Starlight Cinemas, Inc. v. Mass. Bay Ins. Co.

• Docket Number: B313518
• Decision Date: 01 May 2023
• Citation: 91 Cal.App.5th 24,308 Cal.Rptr.3d 31
• Parties: STARLIGHT CINEMAS, INC., et al., Plaintiffs and Appellants, v. MASSACHUSETTS BAY INSURANCE COMPANY, Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

91 Cal.App.5th 24

308 Cal.Rptr.3d 31

STARLIGHT CINEMAS, INC., et al., Plaintiffs and Appellants,

v.MASSACHUSETTS BAY INSURANCE COMPANY, Defendant and Respondent.

B313518

Court of Appeal, Second District, Division 7, California.

Filed May 1, 2023

Shernoff Bidart Echeverria, William M. Shernoff, Claremont, and Travis M. Corby, Claremont, for Plaintiffs and Appellants.

Hayes, Scott, Bonino, Ellingson, Guslani, Simonson & Clause, Stephen M. Hayes, Redwood City, Charles E. Tillage, Redwood City; Greines, Martin, Stein & Richland, Laurie J. Hepler, San Francisco, and Stefan C. Love for Defendant and Respondent.

FEUER, J.

Starlight Cinemas, Inc., Akarakian Theaters, Inc., Arman Akarakian, and Daniel Akarakian (collectively, Starlight) appeal from a judgment entered in favor of defendant Massachusetts Bay Insurance Company (MBIC) after the trial court granted MBIC's motion for judgment on the pleadings without leave to amend. Starlight, which owns and operates movie theaters in Southern California, sued MBIC for breach of an insurance contract and bad faith denial of coverage after MBIC denied Starlight's claim for losses sustained when it was compelled by government orders to suspend operations during the COVID-19 pandemic.

Starlight contends a policy term providing coverage for lost business income due to a suspension of operations "caused by direct physical loss of or damage to property" can be reasonably construed to include loss of use of its theaters without any physical alteration to the property, and the trial court therefore erred in entering judgment for MBIC. We conclude Starlight has not alleged a covered loss because the policy language requires a physical alteration of the covered property, which was not alleged. We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Policy

As alleged in the complaint, MBIC issued Starlight an " ‘all risk’ " commercial property and general liability insurance policy for a one-year period beginning August 19, 2019 (the policy).¹ A copy of the policy was attached to Starlight's complaint.

The policy included coverage for loss of business income due to an interruption of operations (business interruption coverage). Section A.1 of the "Business Income (and Extra Expense) Coverage Form" provided 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 premises which are described in the declarations and for which a business income limit of insurance is shown in the declarations ...." (Capitalization omitted and italics added.) "Operations" were defined, in pertinent part, to mean "[y]our business activities occurring at the described premises ...." "Suspension" was defined in part as "[t]he slowdown or cessation of your business activities." The "period of restoration" was defined as the period beginning "72 hours after the time of direct physical loss or damage ... [¶] ... [¶] caused by or resulting from any covered cause of loss at the described premises" and ending on the earlier of "[t]he date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality" or "the date when business is resumed at a new permanent location." (Capitalization omitted.) A policy endorsement eliminated the 72-hour coverage delay, stating, "the period of restoration begins at the time of direct physical loss or damage ...."

The policy also included civil authority coverage. Section A.5 of the "Business Income (and Extra Expense) Coverage Form" provided that if "a covered cause of loss causes damage to property other than the property at the [insured] premises," MBIC would pay for lost business income and extra expenses "caused by action of a civil authority that prohibits access to the [insured] premises" under two conditions: if "[a]ccess to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage" and "[t]he action of the civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the covered cause of loss that caused the damage ...."

The policy included an endorsement entitled "Exclusion of Loss Due to Virus or Bacteria" (the virus exclusion) that provided in pertinent part, "We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness, or disease." (Capitalization omitted.)

B. The Complaint

Starlight filed this action on September 1, 2020 against MBIC and Starlight's insurance broker, Maroevich, O'Shea & Coughlan Insurance Services, Inc. (Maroevich). The complaint alleged causes of action against MBIC for breach of contract and breach of the implied covenant of good faith and fair dealing. The complaint also alleged a cause of action against Maroevich for negligence in procuring the policy for Starlight.²

As alleged, Starlight owns and operates movie theaters across Southern California. On March 16, 2020, in response to the COVID-19 pandemic, the County of Los Angeles Department of Public Health issued an order prohibiting all indoor public and private gatherings and specifically ordering the closure of all theaters. Over the next few days, the counties of Orange and Riverside issued similar orders closing theaters. And on March 19 the Governor issued a statewide stay-at-home order banning public and private gatherings. As a result of these orders (collectively, the government orders), Starlight was required to close its theaters and cease business operations. These closures resulted in "a loss of functional use of [Starlight's] premises and an interruption of [its] business," and the government orders were the "predominant cause of the interruption of [Starlight's] business."

Starlight promptly submitted a claim to MBIC under the policy, which was then in force. As alleged, MBIC "did not conduct a fair, balanced and thorough investigation" of Starlight's claim. Instead, "[h]aving conducted no investigation whatsoever," MBIC (through its claims adjuster) denied the claim by letter dated April 27, 2020.³ The denial letter recited several policy provisions and stated, "[o]ur investigation and discussion with you confirmed there were no direct physical damages sustained to your described premises or property."

Business interruption coverage did not apply to Starlight's claim because the policy language "requires that there is direct physical loss or damage caused by a covered cause of loss, which results in a partial or complete shutdown of your business," and "[i]n this event, there was no direct physical damage to property at your premises that resulted in a shutdown from a covered loss." (Capitalization omitted.) Likewise, civil authority coverage did not apply because "there was no physical loss or damage to properties in your area from a covered cause of loss ...." (Capitalization omitted.) Further, "because the policy excludes coverage for loss or damage caused by or resulting from any virus, any loss you sustained is not a loss resulting from a covered loss[.]"

Starlight's first cause of action for breach of contract alleged it "sustained a loss when [its] movie theaters were required by the Government Orders to shut, and [Starlight] suffered a functional loss of [its] premises and a suspension of [its] business operations." This was a covered loss under the policy, and MBIC breached its contractual duty to pay the claim.⁴ The second cause of action for breach of the implied covenant of good faith and fair dealing alleged MBIC engaged in bad faith by, among other things, "failing to conduct a prompt, fair, balanced and thorough investigation of [Starlight's] claim" and "failing to conduct an investigation to determine the efficient proximate cause" of Starlight's loss before denying the claim.

On October 2, 2020 MBIC answered the complaint with a general denial and asserted numerous affirmative defenses, including that the policy "afforded no coverage" or any coverage was barred by policy exclusions.

C. MBIC's Motion for Judgment on the Pleadings

On December 11, 2020 MBIC filed a motion for judgment on the pleadings. MBIC argued that under California law, the phrase "direct physical loss of or damage to property" in an insurance contract requires a physical alteration of the insured property, citing the holding in MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co. (2010) 187 Cal.App.4th 766, 115 Cal.Rptr.3d 27 ( MRI Healthcare ). MBIC relied on the language in MRI Healthcare that a "direct physical loss" as used in an insurance policy precludes business interruption coverage where " ‘the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property.’ " ( Id . at p. 779, 115 Cal.Rptr.3d 27.) In basing its insurance claim on the government orders, Starlight alleged only a "loss of functional use" of its theaters, not any physical alteration. Further, numerous federal district courts in California had dismissed claims by insureds over denial of coverage for lost income stemming from COVID-19 government closure orders after finding that identical policy language required a physical alteration of the insured property. (See, e.g., 10E, LLC v. Travelers Indemnity Co. (C.D.Cal. 2020) 483 F.Supp.3d 828, 835-836 ["[u]nder California law, losses from inability to use property do not amount to ‘direct physical loss of or damage to property’ "]; Mark's Engine Co. No. 28 Restaurant, LLC v. Travelers Indemnity Co. (C.D.Cal. 2020) 492 F.Supp.3d 1051, 1055 ["An insured cannot recover by attempting to artfully plead impairment to economically valuable use of property as physical loss or damage to property."].)

MBIC also argued Starlight could not...