Sea v. Cal. Mut. Ins. Co.

71 Cal.App.5th 688

286 Cal.Rptr.3d 576

The INNS BY THE SEA, Plaintiff and Appellant,

v.CALIFORNIA MUTUAL INSURANCE COMPANY, Defendant and Respondent.

D079036

Court of Appeal, Fourth District, Division 1, California.

Filed November 15, 2021

Reiser Law, Michael J. Reiser, Walnut Creek, Matthew Reiser, Isabella Martinez, Walnut Creek; Hunton Andrews Kurth, Scott P. DeVries, San Francisco, Lorelie S. Masters, Rachel E. Hudgins ; The Meade Firm, Tyler Meade, Berkeley, Samuel I. Ferguson and Seena Forouzan, San Francisco, for Plaintiff and Appellant.

Covington & Burling, Jad H. Khazem, David B. Goodwin, San Francisco, Rani Gupta, Palo Alto, for Oakland Athletics Baseball Company, San Francisco Giants Baseball Club LLC, Los Angeles Dodgers LLC, Angels Baseball LP and Padres L.P. as Amici Curiae on behalf of Plaintiff and Appellant.

Reed Smith, David E. Weiss, Whittier, and T. Connor O'Carroll, San Francisco, for United Policyholders as Amicus Curiae on behalf of Plaintiff and Appellant.

Hayes, Scott, Bonino, Ellingson, Guslani, Simonson & Clause, Mark G. Bonino, Stephen M. Hayes, Charles E. Tillage, and Ryan Z. Keller, San Carlos, for Defendant and Respondent.

Crowell & Moring, Mark D. Plevin, San Francisco; Robinson & Cole and Wystan M. Ackerman for American Property Casualty Insurance Association and National Association of Mutual Insurance Companies as Amicus Curiae on behalf of Defendant and Respondent.

IRION, J.

This appeal presents an issue of first impression for a California appellate court: does a commercial property insurance policy provide coverage for a business's lost income due to the COVID-19 pandemic?¹

As we will explain, under the specific insurance policy that California Mutual Insurance Company (California Mutual) issued to The Inns by the Sea (Inns) for its five lodging facilities, Inns cannot recover from California Mutual for its lost business income resulting from the COVID-19 pandemic. Further, Inns has not identified any manner in which it can amend its complaint to state a claim for coverage. Accordingly, we affirm the trial court's order sustaining California Mutual's demurrer without leave to amend.

I. FACTUAL AND PROCEDURAL BACKGROUND

Inns operates four lodging facilities in Carmel-by-the-Sea, and one lodging facility in Half Moon Bay. On January 9, 2020, Inns renewed its commercial insurance policy with California Mutual (the Policy), which includes commercial property insurance covering each of Inns' five lodging facilities.

In March 2020, the COVID-19 pandemic resulted in government orders restricting the movement of citizens and the operation of businesses. On March 16 and 17, 2020, the counties of Monterey and San Mateo, where Inns' lodging facilities are located, issued orders for the express purpose of "ensur[ing] that the maximum number of people self-isolate in their places of residence to the maximum extent feasible, while enabling essential services to continue, to slow the spread of COVID-19 to the maximum extent possible" (the Orders).² Among other things, the Orders required citizens to shelter in place and prohibited travel unless essential. The Orders also required businesses (except those classified as "Essential Businesses") to cease all but minimum basic operations at any facilities located within the counties. The Monterey County order defined "Essential Businesses" to include "[h]otels, motels, bed and breakfast establishments, and other businesses that provide transient occupancy for visitors to the County, provided that such business[es] require their patrons to shelter in place as otherwise required by this Order." The San Mateo County order contained no such specification. Inns closed its lodging facilities in response to the Orders.

On March 24, 2020, Inns made a claim to California Mutual under its commercial property insurance coverage for the loss of business income caused by the pandemic. On the same day, California Mutual denied coverage, stating that "[l]oss of business due to reasons other than covered physical damage is beyond the scope of the insurance policy."

On April 20, 2020, Inns filed the instant lawsuit against California Mutual in Monterey County Superior Court. The complaint pled causes of action for (1) declaratory relief, (2) breach of contract, (3) breach of the implied covenant of good faith and fair dealing, and (4) bad faith denial of insurance coverage, all of which were based on the allegation that the Policy provided coverage for Inns' loss of business income due to the pandemic.

As factual background, the complaint specifically alleged,

"19. Emerging research on the virus and recent reports from the Center for Disease Control indicate that COVID-19 strains physically infect and can stay alive on surfaces for extended periods, a characteristic that renders property exposed to the contagion potentially unsafe and dangerous.

"20. On March 17, 2020, the Inns were forced to cease operations based on orders from both the County of Monterey and the County of San Mateo ordering cessation of all non-essential travel and directing all businesses and governmental agencies to cease non-essential operations at physical locations. These Closure Orders were issued in direct response to these dangerous physical conditions, and prohibit [Inns] from selling any rooms to the public, thereby forcing [Inns] to close the Inns and to lay off nearly all of its workers and triggering California Mutual's coverage responsibilities.

"21. The Closure Orders were made in direct response to the continued and increasing presence of the coronavirus on [Inns'] property and/or around its premises."³

Attached to the complaint was the Policy issued to Inns by California Mutual. The Policy provides commercial property insurance for "direct physical loss of or damage to Covered Property at the premises ... caused by or resulting from any Covered Cause of Loss," with "Covered Property" generally encompassing Inns' buildings and business personal property, as well as certain personal property of others, unless specifically limited. "Covered Causes of Loss" is defined to mean "Risks Of Direct Physical Loss," unless excluded or limited. To provide a simple example of this coverage, if a storm caused the roof to blow off one of Inns' properties, California Mutual would pay for the loss of the roof.⁴

As especially pertinent here, however, the commercial property insurance also provides "Business Income (and Extra Expense)" and "Civil Authority" coverage. The Business Income coverage states 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 [Inns'] premises .... The loss or damage must be caused by or result from a Covered Cause of Loss." (Italics added.) The "Period of Restoration" is defined as "the period of time that: [¶] a. Begins: [¶] (1) 72 hours after the time of direct physical loss or damage for Business Income coverage; or [¶] (2) Immediately after the time of direct physical loss or damage for Extra Expense coverage; [¶] caused by or resulting from any Covered Cause of Loss at the described premises; and [¶] b. Ends 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."⁵

The Extra Expense coverage provides for coverage of additional expenses during the restoration period:

"b. Extra Expense means necessary expenses you incur during the ‘period of restoration’ that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.

"We will pay Extra Expense (other than the expense to repair or replace property) to:

"(1) Avoid or minimize the ‘suspension’ of business and to continue operations at the described premises or at replacement premises or temporary locations, including relocation expenses and costs to equip and operate the replacement location or temporary location.

"(2) Minimize the ‘suspension’ of business if you cannot continue ‘operations’.

"We will also pay Extra Expense to repair or replace property, but only to the extent it reduces the amount of loss that otherwise would have been payable under this Coverage Form."⁶

The Civil Authority coverage applies when Inns' property does not itself sustain damage or loss, but damage or loss somewhere else gives rise to an order by a civil authority that prohibits access to Inns' premises. The Policy states, "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." (Italics added.)⁷

The complaint alleged that Inns was entitled to recover from California Mutual under either the Business Income coverage or the Civil Authority coverage.

California Mutual filed a demurrer. Specifically, California Mutual argued that the Policy did not provide coverage for Inns' lost business income resulting from the pandemic, under either the Business Income or Civil Authority coverages, because the pandemic did not give rise to direct physical loss of or damage to property. In addition, California Mutual argued that even if the pandemic gave rise to direct physical loss of or damage to property, three exclusions in the Policy operated to exclude coverage.⁸

After holding a hearing, the trial court issued an order on August 6, 2020, sustaining the demurrer without leave to amend. Inns appeals from the judgment.⁹

II.DISCUSSION

A. Applicable Legal Standards

We begin with the legal standards governing an appeal from an order...