Does having COVID-19 in company's premises constitute loss for insurance purposes?

Employees tested COVID-19-positive, employer says in support of property claim

Does having COVID-19 in company's premises constitute loss for insurance purposes?

Temporary loss of a property’s use because of COVID-19-related closure orders does not amount to direct physical loss or damage under a property insurance policy, the California Court of Appeal for the Second District has said.

In United Talent Agency v. Vigilant Insurance Company, Vigilant Insurance Company and Federal Insurance Company issued property insurance policies covering direct physical loss or damage to insured property in United Talent Agency (UTA)’s premises in different states, including California, New York, Tennessee, and Florida. The policies included business income and extra expense provisions and a civil authority provision.

UTA filed a suit alleging that the insurers wrongfully denied property insurance coverage for economic losses relating to the pandemic. UTA made the following claims:

  • The COVID-19 closure orders and the virus itself prevented UTA from using its insured locations for the intended purposes;
  • UTA experienced substantial financial losses consisting of lost profits, lost commissions, and lost business opportunities, as well as losses due to cancelled live events and television and movie productions;
  • At least 13 UTA employees, five spouses, and some dependents tested positive for COVID-19.

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The insurers brought a demurrer. They argued that UTA failed to establish a viable cause of action under s. 410.30(e) of California’s Code of Civil Procedure and failed to allege a loss subject to insurance coverage.

The trial court, ruling favorably on the insurers’ demurrer, noted the following:

  • UTA failed to assert that it had certain knowledge of the presence of the virus in its property;
  • Insured parties typically need to confirm the presence of contaminants like asbestos, mold, or oil spills in their property before they can be covered.

Upon UTA’s appeal, the California Court of Appeal for the Second District affirmed the trial court’s decision and found no error in it.

Regarding the insurance policies’ business income and extra expense provisions, the appellate court held that UTA failed to state sufficient facts either showing loss of use of its properties due to closure orders and other measures imposed to reduce the spread of the virus or show physical damage to properties because of the supposed presence of the virus in the air and on surfaces.

First, UTA’s alleged loss of use arose from an interruption in business operations, not from a physical deprivation of property, the appellate court said. The measures implemented to limit the spread of the virus had a weak relationship to any specific location.

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Second, the appellate court agreed with prior cases finding that the actual or potential presence of the virus did not constitute direct physical damage or loss to property. Short-lived contamination that simple cleaning could address would not amount to direct physical loss, the decision in Inns-by-the-Sea v. California Mutual Ins. Co. (2021) stated.

Relating to the policies’ civil authority provision, UTA argued that it was covered because the closure orders prevented access to its insured properties.

The civil authority order, on its own, could not cause physical loss or damage to property, the appellate court said. Rather, such loss or damage should precede and necessitate the order’s issuance. In this case, the governments were issuing closure orders because of the COVID-19 public health crisis, not because of damage to property near UTA’s insured premises.

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