Endeavor Operating Co. v. Hdi Global Ins. Co.

96 Cal.App.5th 420

313 Cal.Rptr.3d 746

ENDEAVOR OPERATING COMPANY, LLC, Plaintiff and Appellant,

v.HDI GLOBAL INSURANCE COMPANY et al., Defendants and Respondents.

B323865

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

Filed September 21, 2023

As Modified on Denial of Rehearing October 19, 2023

Latham & Watkins, Kirsten C. Jackson, Los Angeles, Robert J. Gilbert, David A. Barrett, Roman Martinez, Eric J. Konopka, Alexader G. Siemers ; The Law Offices of Dorn G. Bishop and Dorn G. Bishop, San Diego, for Plaintiff and Appellant.

Zelle, Thomas J. D'Antonio, Oakland, Kristin C. Cummings ; Greines, Martin, Stein & Richland, Laurie J. Hepler, San Francisco, and Stefan C. Love for Defendant and Respondent HDI Global Insurance Company.

Clyde & Co, Susan Koehler Sullivan, Douglas J. Collodel and Gretchen S. Carner, Los Angeles, for Defendant and Respondent ACE Insurance Company.

Clyde & Co and Kathryn C. Ashton, San Francisco, for Defendant and Respondent Interstate Fire & Casualty Company.

Dentons, Julia M. Beckley, Erin E. Bradham and Douglas Janicik for Defendant and Respondent AIG Specialty Insurance Company.

HOFFSTADT, J.

This appeal involves a poorly drafted commercial property insurance policy, and whether the parties intended that policy to cover economic losses stemming from a specific global pandemic that had yet to occur and hence was most assuredly outside the parties’ contemplation when they drafted the policy. This appeal squarely presents two questions.

First, can the policy holder in this case—an entertainment conglomerate that operates sports and other entertainment ventures at venues around the globe—recover the economic losses it suffered when the COVID-19 pandemic shut down many of those venues without first establishing that there was "direct physical loss or damage to property"? This question is one on which the Courts of Appeal have split, and is pending before our Supreme Court in John's Grill, Inc. v. The Hartford Financial Services Group, Inc. (2022) 86 Cal.App.5th 1195, 303 Cal.Rptr.3d 201 ( John's Grill ), review granted Mar. 29, 2023, S278481, and Another Planet Entertainment, LLC v. Vigilant Ins. Co. (9th Cir. 2022) 56 F.4th 730, request for certification granted Mar. 1, 2023, S277893. Until that Court provides guidance, we side with the vast majority of cases holding that direct physical loss or damage to property, rather than mere loss of the property's use, is a prerequisite for coverage. We further hold that two of the clauses in the policy here—namely, extension clauses dealing with orders by civil authorities and with impediments to access—do not, by their addition of the word "event," eliminate the requirement of direct physical loss or damage to property.

Second, has "direct physical loss or damage to property" been sufficiently pled where, as here, the policy holder alleges that the virus that causes COVID-19 has either been deposited onto or "adsorbed" to the surface of the policy holder's property? The Courts of Appeal have split on this question as well, and that question is pending before our Supreme Court in Shusha, Inc. v. Century-National Ins. Co. (2022) 87 Cal.App.5th 250, 303 Cal.Rptr.3d 100 ( Shusha ), review granted Apr. 19, 2023, S278614. Until that Court provides guidance, we side with those cases holding that the ephemeral existence of COVID-19 or its predecessor virus on property does not constitute "direct physical loss or damage to property" as a matter of law.

As a result, we affirm the trial court's judgment dismissing the policy holder's complaint on demurrer.

FACTS AND PROCEDURAL BACKGROUND

I. Facts

A. The insured

Endeavor Operating Company, LLC (Endeavor) is a "holding company" that owns "various subsidiaries in the entertainment, sports, and fashion business sectors." Its subsidiary entities include, among others, (1) IMG Events, "which hosts sporting and cultural events at rented venues worldwide"; (2) IMG Media, "which produces and distributes sports programming and sells media rights and sponsorships"; (3) William Morris Endeavor Entertainment, LLC, which is a "talent agency ... that represents artists, musicians, models, performers, and content creators"; and (4) IMG Academy, which is a "sports education academy." Endeavor's portfolio of events includes the Wimbledon tennis tournament, New York Fashion Week, and Ultimate Fighting Championship matches, and its clients include Nobel laureates as well as the National Football League.

B. The insurance policy¹

HDI Global Insurance Company (HDI) issued Endeavor a commercial property insurance policy that was effective from December 31, 2018 through December 31, 2019 (the policy). Although HDI issued an extension to that policy that lasted until January 31, 2020, and HDI, along with three other insurance companies² (collectively, the insurers) issued a new policy effective January 31, 2020 but not provided in writing until late March 2020, the parties on appeal have effectively stipulated that the terms of the original, HDI-issued policy are controlling here.³ Those terms provide coverage that, at times, is up to $175 million per occurrence.

1. Main coverage provision

Consistent with its title as a "GlobalProperty Insurance Policy" and with the bulk of Endeavor's $665,149.78 annual premium being allocated to "Commercial Property Coverage," the policy identifies the "Loss or Damage Insured" as "all risk of direct physical loss or damage to property ...." (Italics added.) Alas, the policy nowhere defines "direct physical loss or damage."

2. Types of covered losses

The policy also defines the various "interest[s] of the Insured" that it covers. As pertinent to this appeal, the policy covers two types of losses. First, the policy covers losses suffered to "[a]ll real and personal property" "owned, used, or intended for use by" Endeavor (the property repair clause). Second, the policy covers any resulting business interruption losses—which encompass (1) loss of gross earnings "due to the necessary interruption of business conducted by" Endeavor; and (2) loss of gross profits "resulting from interruption of or interference with [Endeavor's] business"—but only if they "result[ ] from loss or damage" "to real and/or personal property" insured under the policy (collectively, the business interruption clauses).⁴

3. Extensions

The policy then sets forth three "Extensions of Coverage." Two of those are pertinent to this appeal. First, the policy "extend[s]" coverage "to insure loss sustained during the period of time when, as a result of loss, damage or an event not excluded [by one of the policy's enumerated exclusions,] access to property is impaired by order or action of civil or military authority" (the civil authority clause). (Italics added.) Second, the policy "extend[s]" coverage "to insure loss sustained during the period of time when, as a result of loss, damage or an event not excluded [by one of the policy's enumerated exclusions], ingress to or egress from real or personal property is impaired" (the ingress/egress clause). (Italics added.) In its "Limits of Liability" section, the policy adds two further prerequisites "for coverage to apply" under the civil authority and ingress/egress clauses—namely, that (1) there be an "[i]nsured physical loss or damage" to some property, and (2) this physical loss or damage to some property "occur within [1 or 10] statute mile[s] from [Endeavor's] premises."⁵ The "Limits of Liability" section caps coverage under the civil authority and ingress/egress clauses to $25 million "per occurrence," and the policy elsewhere defines "occurrence" as a "[l]oss, or a series of losses or several losses, which are attributable directly or indirectly to one cause or disaster or to one series of similar causes or disasters arising from a single event ." (Italics added.)

4. Period of recovery

The policy also defines "[t]he length of time for which loss may be claimed" under the business interruption, civil authority, and ingress/egress clauses (the period of recovery clause). This period of recovery starts with "the date of such loss or damage" (even if the policy has already expired); the period ends at the expiration of the (1) "time ... required," "with the exercise of due diligence and dispatch[,] to rebuild, repair, or replace the property that has been destroyed or damaged," plus (2) the "time" required to "restore [Endeavor's] business to the condition that would have existed had no loss occurred," which is gauged in part by whether Endeavor "has resumed [its] normal operations"—but in any event no longer than 365 days.

5. Contamination/pollution exclusion

The policy also enumerates several exclusions from coverage. Relevant to this appeal is the contamination/pollution exclusion, which excludes a loss that would otherwise be covered if the "loss or damage" was "caused by, resulting from, or contributed to or made worse by actual" or "threatened release, discharge, ... or dispersal of contaminants or pollutants." (Capitalization omitted.) The term "contaminants or pollutants" is defined in the exclusion to encompass, among other things, a "virus."

C. The COVID-19 pandemic

In late 2019 or early 2020, the SARS-CoV-2 virus—which causes COVID-19—was first identified in Wuhan, China. The virus can spread by direct contact between humans, through particles in the air, and by contact between a person and a surface on which the virus has landed. When viral particles make contact with a surface, they are either "deposited" onto the surface (that is, they form "merely a physical presence" that "is readily reversable"), or they are "adsorbed" to the surface (that is, they form a "weak" "noncovalent chemical bond" that "is relatively hard to detach"). While viral particles "left undisturbed" can persist in some form on some surfaces for up to 28 days, both deposited and adsorbed particles can both be inactivated and/or removed with a simple cleaning of the surface.

When COVID-19 outbreaks surged across...