California Supreme Court Issues 7–0 Ruling Restricting COVID Insurance Coverage

A man wearing a mask walks along the Venice Beach boardwalk on the day Los Angeles County reopened its beaches, which had been closed due to the COVID-19 pandemic, in California on May 13, 2020. Mario Tama/Getty Images

The California Supreme Court on Thursday issued a 7–0 ruling that sided with an insurance company against businesses that were shut down during the COVID-19 pandemic, saying they did not suffer property damage that was covered by insurance.

In an opinion written by Chief Justice Patricia Guerrero and signed by all the justices on the state’s high court, the judges found that COVID-19 does not cause the type of damage to property that would trigger coverage under an insurance policy.

“The actual or potential presence of COVID-19 on an insured’s premises generally does not constitute direct physical loss or damage to property within the meaning of a commercial property insurance policy under California law,” the justice wrote.

“Direct physical loss or damage to property requires a distinct, demonstrable, physical alteration to property,” she wrote, adding that most courts around the United States have come to similar conclusions. “The physical alteration need not be visible to the naked eye, nor must it be structural, but it must result in some injury to or impairment of the property.”

During and after the pandemic, some California businesses sought to recover losses under certain insurance policies, saying they suffered losses from government-mandated closures as well as from the virus itself.

One company, Another Planet, which manages concert venues across Northern California, claimed in court that COVID-19 can cause “direct physical damage” and “direct physical loss” to properties because the virus will make the facilities unfit for use. The firm operates the Berkeley Greek Theater, Bill Graham Civic Auditorium, the Fox Theater, and more.

The firm said in court papers that it suffered losses in excess of $20 million due to the closure of its venues in 2020 due to the spread of COVID-19, suing Vigilant Insurance Company for not fulfilling its contract for denying coverage for the COVID-19-related losses that it suffered.

Earlier this year, a lawyer for Another Planet, Kirk Pasich, told the California Supreme Court in oral arguments that “we know from the science that this virus spreads inside buildings,” which renders the property “unusable.”

The company, he added, should get “a chance to prove they suffered a direct loss or damage” covered under insurance policies in California, according to a court reporter with the San Francisco Chronicle.

Some of the justices, however, appeared to be skeptical of that argument. “The flu kills lots of people every year. Does the flu have any different qualities?” Justice Goodwin Liu asked Mr. Pasich, according to the paper.

In the same hearing, Jonathan Hacker, an attorney for Vigilant Insurance, said that the company’s policy covers losses that are caused by property damage, adding that most courts have previously ruled that similar policies didn’t cover financial losses incurred during the pandemic. He noted that the virus doesn’t cause direct damage to property, only harm to people.

“The virus causes harm to humans. It does not cause harm to property,” Mr. Hacker said, according to the court reporter. “No courts have ever before held that a virus can cause direct loss or physical damage to property.”

Federal Judge Vince Chhabria had previously rejected the insurance-related claims made by Another Planet that COVID-19 caused property damage.

The case was being closely watched by other venues, sports companies, and restaurants. According to filings on the docket, the Los Angeles Lakers submitted a “friend of the court” brief, or amicus brief, that backed Another Planets’ insurance-related arguments.

Other Rulings

United Talent Agency, another California company had sued Vigilant Insurance for $150 million under similar pretexts. However, the California Court of Appeals rejected its arguments in April 2022.

“At least 13 UTA employees, five spouses, and some of their dependents have tested positive for COVID-19,” wrote United Talent’s attorneys in their 2020 complaint, adding that COVID-19 caused the firm to “suffered losses from cancelled live events,” including canceled tours by Guns N’ Roses, Post Malone, Toby Keith, Pitbull, Burna Boy, Monsta X, and more.

But the court disagreed. “We are mindful that the human and financial toll of the pandemic has been staggering. However, insurance is not a general safety net for all occurrences,” said the appeals court’s majority opinion.

Although many courts have issued similar rulings as the California Supreme Court’s Thursday decision, Vermont’s Supreme Court in 2022 found that COVID-19 may damage property in a separate case.

At the time, a 3–2 majority found that shipbuilder Huntington Ingalls Industries cleared the state’s “extremely low bar” for initial pleadings by alleging that the virus adheres to surfaces, turning them into vectors for disease that must be counteracted with barriers and other physical modifications.

“To be clear, this opinion does not state that what occurred in insured’s shipyards is ‘direct physical loss or damage to property’ under the policy,” and HII must still prove its case on remand, Associate Justice Harold Eaton Jr wrote at the time.

Reuters contributed to this report.