In Protégé Rest. Partners, LLC v. Sentinel Ins. Co., Ltd., No. 21-16814, 2022 WL 14476377 (9th Cir. Oct. 25, 2022), the U.S. Court of Appeals for the Ninth Circuit rejected another business interruption insurance claim related to the COVID-19 pandemic.
The plaintiff-appellant owns and operates a restaurant in Palo Alto, California. It purchased an insurance policy from the defendant that provides, in relevant part, three types of business interruption coverage, including Civil Authority, Business Income and Extra Expense, but only if there has been "direct physical loss or physical damage" or "risks of physical loss" to property.
The plaintiff-appellant attempted to distinguish its claim from many other failed ones by alleging that "the presence and contamination of [its] property by COVID-19 … satisf[ies] the policy's 'direct physical loss of or physical damage to property' requirement." This was based on a hypothetical discussed in an opinion of the California Court of Appeal, recognizing the "possibility of business-interruption insurance coverage for direct physical damage to property by COVID-19 in the unique circumstance where the coronavirus is present on and within the covered property and the policy holder alleges that such contamination caused the suspension of its operations."
After the plaintiff-appellant filed its opening brief, the California Court of Appeal issued an opinion considering and rejecting this argument; therefore, the Ninth Circuit did likewise. Coverage requires "some physicality to the loss of property—e.g., a physical alteration, physical contamination, or physical destruction." "[A]lthough COVID-19 'may affect how people interact with and within a particular space,' 'the presence or potential presence of the virus does not constitute direct physical damage or loss' because it is 'a ubiquitous virus transmissible among people and untethered to any property.' " The Ninth Circuit affirmed the district court's dismissal of the case under Federal Rule of Civil Procedure 12(b)(6).
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