Spaghettini, LP v. Fireman's Fund Ins. Co.

1

SPAGHETTINI, LP, Plaintiff and Appellant, v. FIREMAN'S FUND INSURANCE COMPANY, Defendant and Respondent.

A163858

California Court of Appeals, First District, Fifth Division

July 5, 2023

NOT TO BE PUBLISHED

(Sonoma County Super. Ct. No. SCV-266378)

BURNS J.

Spaghettini LP sued its insurer, Fireman's Fund Insurance Company for breach of contract, among other causes of action, after Fireman's denied Spaghettini's claim for losses it sustained because of the COVID-19 pandemic. The trial court sustained Fireman's demurrer without leave to amend. Spaghettini appeals from the judgment entered in Fireman's favor. Spaghettini argues that the trial court erred by concluding Spaghettini's COVID-19 pandemic losses were not covered under its commercial property insurance policy. Finding no error, we affirm.

Background

A.

Spaghettini owns and operates a restaurant in Orange County. It purchased a commercial property insurance policy from Fireman's, which was effective between February 2, 2020 and February 2, 2021.

In the policy's provision for business income and extra expense coverage, Fireman's promised to pay for "the actual loss of business income and necessary extra expense you sustain due to the necessary suspension of your operations during the period of restoration arising from direct physical loss or damage to property at a location, or within 1,000 feet of such location, caused by or resulting from a covered cause of loss." (Italics added and bold omitted.) A "slowdown or cessation of [business] operations" at the insured property is a "[s]uspension" under the policy. (Bold omitted.) Coverage under this provision is limited to the "[p]eriod of restoration," during which property is "repaired, rebuilt, or replaced." (Bold omitted.)

The policy also contains an extension of coverage for communicable disease, which provides: "We 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: [¶] (a) Tear out and replace any part of Property Insured in order to gain access to the communicable disease; [¶] (b) Repair or rebuild Property Insured which has been damaged or destroyed by the communicable disease; and [¶] (c) Mitigate, contain, remediate, treat, clean, detoxify, disinfect, neutralize, cleanup, remove, dispose of, test for, monitor, and assess the effects [of] the communicable disease." (Italics added and bold omitted.)

B.

In March 2020, in response to the COVID-19 pandemic, the Governor of California and Orange County issued shelter-in-place orders mandating all restaurants suspend in-person dining. The orders allowed restaurants to operate only for take-out, drive-through, or food delivery. Because of these and later orders (of which the trial court took judicial notice), Spaghettini was forced to shut down its indoor dining, which significantly reduced its business.

That same month, Spaghettini submitted notice to Fireman's of its "property and business-interruption loss" and the presence of infected persons on or near its property. Fireman's rejected Spaghettini's claim, explaining that there was no coverage because it suffered no physical loss or damage to property.

Spaghettini sued Fireman's for breach of contract, breach of the implied covenant of good faith and fair dealing, false promise, and negligent misrepresentation. In its operative complaint, Spaghettini alleges that, in March 2020, state and local governments issued business closure and stay-at-home orders to control the spread of COVID-19 within the community. Later, government orders imposed strict capacity limits and distancing requirements. Spaghettini also alleges that the virus was present at its restaurant, as evidenced by the fact that individuals who tested positive for the coronavirus were present at the covered property in 2020 and 2021.

Spaghettini asserts it was "forced to suspend and reduce its business" both by the government orders that compelled a shutdown of business operations and by physical damage or loss caused by "physical droplets" containing COVID-19 landing on surfaces and then "attach[ing] to and adher[ing] on surfaces and materials, . . . becom[ing] a part of those surfaces and materials [and] converting the surfaces and materials to fomites." Spaghettini further alleges that this "represents a physical change in the affected surface or material"-changing them from safe to dangerous-"which constitutes physical loss and damage." The complaint also includes allegations that COVID-19 "caused such physical loss and damage to [Spaghettini's] property."

In addition to lost business revenue due to the suspension of operations, Spaghettini alleges that, by physically altering, "infest[ing]," and rendering its property unusable, COVID-19 necessitated it incur additional expenses to clean, sanitize, repair, alter, modify, or otherwise make its restaurant safe.

C.

Fireman's filed a demurrer, asserting that, as a matter of law, there was no coverage because Spaghettini had not adequately alleged direct physical loss or damage to the property and, in the alternative, it had not alleged facts showing that its COVID-19 losses were caused by direct physical loss or damage. In addition, Fireman's argued that Spaghettini could not establish the prerequisites necessary for communicable disease coverage.

The trial court sustained Fireman's demurrer without leave to amend. The court noted that "the presence of Covid-19 particles does not amount to 'distinct, demonstrable, physical alteration of the property,'" and that, accordingly, Spaghettini failed to allege direct physical loss or damage to its property. The trial court also observed that Spaghettini failed to allege the occurrence of a "communicable disease event" because it did not allege that a public health authority ordered that Spaghettini's premises in particular must be evacuated, decontaminated, or disinfected due to an outbreak there. The court entered judgment in Fireman's favor.

Discussion

A.

Spaghettini argues that the trial court erred by sustaining Fireman's demurrer because Spaghettini adequately alleged the" 'direct physical loss or damage'" required for coverage under the policy's business income and extra expense provision. We have independently reviewed Spaghettini's operative complaint to determine whether it alleges facts sufficient to state a cause of action under any legal theory. (Mathews v. Becerra (2019) 8 Cal.5th 756, 768 (Mathews).) Although our opinion is based on different reasoning, we conclude the trial court did not err by sustaining Fireman's demurrer without leave to amend.

1.

In reviewing the sufficiency of a complaint, we treat the demurrer as admitting all properly pleaded facts. But we do not accept the truth of factual or legal conclusions. (Mathews, supra, 8 Cal.5th at p. 768.) We also consider the complaint's exhibits and matters that may be judicially noticed. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318; Hoffman v. Smithwoods RV Park, LLC (2009) 179 Cal.App.4th 390, 400 (Hoffman).) We affirm a judgment of dismissal if it is proper on any grounds stated in the demurrer, regardless of whether the court stated that ground as its rationale. (Carman v. Alvord (1982) 31 Cal.3d 318, 324.)

Interpretation of an insurance policy is a question of law. (Palmer v. Truck Ins. Exchange (1999) 21 Cal.4th 1109, 1115.) We aim to give effect to the parties' mutual intentions. (Ibid.; Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264; see Civ. Code, § 1636.) An insurance policy "must be examined as a whole, and in context, to determine whether an ambiguity exists." (Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th 315, 322 (Minkler).) "If contractual language is clear and explicit, it governs." (Bank of the West, at p. 1264; see Civ. Code, § 1638.) Terms are to be interpreted in their lay or ordinary sense. (E.M.M.I. Inc. v. Zurich American Ins. Co. (2004) 32 Cal.4th 465, 471; see Civ. Code, § 1644.)

If the terms are ambiguous-that is susceptible of more than one reasonable interpretation-we interpret them to protect the insured's objectively reasonable expectations. (Bank of the West v. Superior Court, supra, 2 Cal.4th at pp. 1264-1265.) "Only if these rules do not resolve a claimed ambiguity do we resort to the rule that ambiguities are to be resolved against the insurer." (Minkler, supra, 49 Cal.4th at p. 321.)

The insured bears the burden of establishing that its claim falls within a policy's coverage. (Minkler, supra, 49 Cal.4th at p. 322.)

2.

Spaghettini's argument on appeal is two-pronged. First, it contends that the trial court misinterpreted the policy because "direct physical loss or damage" does not require a "distinct, demonstrable, physical alteration" of the property and that allegations of loss of use suffice. In the alternative, if physical tangible alteration is required, Spaghettini insists that it has satisfied this requirement by alleging both the presence of COVID-19 at its property and that COVID-19 particles transform once safe surfaces into property that is potentially dangerous.

The meaning of "direct physical loss or damage" is well established under California law. To satisfy the policy terms, property must undergo a" 'distinct demonstrable, physical alteration.'" (MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co. (2010) 187 Cal.App.4th 766, 779 (MRI Healthcare); Starlight Cinemas, Inc. v. Massachusetts Bay Ins. Co. (2023) 91 Cal.App.5th 24, 38.)" '[D]etrimental economic impact'" does not suffice on its own. (MRI, supra, at p. 779; accord, Musso &Frank Grill Co., Inc. v. Mitsui Sumitomo Ins. USA Inc. (2022) 77...