Insurer Defeats California Restaurant’s Coronavirus Business Loss Claim

A federal court in California has dismissed a lawsuit filed by a Los Angeles restaurant seeking business interruption losses from Travelers Indemnity due to coronavirus-related restrictions on its business.

Judge Stephen Wilson of the U.S. District Court for Central California ruled that the insurance policy issued to 10E restaurant does not cover losses due to Mayor Eric Garcetti’s ban on in-person dining due to the coronavirus because 10E suffered no “direct physical loss of or damage to property” as required for civil authority coverage.

The judge also rejected the plaintiff’s bid to remove the case to state court.

The ruling was another victory for insurers claiming most business policies do not cover coronavirus-related business losses.

The Travelers policy in this California case covers losses and expenses “caused by action of civil authority that prohibits access to the described premises” and further states that the “civil authority action must be due to direct physical loss of or damage to property….”

The policy also contains an endorsement, “exclusion of loss due to virus or bacteria” that applies to “action of civil authority.” The endorsement reads: “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

The plaintiff argued that it is entitled to recover under the policy because public health restrictions prohibited access to its restaurant and the restrictions caused “physical damage” by “labeling of the insured property as non-essential” and “prevent[ing] the ordinary intended use of the property.”

Plaintiff also alleges that the virus exclusion “does not include exclusion for a viral pandemic.”

Travelers argued that 10E “did not plausibly” allege that it suffered “direct physical loss of or damage to property” as required for civil authority coverage.

Judge Wilson wrote, “Under California law, losses from inability to use property do not amount to “direct physical loss of or damage to property” within the ordinary and popular meaning of that phrase. Physical loss or damage occurs only when property undergoes a “distinct, demonstrable, physical alteration.”

He added, “An insured cannot recover by attempting to artfully plead impairment to economically valuable use of property as physical loss or damage to property.”

The judge said the restaurant attempted to substitute impaired use or value for physical loss or damage, arguing that in-person dining restrictions interfered with the use or value of its property – not that the restrictions caused direct physical loss or damage. Plaintiff characterized in-person dining restrictions as labeling of the insured property as nonessential.

“That ‘labeling’ surely carries significant social, economic, and legal consequences. But it does not physically alter any of plaintiff’s property,” the judge wrote.

He further dismissed the plaintiff’s claim that its business hardships resulted from the physical action of the novel coronavirus itself. He said that even if 10E could somehow recover for physical loss or damage to other property, such loss or damage could hardly qualify as “direct” as the policy requires.

Finally he rejected the plaintiff’s “attempts to circumvent the plain language of the policy” by emphasizing its disjunctive phrasing – “direct physical loss of or damage to property”– and insisting that “loss,” unlike “damage,” encompasses impaired use. While public health restrictions kept the restaurant’s customers at home, the restaurant remained in possession of its dining room, bar, flatware, and all of the accoutrements of its “elegantly sophisticated surrounding,” the ruling stated.

This is another in a string of cases where insurers have prevailed in coronavirus business loss cases. The pro-insurer rulings have come from a federal courts in Texas, New York and Florida, a District of Columbia court and a Michigan state court.