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Vol. 11 - Issue 1

January 3, 2022


Hundreds Of Covid-19 Coverage Decisions: This One Was Most Significant

Inns-by-the-Sea v. California Mutual Ins. Co., 71 Cal. App. 5th 688 (2021)


While the Covid-19 business interruption cases involve property policies, which are not the subject of this annual insurance coverage best-of, the story was just too significant to ignore here.  Plus, many involved in liability coverage, and not normally property coverage, all of a sudden found themselves in the thick of Covid-19 business interruption cases.  Many who have spent a career thinking that BI meant “bodily injury” were now using it to mean “business interruption.”  So the story is relevant to CO readers. 

As widely reported, state and federal courts issued hundreds of decisions – both at the trial and appellate level – addressing coverage for Covid-19 business interruption losses.  It was a landslide win for insurers.  According to Penn Law School’s latest numbers, insurers won 94% of cases before federal district courts and 72% at the state trial level.  Insurers have also won every decision from federal circuit courts of appeal.  This is Reagan-Carter, the Globetrotters vs. Washington Generals, Tiger at the 1997 Masters [final round on my wedding day, fyi.].  Even Ted Lasso couldn’t find anything positive in this for policyholders.  As an aside, I addressed the state of Covid-19 business interruption coverage in a September 29, 2021 article in The Wall Street Journalhttps://www.coverageopinions.info/WSJCovidRaid.pdf.
While the decisions numbered in the several hundreds, I believe that Inns-by-the-Sea v. California Mutual Ins. Co. is worthy of being called the most significant.  Simply put, in determining that no coverage was owed for Covid-19 business interruption losses, the case has everything.  To make this point, I am going to address the decision in list-fashion and not as a narrative discussion.

The Jurisdiction
There has been no shortage of policyholder angst about the vast majority of Covid-19 coverage decisions coming from federal courts.  The oft-made policyholder argument has been that the coverage issue is a novel one and involving state law.  Thus, the decisions on coverage should be made by state courts and not federal courts predicting state law.  But Inns-by-the-Sea was decided by a California state court – not to mention at the appellate level and unanimous.  In addition, in general, when it comes to insurance coverage, California is not one where policyholders usually complain about being (except on the Cumis statute independent counsel rate issue).

The Facts
The facts in Inns-by-the-Sea are those seen in just about every Covid-19 business interruption coverage case: a business -- here, a company with hotels on the California coast – was forced to close its doors on account of county orders designed to limit the spread of the coronavirus.  So there is no argument that something about the facts at issue makes the decision different from all others.

The Policy Language
The business interruption policy language is the standard provisions that are contained in most policies: “We will pay for the actual loss of Business Income you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration’. The ‘suspension’ must be caused by direct physical loss of or damage to property at [Inns’] premises … . The loss or damage must be caused by or result from a Covered Cause of Loss.”  So there is no argument that something about the policy language at issue makes the decision different from all others.
The Presence Of Covid-19 On the Premises
Many courts that found against policyholders had much to say about the absence of Covid-19 on the shuttered premises.  This was an important factor in many courts’ decisions that the physical damage requirement for coverage had not been satisfied.  Here, however, that was not an issue, as the court gave the policyholder the benefit of the assumption, for the purpose of its analysis, “that the complaint describes (or could be amended to describe) a scenario in which, at some point, a person infected with COVID-19 was known to have been present at one or more of Inns’ lodging facilities.”

The Court Considered The Popularly Cited Policyholder Case Law
In support of the argument, that the presence of Covid-19 satisfies the physical damage requirement for business interruption coverage, policyholders often point to a series of cases where courts found coverage for businesses shut down by the presence of substances that did not physically alter the structure.  Such cases involve smoke, odor, ammonia, asbestos and others. 

The Inns-by-the-Sea court considered these decisions at length, and rejected them, based on glaring distinguishing factors.  First, the orders “reveal that they were issued because the COVID-19 virus was present throughout San Mateo and Monterey Counties, not because of any particular presence of the virus on Inns’ premises.”  In addition, even if the virus had been present on the premises, and the Inns had to thoroughly sterilize them, the Inns “would still have continued to incur a suspension of operations because the Orders would still have been in effect and the normal functioning of society still would have been curtailed.”  In other words, even if Covid had been present on the premises, and the Inns had to sterilize them, the Inns could still not have opened its doors.

Loss Of Use Is Not Physical Loss
The court rejected the argument that “the inability to use physical property to generate business income, standing on its own, . . .  amount[s] to a ‘suspension’ … caused by direct physical loss of property within the ordinary and popular meaning of that phrase.”  While the court cited to the Couch treatise to make this point – which some policyholders will say taints the opinion, on account of a conspiracy worthy of a John Grisham novel (a story beyond the scope here) – the court also made a point difficult to ignore.  Not to mention it is tied to the policy language, which policyholders point to as what needs to be the most important source for an insurer’s decision.  

Looking to the policy’s definition of “period of restoration,” the court stated: “The Policy’s focus on repairing, rebuilding or replacing property (or moving entirely to a new location) is significant because it implies that the ‘loss’ or ‘damage’ that gives rise to Business Income coverage has a physical nature that can be physically fixed, or if incapable of being physically fixed because it is so heavily destroyed, requires a complete move to a new location. Put simply, that the policy provides coverage until property ‘should be repaired, rebuilt or replaced’ or until business resumes elsewhere assumes physical alteration of the property, not mere loss of use.”

The Absence Of A Virus Exclusion
The court rejected the argument, that because ISO adopted a virus exclusion in 2006 (although not present in the policy at issue), it is an acknowledgment that a virus is capable of causing direct physical loss of or damage to property.  But, in doing so, the court acknowledged that “it may be possible that in certain hypothetical situations a virus could cause a suspension of operations through direct physical loss of or damage to property.”  But, as pled, the court stated: “this is simply not such a case.”


As Inns-by-the-Sea v. California Mutual Ins. Co. addresses the panoply of the issues that policyholders have raised, and then some, in support of Covid-19 coverage – and, especially, the jurisdictional one – I believe that it is worthy of being called the most significant decision out of the hundreds handed down in 2021.

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