A Video Explaining Pandemic & Direct Physical Damage

The Need for Damage or Loss to Tangible Property

The Covid-19 Pandemic has resulted in multiple cases dealing with the need for actual tangible damage. For example, in a Class Action attempt failed for lack of direct physical damage.

Caribe Restaurant & Nightclub, Inc. (“Caribe”) initiated a class action against Defendant Topa Insurance Company (“Topa”) alleging breach of contract and seeking declaratory judgment for insurance coverage.

The USDC ruled on a Covid 19 business interruption claim in Caribe Restaurant & Nightclub, Inc., Individually and On Behalf of All Others Similarly Situated v. Topa Insurance Company, Case No. 2:20-cv-03570-ODW (MRWx), United States District Court Central District of California (April 9, 2021) as have almost every court in the country.

Caribe owned and operated La Luz Ultralounge (“La Luz”), a restaurant and nightclub located in Bonita, California. Caribe purchased an insurance policy (“Policy”) from Topa.

In March 2020, due to the COVID-19 pandemic, the State of California and County of San Diego ordered “the closure of bars” and “bann[ed] onsite dining.” In May 2020, San Diego County “permitted the resumption of onsite dining” subject to restrictions. Caribe alleged that, as a result of these civil authority orders, it was forced to “suspend or reduce business” at La Luz. Caribe also alleges that COVID-19 “impaired Caribe’s property by making it unusable in the way that it had been used before.”

Caribe alleged that its losses were covered under the Policy and identified four specific provisions: “Business Income”; “Extra Expense”; “Civil Authority”; and “Duties in the Event of Loss” (referred to as the “Sue and Labor” provision). Caribe filed claims for coverage under these provisions, which Topa denied. Accordingly, Caribe sued Topa asserting that denial of coverage was a breach of contract and seeking declaratory judgment.

Because Caribe did not allege direct physical loss or damage, its claims were not covered and its causes of action for breach of contract and declaratory judgment fail. Therefore, the Court granted Topa’s Motion to Dismiss without leave to amend.

As sad as the Covid 19 losses are a court has no right to, nor will it, change the wording of the policy. The damage done to Caribe and those similarly situated was done by the state of California. Failing to obtain insurance benefits perhaps some creative lawyer will find a way to sue the state for its wrongful and allegedly unconstitutional orders depriving Caribe of the right to do business.

The Supreme Court of California, in Kazi v. State Farm Fire & Cas. Co., 24 Cal. 4th 871, 15 P. 3d 223, 103 Cal. Rptr. 2d 1, 15 P. 3d 223 (2001) found that a CGL insurer only owes a duty to indemnify if there is damage to tangible property. The court stated:

A standard general liability insurer has a duty to defend and indemnify for a loss to tangible property only. The property loss section of these policies provides coverage for physical injury, loss, or destruction of tangible property, and the focus of the property damage coverage is the property itself. (Waller v. Truck Ins. Exchange, Inc., 11 Cal. 4th 1, 17 (1995) (Waller).

For our purposes, it is important to note that the policies are not intended to cover intangible property losses, including loss of an investment, loss of goodwill or loss of intangible property use. (Id. at pp. 17-18; Gunderson, supra, 37 Cal. App. 4th at p. 1109.)

The court found that an easement is intangible, so there was no obligation to defend or indemnify an insured for such intangible losses. The Kazis had purchased land (Parcel A) adjacent to Parcel B, which was purchased by the Tollaksons. Sale documents indicated that the two parcels shared a common driveway 20 feet in width that straddled the boundary line. The Tollaksons assumed the existence of an implied easement. The Kazis subsequently graded an access road on Parcel A near the boundary line. The Tollaksons filed suit, alleging that the Kazis’ access road obstructed the Tollaksons’ implied easement over Parcel A.

In Mraz v. Canadian Universal Insurance Co., 804 F. 2d 1325 (4th Cir. 11/04/1986) he Court of Appeal for the Fourth Circuit concluded, with regard to response costs resulting from government orders to clean up hazardous waste, that:

Response costs are not themselves property damages. An examination of CERCLA’s provisions defining response, § 9601 (23)-(25), and authorizing the president to take response action, § 9604, makes it clear that property damage and response are independent; for example, the government may take response action in cases of a substantial threat of a release of hazardous substances before any damage ever occurs.

One cannot equate response costs with “injury to or destruction of tangible property,” this policy’s definition of property damage. Instead, response costs are an economic loss.

Since the court concluded that response costs were not “property damage” to tangible property, the insurer had no duty to defend or indemnify.

ZALMA OPINION

Although Covid-19 has brought on most of the litigation concerning the requirement for damage to tangible property, this video explains that it has been an issue over many years and has been upheld as a requirement by the courts that have considered the issue. Of course, an insurer could, if it desired, write coverage for damage to intangible property but, if it did, it would find it almost impossible to resolve claims because calculating losses to intangibles is necessarily speculative and difficult to determine with certainty.

© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.