If a hotel, store, or other commercial building becomes unusable because of contamination by asbestos or noxious or dangerous chemicals, the resulting losses to the building’s owner would probably be covered by property insurance policies. So why are losses linked to COVID-19 any different?

The pandemic’s widespread economic fallout has triggered numerous insurance claims – most of which have been unsuccessful. A recent decision by the California Court of Appeal, which adds to that string of defeats, explains why (Inns By The Sea v California Mutual Insurance.)

Inns By The Sea (“Inns”) operates five hotels in Northern California – one in Half Moon Bay, and four in Carmel. In March of 2020, the counties of San Mateo and Monterey, hoping to slow the spread of the pandemic, ordered all but essential businesses to shut down.

Inns complied, closing its five properties. On March 24, 2020, it made a claim under its commercial property insurance coverage for the loss of business. California Mutual, the insurer, denied the claim on the same day, stating that a “loss of business due to reasons other than covered physical damage is beyond the scope of the insurance policy.”

The following month, Inns sued California Mutual in the Superior Court of Monterey County. It pointed out that the COVID-19 virus could stay alive for extended periods on surfaces such as hotel room furniture and fixtures. This made any property exposed to the contagion potentially dangerous to guests and staff, it said, requiring Inns to close its hotels.

Inns pointed out that the insurance on its properties did not specifically exclude losses caused by a virus. Such exclusion clauses were introduced by the insurance industry in 2007 and were widely adopted by commercial insurance issuers.

In addition, Inns noted, the insurance policies included “Civil Authority” coverage against losses resulting from an order by a civil authority that prohibited access to Inns’ properties. That’s precisely what the mandates issued by the counties did, the company told the court.

California Mutual argued that its policy was intended to cover the effects of typical physical damage to a property, such as a roof blown off by a windstorm. The presence of the COVID-19 virus, which could be removed by thorough disinfection and sanitation measures, did not qualify as a physical loss covered by the policy.

The trial court agreed with the insurer. Inns appealed.

The appellate justices noted that California courts interpret the wording of insurance contracts in their “ordinary and popular sense.” If there is any ambiguity, that should be resolved to protect “the objectively reasonable expectations of the insured.” They added that “courts will not strain to create an ambiguity where none exists.”

The policies on the Inns hotels covered loss of business income due to suspension of operations, they said. However, “the ‘suspension’ must be caused by direct physical loss of or damage to property at [Inns’] premises,” and “the loss or damage must be caused by or result from a Covered Cause of Loss.”

The presence of the virus at the hotels did not qualify as a “physical loss or damage” that the policy was intended to cover, the higher court said. Contamination of a building might trigger such coverage, but it would have to seriously impair or destroy the building’s function. That was not the case at the hotels, which could remedy the issue with disinfection.

The justices noted that “it was the presence of the virus throughout San Mateo and Monterey Counties — not the presence of the virus specifically on Inns’ premises — that gave rise to the (shutdown) Orders, leading to Inns’ suspension of operations.”

The “Civil Authority” clause in the Inns’ insurance policies, which would take effect if a government agency “prohibit(ed) access to” an insured prooperty, was not triggered by the shutdown order, the justices said.

That’s because the county mandates were not based on “direct physical loss or damage” to the hotels, but on an attempt to control the spread of the virus.

Finally, the justices did not accept the Inns’ argument that the absence of a virus exclusion clause in its policies meant that virus-related losses were therefore covered.

That’s not how California law works, they said. An insurance policy’s coverage is defined by what the policy includes; if an occurrence is not included, there is no requirement that it be specifically excluded.

The appellate court upheld the lower court's ruling in favor of the insurance company.

By Laurie Murphy