Another COVID-19 Business-Interruption Question Goes to Calif. Supreme Court

A federal appellate court is again asking the California Supreme Court to resolve a question about insurance coverage for COVID-19 business shutdowns — this time only on a narrow issue about a virus exclusion.

A panel of the 9th Circuit Court of Appeals on Tuesday sent a certified question to the state high court asking whether a virus exclusion in a policy issued to the owner of the swank French Laundry restaurant in Napa Valley is unenforceable because enforcement of it would render illusory another provision of the policy that provide limited virus coverage.

“Courts at both the state and federal level are grappling with the application of California insurance contract interpretation law to coverage for losses from business shutdowns due to government closure orders in response to COVID-19,” the 9th Circuit’s order states. “While both state and federal courts have published opinions providing some guidance, there remains much uncertainty as to how California law applies in many scenarios (such as the scenario presented in this case).”

The appellate panel noted that on Dec. 28 it sent another certified question to the California Supreme Court asking whether the physical presence of the SARS-CoV-2 virus on a property can cause direct physical loss or damage covered by an all-risk commercial insurance policy. That issue arose when concert organizer Another Planet Entertainment appealed a ruling that Vigilant Insurance Co. did not have to cover losses caused by COVID-19 shutdowns of non-essential businesses.

“We believe the Supreme Court of California may gain some efficiencies through concurrent consideration of our certification in this case,” the panel’s order says.

French Laundry Partners, operated by celebrity chef Thomas Keller, owns two restaurants in Yountville, a prime tourist destination in California’s most notable winemaking region. The company sued The Hartford after it was forced to furlough 300 employees and shut down The French Laundry and Bouchon Bistro restaurants in March 2020 because of public health orders.

French Laundry says a “Property Choice Deluxe Form” included in ts property extends coverage for a loss or damage due to virus. The Hartford disagrees and persuaded a US District Court judge to dismiss the lawsuit in April 2021. French Laundry appealed.

The 9th Circuit panel noted that a California appellate court has ruled in favor of another restaurant that alleged similar conflicting policy language created illusory coverage that precluded a virus exclusion. The California 5th District Court of Appeal ruled that a virus exclusion in the policy cannot be enforced because the same policy offers coverage for damages caused by viruses.

Policyholder attorney David B. Goodwin, senior counsel for the Covington & Burling law firm in San Francisco, said he was surprised the Ninth Circuit certified a question in the French Laundry case because the 5th District decision already addressed the issue. Goodwin said 83% of commercial property policies have a standard-form virus exclusion created by the Insurance Service Office, no virus exclusion or a very limited virus exclusion

“Because this is such an unusual issue – a ‘red-haired, bearded one-eyed man-with-a-limp’ case (to quote from a dissent written by Justice Fortas in U.S. v. Grinnell Corp. back in 1966) – this may be one of the rare certified questions that the California Supreme Court declines to accept,” he said in an email.

The 9th Circuit stayed proceedings in French Laundry’s appeal until the California Supreme Court decides whether to answer its certified question.

Top photo: The French Laundry restaurant in Yountville, Calif. Photo courtesy of Thomas Keller Group.