Marina Pac. Hotel & Suites, LLC v. Fireman's Fund Ins. Co.

Decision Date13 July 2022
Docket NumberB316501
Citation81 Cal.App.5th 96,296 Cal.Rptr.3d 777
Parties MARINA PACIFIC HOTEL AND SUITES, LLC, et al., Plaintiffs and Appellants, v. FIREMAN'S FUND INSURANCE COMPANY, Defendant and Respondent.
CourtCalifornia Court of Appeals Court of Appeals

Barnes & Thornburg, David P. Schack, Matthew B. O'Hanlon and Jonathan J. Boustani, Los Angeles, for Plaintiffs and Appellants Marina Pacific Hotel & Suites, LLC, Venice Windward, LLC, Larry's Venice, L.P. and Erwin H. Sokol.

DLA PIPER, John P. Phillips, San Francisco, Joseph Davison and Brett Solberg for Defendant and Respondent.

PERLUSS, P. J.

For more than two years our understanding of COVID-19, the infectious disease caused by the SARS-CoV-2 virus and its many variants, has evolved.1 Today we think we know how it spreads, how to protect against it and how best to treat those who have it. Perhaps we do. But even so, when a pleading alleges facts sufficient to constitute a cause of action, what we think we know—beliefs not yet appropriately subject to judicial notice—has never been a proper basis for concluding, as a matter of law, those alleged facts cannot be true and, on that ground, sustaining a demurrer without leave to amend. Yet that is precisely what occurred here.

The owners of Hotel Erwin and Larry's (a restaurant adjacent to the hotel) in Venice Beach—Marina Pacific Hotel & Suites, LLC; Venice Windward, LLC; Larry's Venice, L.P.; and Erwin H. Sokol, as trustee of the Frances Sokol Trust (collectively insureds)—sued Fireman's Fund Insurance Company alleging the COVID-19 virus was present on, and had physically transformed, portions of the insured properties—"direct physical loss or damage" within the meaning of Fireman's Fund's first-party commercial property insurance policy—but Fireman's Fund refused to pay policy benefits for covered losses incurred as a result. The trial court sustained Fireman's Fund's demurrer to the insureds’ first amended complaint without leave to amend and dismissed the lawsuit, ruling the COVID-19 virus cannot cause direct physical loss or damage to property for purposes of insurance coverage. That might be the correct outcome following a trial or even a motion for summary judgment. It was error at this nascent phase of the case. We reverse.

FACTUAL AND PROCEDURAL BACKGROUND
1. The Fireman's Fund (Allianz) Policy2

As alleged in the operative first amended complaint, Fireman's Fund issued its commercial property insurance policy no. USC007058190 for the period July 1, 2019 to July 1, 2020 to provide coverage for Hotel Erwin and Larry's. Marina Pacific Hotel & Suites, LLC; Venice Windward, LLC; Larry's Venice, L.P.; and Erwin H. Sokol, as trustee of the Frances Sokol Trust—plaintiffs in this litigation—were named insureds. A copy of the policy was attached as Exhibit A to the pleading.

The policy's general property coverage provision states, "[W]e will pay for direct physical loss or damage to [the insured property] caused by or resulting from a covered cause of loss during the Policy Period." The policy provided business interruption coverage (with a $22 million limit) for "the actual loss of business income and necessary extra expense you sustain due to the necessary suspension of your operation during the period of restoration arising from direct physical loss or damage to [covered] property." The terms printed in boldface type were separately defined. As pertinent here, "covered cause of loss" was defined as "risk of direct physical loss or damage not excluded or limited in the Coverage Form"; "business income" was defined as the net profit or loss before income taxes from the business's operations; "suspension" as "the slowdown or cessation" of operations and also meant that part or all of the premises had been rendered untenable. "Period of restoration" meant "the period of time that begins immediately after the time of direct physical loss or damage caused by or resulting from a covered cause of loss to the property" and ends when the property "should be repaired, rebuilt, or replaced with reasonable speed and like kind or quality."

The policy also included "communicable disease coverage" (with a policy limit of $1 million), providing the insurer would pay "for direct physical loss or damage" to insured property "caused by or resulting from a covered communicable disease event ," including costs necessary to repair or rebuild insured property damaged or destroyed by the communicable disease and to "[m]itigate, contain, remediate, treat, clean, detoxify, disinfect, neutralize, cleanup, remove, dispose of, test for, monitor and assess the effects [of] the communicable disease ." In addition, business interruption coverage was provided for suspension of operations during a period of restoration, provided the suspension was "due to direct physical loss or damage to property at a location caused by or resulting from a covered communicable disease event ." "Communicable disease" was defined as "any disease, bacteria, or virus that may be transmitted directly or indirectly from human or animal to a human." "Communicable disease event" was defined as "an event in which a public health authority has ordered that a location be evacuated, decontaminated, or disinfected due to the outbreak of a communicable disease at such location."

As one of the exclusions applicable to all coverages (property coverage, business income and extra expense coverage or any extensions of coverage), the policy, under the heading "Mortality and Disease," provided the insurer would not pay for any loss, damage or expense caused directly or indirectly by, or resulting from, "[m]ortality, death by natural causes, disease, sickness, any condition of health, bacteria, or virus."

2. The First Amended Complaint

The insureds filed their complaint against Fireman's Fund on July 21, 2020—four months after the COVID-19 pandemic first gripped the United States and three weeks after the end of the policy period—and the operative first amended complaint on August 31, 2021, alleging causes of action for breach of contract, tortious breach of contract, elder abuse and unfair competition. All four causes of action were based on Fireman's Fund's denial of coverage and refusal to pay (or to advance) policy benefits for losses claimed by the insureds as a result of the pandemic.

The first amended complaint alleged, in part, the insureds, beginning in March 2020, had suffered loss arising from direct physical loss or damage to covered property based on the existence of COVID-19. They asserted that "COVID-19 is a covered cause of loss under the Policy because it is not excluded or limited thereunder" and, on information and belief, that "the presence of COVID-19 on property, including on and within Insured Properties (i.e., an external force), caused and continues to cause physical loss and/or damage to property by causing, among other things, a distinct, demonstrable or physical alteration to property" and "by transforming the physical condition of property at Insured Properties and within the covered radius," causing the properties to remain in an unsafe and hazardous condition.

Also on information and belief the insureds alleged COVID-19 spreads through three primary modes of transmission: airborne transmission (droplets of saliva or nasal discharge of an infected individual, which are released by a cough

, sneeze, speech or similar modes and inhaled by others); aerosols (smaller droplets that can linger in the air for hours and reach others further away); and fomite transmission—indirect contact with surfaces or objects where the virus has been disseminated by a person with COVID-19. The first amended complaint continued, "Both porous and nonporous surfaces or objects can harbor COVID-19 and serve as vehicles of transmission. Once this occurs, the transfer of COVID-19 may and does readily occur between inanimate and animate objects, or vice versa. A study by the Virology Journal showed that COVID-19 can survive on surfaces up to 28 days, serving as a vehicle for transmission during that time span." Citing several journal articles, the insureds alleged the COVID-19 virus does not simply live on the surface of objects. Rather, "it also actually bonds and/or adheres to such objects through physico-chemical reactions involving, inter alia , cells and surface proteins" and "caus[es], among other things, a distinct, demonstrable or physical alteration to property."

The insureds alleged COVID-19 had been present in and before March 2020 on a variety of physical objects in the insured properties, including furniture, countertops, walls, bedding, appliances and food and other packaged items, as well as in the air. The presence of the virus was not due to a single episode. Rather, "because COVID-19 is a pandemic and is statistically certain to be carried by a number of individuals who visit the Insured Properties and other properties within the covered radius daily, COVID-19 is continually reintroduced to the air and surfaces of those locations." Further, they alleged, in response to multiple employees of Hotel Erwin testing positive, "various public health authorities have ordered that Hotel Erwin be evacuated, decontaminated, or disinfected," and specifically alleged one employee had been ordered by the Los Angeles County Department of Health–Environmental Health Division to "evacuate the hotel and quarantine."

The physical loss or damage to property, the insureds alleged, required the closure or suspension of operations at Hotel Erwin and Larry's or portions of those properties at various times and caused them to incur extra expense, adopt remedial and precautionary measures "to attempt to restore and remediate the air and surfaces at the Insured Properties, dispose of property damaged by COVID-19 and limit operations at the Insured Properties." In addition, access to the insured properties, the insureds alleged, had at times been prevented or limited by governmental orders...

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