Covid Coverage Case Heads to Argument With Billions on the Line

Marquee names including the Los Angeles Lakers basketball team and the National Hockey League are supporting a concert promoter seeking to force Vigilant Insurance Co. to provide coverage for losses incurred during the coronavirus pandemic shutdown.

With a decision due before the summer concert season begins, the California Supreme Court on Tuesday will hear arguments to answer a question posed by the US Court of Appeals for the Ninth Circuit and potentially billions of dollars: “Can the actual or potential presence of the COVID-19 virus on an insured’s premises constitute ‘direct physical loss or damage to property’ for purposes of coverage under a commercial property insurance policy?”

Chubb Limited-owned Vigilant argues Another Planet Entertainment Inc.'s policy requires an “actual, physical change to trigger coverage. The temporary presence of a readily removable substance like Covid-19 viral particles does not constitute ‘direct physical loss or damage’ as a matter of law,” the carrier contends.

Another Planet, which sued its insurer for coverage after live entertainment evaporated during shutdown, asserts the virus physically alters and damages property and that a trial judge erred in dismissing its suit alleging contractual breaches, bad faith, and fraud.

Unlike other cases in which courts have held that Covid can’t trigger “all risks” coverage in the first instance, “it is impossible to come to that same conclusion here unless one ignores the Policy’s mechanics and explicit provisions,” Another Planet said. The promoter “expressly alleged that SARS-CoV-2 was on, in, and around insured premises and provided the factual basis to prove that the virus caused the damage required to trigger the Policy’s numerous property and business interruption coverages.”

A ruling permitting Another Planet to reinstate its complaint could be costly for the insurance industry.

Requiring paying benefits for economic, operational losses unaccompanied by structural change to property means that “a substantial detrimental impact on California policyholders and the California insurance marketplace would follow,” the American Property Casualty Insurance Association and National Association of Mutual Insurance Companies said in a friend of the court brief.

Analyses APCIA conducted in May 2020 estimated that California Covid-related business interruption losses “for businesses with fewer than 250 employees and some business interruption coverage—should coverage be mandated—would range from $9.1 billion to $33.7 billion per month,” the trade groups said.

“By comparison, total monthly premiums for commercial property policies written in California amount to only $480 million, of which business interruption premiums constitute a small fraction,” the brief said.

Litigation Awaits

This is one of three Covid insurance-coverage cases the California high court agreed to review and the first to get to oral arguments.

The famed Napa Valley restaurant the French Laundry, in another question from the Ninth Circuit, was granted review and justices deferred briefing pending a separate case involving John’s Grill in San Francisco’s Union Square.

Some 62 Covid-related insurance coverage cases are pending in the Ninth Circuit, Vigilant said. And the entities lining up behind Another Planet similarly are suing their insurers to make up for losses and costs incurred.

The harms Covid caused to arenas “required significant amounts of money to remediate and resulted in millions of dollars of lost business income and extra expense from the cancellation of home games,” the Los Angeles Lakers Inc. said.

The NHL and Major League Baseball, likewise suing their insurers over billions in lost earnings, urged the court look to existing state appellate cases.

Risk of Claw Back

“Most published California appellate cases to consider the issue have held that a policyholder can state a claim based on ‘direct physical loss or damage’ under a property and business interruption insurance policy by alleging that the COVID-19 virus was present on the property, changed the air or surfaces of that property from safe to unsafe, and prevented the insured from using their property to run their business as normal. These well-reasoned decisions are consistent with California insurance law and pre-pandemic cases holding that noxious substances, such as odors, fumes, and smoke, trigger property and business interruption coverage,” the leagues said in a jointly filed amicus brief.

The real threat, French Laundry, California Pizza Kitchen, and renown chef and restaurateur Thomas Keller argue, is “the insurance industry will use the results in nationwide COVID-19 litigation to claw back the coverage courts have confirmed over the last 60 years. It is already succeeding.

“Given that the vast, vast majority of insurance coverage cases are settled, short of court, but on the basis of court decisions, this may lead to a massive constriction of coverage for thousands and thousands of policyholders. Such contraction of coverage should not occur outside the review of California’s insurance regulator, the only party with the power to negotiate such a change and adjust rates accordingly,” the restaurant owners said.

A decision is due within 90 days of oral argument.

Pasich LLP represents Another Planet. Clyde & Co. LLC and O’Melveny & Myers LLP represent Vigilant.

The case is Another Planet Entertainment, LLC v. Vigilant Insurance Co., Cal., No. S277893, oral arguments 3/5/24.