In this Court of Appeal Judgement in the State of California, the Californian appeal court dealt authoratively with the question of whether a commercial property insurance policy provides coverage for a business’s lost income due to the Covid-19 pandemic.

The court pointed out that while at that time no California appellate court had addressed the issue numerous Federal Courts and courts in other states had done so and that the overall majority of Federal District Court cases found no possibility of coverage.

The policy provided an indemnity for:

Direct physical loss of or damage to Covered Property at the premises … caused by or resulting from any Covered Cause of Loss.”

Covered Property encompassed the insured’s buildings and business personal property as well as certain personal property of others.

“The Covered Causes of Loss” was defined to mean “Risks Of Direct Physical Loss,” unless excluded or limited.

The policy also provided insurance for suspension of  “Business Income” and “Civil Authority” coverage.  That cover provided an indemnity in respect of suspension of operations which had to be caused by direct physical loss of or damage to property at the insured’s premises.  And the loss or damage must be caused by or resulted from a Covered Cause of Loss.

The Civil Authority coverage applied where the insured’s property did not in itself sustain damage or loss but damage or loss somewhere else gives rise to an order by a Civil Authority that prohibits access to the insured’s premises.

The judgment contains a useful review and discussion on what constitutes physical damage in the context of American case law.

The insured relying on the case law argued that the facts of the case were analogous to cases in which property insurance cover was triggered because a physical force rendered real property uninhabitable or unsuitable for its intended use, without any structural alterations.

The court of appeal said that the insured could not reasonably allege that the presence of the Covid-19 virus on its premises is what caused the premises to be uninhabitable or unsuitable for the intended use.

The shutdown orders were issued because the virus was present throughout the relevant counties not because of the particular presence of the virus on the insured premises.

The insured’s allegations that it ceased operations “as a direct and proximate result of the Closure Orders” did not make the proximate cause the particular presence of the virus on the insured’s premises.

The presence of Covid-19 on the insured’s property did not cause damage to the property necessitating rehabilitation or restoration efforts.  All that is required for the insured to return to full working order is for the government orders and restrictions to be limited.

The Court of Appeal said that even if the insured had thoroughly sterilised its premises to remove any trace of the virus after the orders were issued the insured would still have continued to incur a suspension of operations because the orders would still have been in effect and the normal function of society would still have been curtailed.

The property did not change.  The world around it did.  And for the property to be usable again, no repair or change can be made to the property – the world must change.

The closure orders were not directed at a particular business establishment due to the presence of Covid-19 on that specific business’s premises. The court said that it might be a different case if the restaurant was forced to close because its kitchen tested positive for Covid-19 requiring the entire facility to be thoroughly sanitised and to remove empty for a period. That was not decided.

In summary the court said that despite the insured’s allegations that the Covid-19 virus was on its premises it had not identified any direct physical damage to property that caused it to suspend its operations.  The claim was denied on that basis.

The position is no different in South African law. The Inns By The Sea v California Mutual Insurance Company (Super. Ct. No. 20CV001274)