A California appeals court ruling Monday in a COVID-19 business interruption case creates a conflict among the state’s appeals courts as to whether the virus’ presence creates physical damage and could lead to differing trial court decisions regarding coverage.
While the Santa Ana-based appellate court affirmed a lower court decision in a Berkshire Hathaway Group Inc. unit’s favor in Coast Restaurant Group Inc. v. Amguard Insurance Co. based on policy exclusions, the ruling means lower courts can now rule either way on the issue of whether COVID-19-related business interruption policies cover physical damage, according to a policyholder attorney, whose firm submitted an amicus brief on the plaintiff’s behalf.
Brea, California-based Coast Restaurant, which operates Cedar Creek Inn, charged Amguard with breach of the implied covenant of good faith and fair dealing and breach of contract in its April 2021 first amended complaint, according to the ruling.
A district court in Westminster, California, ruled in Armguard’s favor in September 2021 based on the policy’s virus exclusion but did not determine whether there was coverage for “risk of physical loss” under the policy.
The three-judge appeals court panel concluded in its ruling that the “appellant suffered a covered loss under the policy because the governmental restrictions in this case deprived the appellant of important property rights in the covered property.”
However, it affirmed the trial court ruling based on the coverage’s virus exclusion as well as its exclusion for loss or damage caused by enforcement of any ordinance or law.
Policyholder attorney David B. Goodwin, senior counsel with Burling & Covington LLP in San Francisco, pointed to the November 2021 ruling by the California state appeals court in San Diego in The Inns by the Sea v. California Mutual Insurance Co., which held there was no physical loss or damage caused by the virus. The policy in that case did not have a virus exclusion.
Monday’s ruling “means there’s now a difference between two appellate courts and the trial courts are now free to follow one or the other” under the state’s judicial procedures, Mr. Goodwin said.
The California Supreme Court has accepted for review two other COVID–19 business interruption cases but is not expected to rule on them until next year, he said.
Mr. Goodwin said many small businesses’ policies include the Insurance Service Office’s virus exclusion, while those of larger businesses typically do not.
Other attorneys at Mr. Goodwin’s firm filed a pro-policyholder amicus brief in the Coast Restaurant case on behalf of United Policyholders.
Attorneys in the case did not respond to requests for comment.