United Talent Agency v. Vigilant Ins. Co.

• Decision Date: 22 April 2022
• Docket Number: B314242
• Citation: 77 Cal.App.5th 821,293 Cal.Rptr.3d 65
• Parties: UNITED TALENT AGENCY, Plaintiff and Appellant, v. VIGILANT INSURANCE COMPANY et al., Defendants and Respondents.
• Court: California Court of Appeals Court of Appeals

77 Cal.App.5th 821

293 Cal.Rptr.3d 65

UNITED TALENT AGENCY, Plaintiff and Appellant,

v.VIGILANT INSURANCE COMPANY et al., Defendants and Respondents.

B314242

Court of Appeal, Second District, Division 4, California.

Filed April 22, 2022

Pasich, Michael S. Gehrt, Kirk Pasich, Nathan M. Davis and Caitlin S. Oswald for Plaintiff and Appellant.

Clyde & Co, Susan Koehler Sullivan, Douglas J. Collodel, Gretchen S. Carner, Brett C. Safford, Los Angeles; O'Melveny & Myers, Jonathan D. Hacker for Defendants and Respondents.

COLLINS, J.

INTRODUCTION

Appellant United Talent Agency (UTA) sued Vigilant Insurance Company and Federal Insurance Company, alleging that the insurers wrongfully denied property insurance coverage for economic losses related to the COVID-19 pandemic. The insurance policies covered "direct physical loss or damage" to insured property. UTA asserted that the policies covered its losses under two theories: first, loss of use of its properties due to civil closure orders and other limitations imposed to slow the spread of the virus, such as cancelled events and productions; and second, "damage" to its properties caused by the alleged presence of the virus in the air and on surfaces. The trial court sustained the insurers’ demurrer without leave to amend, and UTA appealed.

We find that UTA has failed to allege facts sufficient to demonstrate direct physical loss or damage under either theory, and therefore affirm.

FACTUAL AND PROCEDURAL BACKGROUND¹

A. UTA and the insurance policies

UTA is a large talent agency that represents actors, directors, producers, recording artists, writers, and other professionals in industries such as film, television, music, digital media, and publishing. It purchased property insurance policies from Vigilant and Federal that covered UTA premises in several states, including California, New York, Tennessee, and Florida.²

As relevant here, the policies included "business income and extra expense" provisions and a "civil authority" provision. The business income and extra expense provisions addressed business income loss and extra expenses incurred due to "impairment of ... operations," if the impairment was "caused by or result[ed] from direct physical loss or damage by a covered peril to property." The "direct physical loss or damage must ... occur at, or within 1,000 feet of" a covered premises. The provisions covered losses "during the period of restoration," defined as beginning "immediately after the time of direct physical loss or damage by a covered peril to property," and continuing until "operations are restored," including "the time required to ... repair or replace the property." Covered premises included "dependent business premises," which were "premises operated by others" upon which the insured depends to do things such as "deliver materials or services" or "attract customers." The parties agree that "direct physical loss or damage" is not defined in the policies.

The civil authority provision covered income loss or expenses incurred "due to the actual impairment of ... operations, directly caused by the prohibition of access to" covered premises "by a civil authority." The "prohibition of access by a civil authority must be the direct result of direct physical loss or damage to property away from" covered premises, "provided such property is within one mile" of the covered premises.

B. Complaint

In early 2020, the COVID-19 global pandemic, caused by the SARS-CoV-2 virus, began to affect the United States. State and local civil authorities issued "shelter in place" and "stay at home" orders, requiring suspension of non-essential businesses.³

UTA filed a complaint against the insurers on November 13, 2020, and filed a first amended complaint (FAC) on April 7, 2021.⁴ UTA alleged that the closure orders and the virus itself "impaired UTA's ability to use ... its insured locations ... for their intended uses and purposes. As a result, UTA has suffered, and continues to suffer, substantial financial losses, including lost profits, lost commissions, and lost business opportunities. Additionally, UTA suffered losses as a result of cancelled live events, as well as cancelled television and motion picture productions." UTA alleged that "[a]t least 13 UTA employees, five spouses, and some of their dependents have tested positive for COVID-19." It asserted, "UTA currently estimates that its financial losses, including lost profits, lost commissions, and lost business opportunities, approximate $150,000,000, and are continuing."

UTA alleged that it sought coverage from the insurers for its losses, and the insurers wrongfully denied coverage. UTA stated that Vigilant, Federal, and other insurers in the Chubb group "adopted a universal practice of denying coverage for all business interruption claims associated with SARS-CoV-2, COVID-19, and subsequent events." UTA asserted that there was "no merit to Vigilant's and Federal's position that their policies do not insure the losses that UTA has suffered and is suffering."

UTA asserted two theories for why the insurers’ denial was erroneous. First, UTA alleged loss of use of its properties. It alleged that "[t]he Closure Orders prohibited or limited the use and operations of UTA's insured locations and the premises upon which it relies. This meant that UTA (and many other businesses) could not use their insured locations and properties for their intended purpose." UTA also alleged that the closure orders "prohibited access to venues and locations hosting live events, all of which UTA depends on to deliver and/or accept services." UTA further asserted, "the presence or potential presence of SARS-CoV-2 at, on, and in insured property prevents or impairs the use of the property, thus constituting ‘direct physical loss’ to property as that phrase is used in the Policies, even if it did not constitute ‘damage’ to property as that term is used in the Policies."

Second, UTA asserted that the presence of the virus itself could constitute physical damage. UTA alleged that it was "informed and believes, and on that basis alleges, that SARS-CoV-2 has been present in the vicinity of and on and in its [insured] properties, or would have been present but for [UTA's] efforts to reduce, prevent, or otherwise mitigate its presence" and "had the Closure Orders not been issued." UTA alleged when "an infected person breathes, speaks, coughs

, or sneezes," the virus permeates the air, settles on surfaces, and also "remain[s] airborne for a time sufficient to travel a considerable distance, filling indoor and outdoor spaces, and lingering in, attaching to, and spreading through heating, ventilation, and air conditioning (‘HVAC’) systems." In addition, "[s]tudies suggest that SARS-CoV-2 can remain contagious on some surfaces for at least 28 days." Thus, "respiratory droplets ... expelled from infected individuals land on and adhere to surfaces and objects. In doing so, they physically change the property by becoming a part of its surface. This physical alteration makes physical contact with those previously safe, inert surfaces (e.g., handrails, doorknobs, bathroom fixtures) unsafe. When SARS-CoV-2 attaches or binds to surfaces and objects, it converts those surfaces and objects to active fomites, which constitutes physical loss and damage."⁵ UTA alleged, "Just like invisible smoke in air alters the air, the presence of the SARS-CoV-2 virus alters the air and airspace in which it is found and the property on which it lands. This physical change constitutes physical loss and damage." UTA asserted that "SARS-CoV-2 is no different from mold, asbestos, mudslides, smoke, oil spills, or other similar elements that cause property damage, although they later might be removed, cleaned, or remediated."

UTA alleged causes of action for breach of contract against Vigilant, breach of the implied covenant of good faith and fair dealing against Vigilant, and declaratory relief against both insurers and Doe defendants.

C. Demurrer

The insurers demurred to the FAC, asserting that UTA failed to state facts sufficient to constitute a viable cause of action.⁶ ( Code Civ. Proc., § 430.10, subd. (e).) The insurers asserted that each of UTA's causes of action was "premised on an obligation to pay policy benefits due, but [UTA] has not alleged and cannot allege a covered loss in the first instance, as a matter of law."

The insurers asserted that the relevant policies insured impairment of operations "caused by or result[ing] from direct physical loss or damage by a covered peril to property," and "[t]he Extra Expense[ ] and Building and Personal Property[ ] coverages likewise require ‘direct physical loss or damage.’ " They argued that under California law, the phrase "direct physical loss" required an "actual change in [the] insured property," or a "distinct, demonstrable, physical alteration" of the property. The insurers asserted that neither the temporary limitations placed on the use of properties by the closure orders nor the alleged presence of the virus at UTA's covered properties constituted "direct physical loss or damage." The insurers also argued that "the FAC does not even contain factual allegations that [the virus] was actually present," and even if UTA could make such an allegation, "the virus harms human beings, not property." The insurers asserted that the presence of the virus could not constitute a "direct physical loss or damage" as a matter of law.

The insurers further asserted that coverage was limited to a "period of restoration" as property was being repaired or replaced—a situation that did not apply here, because there was no physical damage to the property. They also argued that restrictions on use arising from the closure orders did not constitute physical loss or damage, and civil orders to avoid gathering in groups did not constitute property damage. In addition, the "civil authority" coverage did not apply because UTA "failed to identify physical loss or...