The California Supreme Court May Finally Weigh in on That Question.

After almost two years of uncertainty, we may finally get clarification as to whether California businesses with business interruption insurance coverage can recover losses they suffered as a result of the State-wide shutdown resulting from the COVID-19 pandemic. On December 28, 2022, the Ninth Circuit Court of Appeals asked the California Supreme Court to answer whether the presence of the COVID-19 virus at an insured’s property can be considered “direct physical loss or damage” – a prerequisite for coverage under most property insurance policies.

Courts throughout the United States have struggled with this question since the pandemic’s emergence in early 2020. As an indication of those struggles, in 2022, two California appellate courts issued conflicting decisions as to whether the mere existence of COVID-19 at the property was sufficient to constitute direct physical loss or damage. In April, Division Four of the Second Appellate District of the California Court of Appeal issued the United Talent Agency LLC v. Vigilant Insurance Co., et al. decision finding that the existence of COVID-19 was insufficient to constitute direct physical loss or damage. But within months of the United Talent Agency decision, Division Seven of the Second Appellate District came to a diametrically opposing view in Marina Pacific Hotel and Suites, LLC v. Fireman’s Fund Insurance Co. when it found that the existence of COVID-19 at the property could be sufficient to constitute direct physical damage.

Because of this split in authority, the Ninth Circuit determined that California law was unclear on the question and asked the California Supreme Court to clarify whether to apply the pro-insurance decision of United Talent Agency or the consumer-friendly Marina Pacific Hotel and Suites decision.

While nine other state high courts have issued rulings on COVID-19 coverage issues – typically ruling in favor of insurance companies – the California Supreme Court has steadfastly refused to weigh in on COVID-19 coverage issues. Given that most California appellate decisions have been decided consistent with United Talent Agency and the Marina Pacific Hotel and Suites decision is something of an outlier, as well as its recalcitrance to weigh in on these issues, it is possible that the California Supreme Court may use its discretion to refuse to answer the Ninth Circuit’s request for clarification – thereby maintaining the uncertainty that exists. But the California Supreme Court has a history of pro-consumer decisions and, given the uncertainty resulting from the existence of two diametrically opposing decisions, could use this opportunity to finally weigh in on an important legal issue that affects California business owners.

The attorneys at TALG will continue to monitor the outcome of this important question and stand ready to answer any questions our clients may have regarding insurance coverage issues.