May 30, 2024

COVID-19 Does Not Constitute Direct Physical Loss or Damage to Property

The Supreme Court of California recently weighed in on conflicting conclusions reached by California Courts of Appeal regarding insurance coverage for COVID-19 related losses, in its May 23, 2024 decision in Another Planet Entertainment, LLC, v. Vigilant Insurance Company, S277893.

As we expected, the court held that “allegations of the actual or potential presence of COVID-19 on an insured’s premises do not, without more, establish direct physical loss or damage to property within the meaning of a commercial property insurance policy.” The court noted that “direct physical loss or damage to property requires a distinct, demonstrable, physical alteration to property. 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 as property.”

The court acknowledged that its holding does not mean there may never be coverage for COVID-19 losses; but it also noted that the facts before it represent the “most common allegations in support of pandemic-related property insurance coverage” – i.e., that the COVID-19 virus causes direct physical damage to property by physically altering surfaces where it lands and attaches.

The insured, Another Planet, operated live entertainment venues. It suffered pandemic-related business losses when its venues closed during government shutdowns. It sought coverage for these losses under its property insurance policy, arguing that the presence or potential presence of the COVID-19 virus caused a “distinct, demonstrable, physical alteration to property,” and its presence or potential presence prevented or impaired the use of Another Planet’s property. 

Another Planet’s policy covered “direct physical loss or damage to” covered property, including “business income loss you incur due to the actual impairment of your operations” and “extra expense you incur due to the actual or potential impairment of your operations,” but only if this impairment is caused by “direct physical loss or damage by a covered peril to property.”

Another Planet’s insurer, Vigilant, denied Another Planet’s claim on the grounds that the presence of the virus did not constitute “physical loss or damage to property.”

The Supreme Court of California had not previously interpreted the phrase “direct physical loss or damage” in this context. In addition to thoroughly examining the many opinions addressing “direct physical loss or damage,” the Court addressed the split in authority for COVID-19 claims “represented on one side by United Talent Agency v. Vigilant Ins. Co. (2022) 77 Cal.App.5th 821, which held that the actual or potential presence of the virus generally could not cause direct physical loss or damage to property, and on the other by Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Ins. Co. (2022) 81 Cal.App.5th 96, which held that it could,” and confirmed that the reasoning of United Talent was correct.

The court’s reasoning rests on what some may believe is a razor-thin distinction: “While Another Planet alleges that the COVID-19 virus alters property by bonding or interacting with it on a microscopic level, Another Planet does not allege that any such alteration results in injury to or impairment of the property itself. Its relevant physical characteristics are unaffected by the presence of the COVID-19 virus.” The Court also rejected Another Planet’s argument that the actual or potential presence of the virus rendered its properties unfit for their intended use due to the risk to humans, noting that “the mere fact that a property cannot be used as intended is insufficient on its own to establish direct physical loss to property.”

Practical implications

As coverage attorneys will often tell you: Read your policy; every claim decision depends on the policy terms and claim facts. As this court noted, the ruling does not hold that COVID-19 virus can never cause direct physical loss or damage to property; there may be different facts or different policy terms, such as communicable disease coverage extension, that may provide coverage for pandemic-related losses. However, the Supreme Court of California has now settled a long history of conflicting rulings regarding coverage for COVID-19 losses and the meaning of the “direct physical loss or damage” requirement found in most commercial property insurance policies.