Shusha, Inc. v. Century-National Ins. Co.

87 Cal.App.5th 250

303 Cal.Rptr.3d 100

SHUSHA, INC., Plaintiff and Appellant,

v.CENTURY-NATIONAL INSURANCE COMPANY, Defendant and Respondent.

B313907

Court of Appeal, Second District, Division 7, California.

Filed December 14, 2022

Hecht Partners, Katheryn Lee Boyd, Kristen L. Nelson, Los Angeles; Law Offices of Jonathan A. Sorkowitz and Jonathan A. Sorkowitz for Plaintiff and Appellant.

Berman Berman Berman Schneider & Lowary, Spencer A. Schneider and Karen E. Adelman, Los Angeles, for Defendant and Respondent.

FEUER, J.

Shusha, Inc., dba La Cava (La Cava) appeals from the judgment of dismissal entered after the trial court sustained without leave to amend the demurrer filed by Century-National Insurance Company (Century-National) to La Cava's first amended complaint. La Cava sued Century-National for breach of an insurance contract and related claims after Century-National denied coverage for La Cava's lost business income as a result of its suspension of restaurant operations in March 2020 due to the COVID-19¹ pandemic and associated government shutdowns.

On appeal, La Cava contends the trial court erred in concluding the alleged presence of the COVID-19 virus in its restaurant did not constitute "direct physical loss of or damage to" the restaurant necessary for coverage under the terms of the policy at issue. La Cava also argues Century-National acted in bad faith by summarily denying coverage without investigating La Cava's claim. We agree La Cava's allegations that contamination by the COVID-19 virus physically altered its restaurant premises were sufficient to withstand demurrer, and we reverse.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Century-National Insurance Policy

As alleged in the operative first amended complaint (complaint), La Cava purchased from Century-National a "commercial package" insurance policy, including commercial property insurance and general liability coverage for a one-year period beginning November 22, 2019 (the policy). A copy of the policy was attached to the complaint.

Section A.1 of the "Business Income (and Extra Expense) Coverage Form" provided in relevant part, "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 premises which are described in the declarations and for which a business income limit of insurance is shown in the declarations ...." (Capitalization omitted and italics added.) "Suspension" was defined to mean, in pertinent part, "[t]he slowdown or cessation of your business activities." The "period of restoration" was defined in part as the period that "begins with the date of direct physical loss or damage caused by or resulting from any covered cause of loss at the described premises" and ends on the earlier of "the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality" or "one year immediately following the date of direct physical loss or damage caused by a covered cause of loss." (Capitalization omitted.)

Section A.5.a of the business income coverage form also included civil authority coverage. This provision provided, "We will pay for the actual loss of business income you sustain and necessary extra expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises , caused by or resulting from any covered cause of loss." (Capitalization omitted and italics added.)

B. The Complaint

La Cava filed this action on July 7, 2020. The first amended complaint alleged causes of action for declaratory judgment, breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair business practices in violation of the Unfair Competition Law (UCL; Bus. & Prof. Code, § 17200 et seq. ). Each cause of action was premised on Century-National's denial of coverage for business income losses claimed by La Cava as a result of the COVID-19 pandemic.

La Cava is a restaurant in the Sherman Oaks neighborhood of Los Angeles. As alleged, La Cava "promptly shut down operations" on or around March 16, 2020, "[o]nce the La Cava management was made aware by [pandemic-related government orders] of the clear and present danger of the virus and its existence everywhere in LA County, including on the surfaces and in the air in and around La Cava's premises." On April 1, 2020 La Cava reopened with limited hours for take-out and delivery only, "prohibiting customers from dining in."

The complaint described and attached several government orders relating to the pandemic. On March 4, 2020 the Governor of California declared a state of emergency due to the rapid spread of COVID-19 in California, and on March 15 the Mayor of Los Angeles issued a public health order prohibiting restaurants in the city from serving food on their premises. On March 19 the Governor issued Executive Order No. N-33-20 requiring residents of California to stay in their homes, with limited exceptions. Also on March 19, the Mayor issued a "Safer at Home" public order, finding "the COVID-19 virus can spread easily from person to person and it is physically causing property loss or damage due to its tendency to attach to surfaces for prolonged periods of time." (Capitalization omitted.) The Mayor's order provided restaurants could offer food to customers "but only via delivery service, to be picked up, or drive-thru." In May, restaurants were again permitted to serve customers on-site by moving all dining outdoors, limiting group size, and spacing tables, among other restrictions. However, on November 22, 2020 the Los Angeles County Department of Health suspended outdoor dining at restaurants, and the Governor did not lift statewide stay-at-home orders to allow restaurants to reopen for outdoor dining until January 25, 2021.

The complaint included numerous allegations concerning the transmissibility of the COVID-19 virus and unfolding pandemic in California. Citing reports by the World Health Organization (WHO) and the Center for Disease Control and Prevention (CDC), the complaint alleged the COVID-19 virus can spread through "[f]loating respiratory droplets, called aerosols" that "behave like smoke," and it can both " ‘linger in the air for minutes to hours’ " and also "travel[ ] on air currents until they attach to an object or other surface." The WHO and CDC "have recognized the tendency of the [COVID-19 virus] to attach to objects and surfaces, ‘such as tables, doorknobs, and handrails,’ " and the virus " ‘may remain viable for hours to days on surfaces made from a variety of materials.’ " The complaint alleged further, "Numerous other scientific studies have discovered that the [COVID-19] virus can survive and persist on surfaces and buildings for nearly a month." Moreover, "The scientific community has confirmed that coronavirus and COVID-19 alter the conditions of properties and buildings such that the premises are no longer safe and habitable for normal use. Without substantial physical alterations, systems changes to facilities, and new protocols for air circulation, disinfection, and disease prevention, an infected property cannot remain open to the public. Cleaning of surfaces alone is insufficient."

Specifically, according to one WHO publication, the COVID-19 virus "adheres to, attaches to, and alters the surfaces of the property and surfaces upon which ... physical droplets land, and physically changes these once safe surfaces to ‘fomites.’ Fomites are objects, previously safe to touch, that now serve as agents and [a] mechanism for transmission of deadly, infectious viruses and diseases." "Thus, the coronavirus and COVID-19 physically change properties and surfaces such that contact with these properties and surfaces, which previously would have been safe, is now deadly and dangerous. This constitutes real and severe damage to and loss of the properties."

The complaint alleged La Cava suffered physical loss of or damage to its dining rooms and other property "caused by the actual presence of virus droplets in the air and on the surfaces in the vicinity of and in [its] restaurant" and "in the form of virus matter present on walls, floors, tables, chairs, silverware, dishes, and other surfaces." The complaint identified 10 commercial businesses, including three restaurants, in Sherman Oaks and its environs, where employees contracted COVID-19. Three of La Cava's employees suffered from COVID-19 in December 2020 and January 2021. The complaint alleged on information and belief that "La Cava is aware that it entertained customers since March 2020 who subsequently tested positive for COVID-19 and who had the ability to use the restroom facilities during the time they were outside dining." "[T]he virus ... is therefore certain to have been present at La Cava at various times," and "droplets containing SARS-CoV-2 have been physically present at the La Cava restaurant premises insured by the Policy at all relevant times." The complaint alleged further in paragraph 81, "The presence of droplets containing coronavirus at La Cava led to its closure and constitutes covered physical damage to [La Cava's] premises. Once the La Cava management was made aware by the Orders of the clear and present danger of the virus and its existence everywhere in LA County, including on the surfaces and in the air in and around La Cava's premises, it promptly shut down operations."

In addition to lost business revenue due to the suspension of operations, La Cava "incurred substantial costs in an attempt to mitigate the suspension of its operations, including but not limited to expenses incurred for reconfiguration to outside dining and increased sanitation procedures. [La Cava] would not have incurred those costs but for the direct physical loss or...