A California Fourth District Court of Appeal, Division One panel listened intently as counsel for policyholder Inns by the Sea, insurer California Mutual, and their respective amici – California’s Major League Baseball teams and insurance industry organizations – argued California’s first state court appeal of a COVID-19 business income coverage lawsuit.Inns by the Sea is represented by Hunton, Reiser Law, and Ferguson Law P.C.Hunton’s special counsel Scott DeVries argued on Inns’ behalf.

As DeVries pointed out, the Inns’ case is about seven words in its California Mutual policy: “direct physical loss of or damage to.” Applying the plain meaning of these terms, Inns argued that COVID-19 is capable of and did cause “direct physical loss of or damage to” its property, which includes on-site air.[1] DeVries analogized damage to air to damage to groundwater, which the California Supreme Court has held is physical property capable of being damaged by trace concentrations of contaminants.[2] The Inns’ policy and allegations differed from two COVID-19 coverage lawsuits filed in California’s federal courts that barreled up a parallel track to the Ninth Circuit: Mudpie, Inc.v.Travelers Casualty Insurance[3] and Selane Products, Inc.

v.Continental Casualty Co.[4] Neither Mudpie nor Selane called on the Ninth Circuit to make an Erie guess as to how California state law would treat a policyholder alleging the presence of virus on-site caused physical loss or damage, which Inns alleged.And this factual distinction was relevant to the Ninth Circuit: Here, Selane did not plausibly allege that its property sustained any physical alterations for two reasons.

First, Selane did not allege that SARS-CoV-2 was present on its property to cause any damage.Second, Selane alleged that the stay-at-home orders caused it to suspend its operations, but it did not plausibly allege that the stay-at-home orders caused its property to sustain any physical alterations.Thus, there is no coverage under the Business Income and Extra Expenses endorsements.[5] The Fourth Appellate Disctict appeared to appreciate the distinction between the facts Inns alleged and those considered by the Ninth in Selane and Mudpie.

Acting Presiding Justice Richard D.Huffman, in questioning California Mutual’s counsel, noted that Inns had alleged COVID on the property, which rendered the property unusable.Inns alleged this constitued damage to and loss of the property.

Even if the Court believed Inns needed to plead more specific facts about how the presence of COVID-19 affected its property, Inns sought leave to amend its’ complaint.Justice Hufman questioned the insurer’s amici on this point too, asking whether Inns could amend to allege the presence of COVID-19 on its property.DeVries also used the lack of a virus exclusion in the Inns’ policy as another distinction from the result in Mudpie.

That policy had an insurance-industry standard virus exclusion.That Inns’ policy did not have such an exclusion put it among the 17% of insureds without one.[6] The absence is also notable because under California law, an insurer’s failure to use an available exclusion supports an inference that the parties didn’t intend to limit coverage in that way.[7] In other words, losses caused by the presence of a virus are covered, otherwise there would be no need for an exclusion.A recording of the argument will be available on the Court’s website until April 2022.

The case was submitted to the Court at the end of oral argument, and a decision in The Inns by the Sea v.California Mutual Insurance Co., Case No.D079036, is expected by February 28, 2022.

  [1] California Mutual’s policy excluded certain airborne risks like smoke, smog, vapor, and gas from industrial operations, implying that air is covered property capable of being damaged.[2] AIU Ins.Co.

v.Superior Court 51 Cal.3d 807 (1990).

[3] 15 F.4th 885 (9th Cir.2021).[4] No 21-55123, 2021 WL 4496471 (9th Cir.

Oct.1, 2021 [unpublished]).[5] Selane Prods., 2021 WL 4496471, at *1; Mudpie, 15 F.4th at 889 (“Mudpie did not allege that COVID-19 was present in its storefront premises during the relevant period.”).

[6] National Association of Insurance Commissioners, Business Interruption / Businessowner’s Policies Report (Dec.9, 2020).[7] Fireman’s Fund Ins.

Cos.v.Atlantic Richfield Co., 84 Cal.

App.4th 842 (2001).