The Californian Court of Appeal in this judgment and discussed here also considered whether the insured’s business was suspended due to direct physical loss of its property.

The policy required suspension of operations caused by direct physical loss of property.

The insured argued that regardless of the physical presence of the Covid-19 virus, it had adequately claimed direct physical loss by alleging “loss of use, function, and value of its property”.

The insured argued that even if the presence of the virus on the premises did not constitute physical damage to the property within the meaning of the policy a policyholder could reasonably expect that a claim “constitutes physical loss where the insured property cannot function as intended”.

The Court of Appeal said that the argument fails because it collapses coverage for “direct physical loss” into “loss of use” coverage.

Both the relevant case law and language of the policy established that inability to use physical property to generate business income, standing on its own, does not amount to a “suspension caused by direct physical loss of the property within the ordinary and popular meaning of that phrase.”

The requirement that the loss be physical, given the ordinary definition of the term is widely held to exclude alleged losses that are intangible or incorporeal and preclude any claim against the property insurer where the insured merely suffers a detrimental income impact and accompanied by a distinct, demonstrable, physical alteration of the property.

Both the words “direct” and “physical” precluded the argument that coverage arises in a situation where the loss incurred by the policyholder stems solely from the inability to use the physical premises to generate income without any other physical impact to the property.

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