal.Rptr.3d 576.)

The Inns-by-the-Sea court concluded that the Covid virus did not itself cause "direct physical damage." " ‘[T]he presence of COVID-19 on Plaintiff's property did not cause damage to the property necessitating rehabilitation or restoration efforts similar to those required to abate asbestos or remove poisonous fumes which permeate property.^{[6 ]} Instead, all that is required for Plaintiff to return to full working order is for the [government orders and restrictions to be lifted].’ [Citation.] ‘This case ... concerns an invisible virus that is present throughout the world.... It is that general presence, and not a specific physical harm to covered properties, that has caused governments at all levels to consider restrictions. The question, therefore, is one of "widespread economic loss due to restrictions on human activities, not the consequence of a direct physical loss or damage to the insured premises." ’ " ( Inns-by-the-Sea , supra , 71 Cal.App.5th 688, 704, 286 Cal.Rptr.3d 576.)⁷

Having concluded that the insured business suffered no "direct physical damage " to its property, the court was equally unwilling to concede that the insured being forced to suspend operations amounted to a "direct physical loss " of its property. This conclusion had the support of considerable authority, starting with a leading insurance treatise:

"The Couch treatise sets forth the generally recognized principle in the context of first party property insurance that mere loss of use of physical property to generate business income, without any other physical impact on the property, does not give rise to coverage for direct physical loss: ‘The requirement that the loss be "physical," given the ordinary definition of that term, is widely held to exclude alleged losses that are intangible or incorporeal and, thereby, to preclude any claim against the property insurer when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property.’ " ( Inns-by-the-Sea , supra , 71 Cal.App.5th 688, 705–706, 286 Cal.Rptr.3d 576, quoting 10A Couch on Insurance (3d ed. 2016) § 148:46, pp. 148-96–148-98.) And here, the court was not blazing a new trail: "California law has repeatedly cited the Couch treatise in adopting this rule. [Citations.]" ( Inns-by-the-Sea , supra , at p. 706, 286 Cal.Rptr.3d 576.)

Such, the court said, was also the conclusion of other courts: "[T]he Business Income coverage applies when there is a suspension of operations caused by ‘direct physical loss of’ property. As numerous courts have observed, the words ‘direct’ and ‘physical’ preclude the argument that coverage arises in a situation where the loss incurred by the policyholder stems solely from an inability to use the physical premises to generate income, without any other physical impact to the property. [Citations.] As the federal Eighth Circuit Court of Appeals persuasively explained, because the policy language requires ‘direct "physical loss" ’ to trigger coverage, ‘there must be some physicality to the loss ... of property—e.g. , a physical alteration, physical contamination, or physical destruction .... The policy cannot reasonably be interpreted to cover mere loss of use when the insured's property has suffered no physical loss or damage.’ [Citation.] ‘The cases consistently conclude that there needs to be some physical tangible injury ... to support "loss of property" or a physical alteration or active presence of a contaminant to support "damage to" property.’ " ( Inns-by-the-Sea , supra , 71 Cal.App.5th 688, 706–707, 286 Cal.Rptr.3d 576.)

Finally, the court deemed its conclusion fully harmonious with other language in the policy: "The Policy's reference to the ‘period of restoration’ further supports our conclusion that mere loss of use, without any other physical impact to Inns’ property, is not sufficient to trigger the business income coverage. The Policy states, ‘We will pay for the actual loss of Business Income you sustain due to the necessary "suspension" of your "operations" during the "period of restoration." The "suspension" must be caused by direct physical loss of or damage to property at [Inns’] premises ....’ (Italics added.) Significantly, the ‘period of restoration’ is defined as ending on the earlier of ‘(1) The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or [¶] (2) The date when business is resumed at a new permanent location.’ "The Policy's focus on repairing, rebuilding or replacing property (or moving entirely to a new location) is significant because it implies that the ‘loss’ or ‘damage’ that gives rise to Business Income coverage has a physical nature that can be physically fixed, or if incapable of being physically fixed because it is so heavily destroyed, requires a complete move to a new location. Put simply, ‘[t]hat the policy provides coverage until property "should be repaired, rebuilt or replaced" or until business...