Class Action Covid 19 Case Fails for Lack of Direct Physical Damage

Posted on April 16, 2021 by Barry Zalma

No Matter How Many Times they Try Courts Find Direct Physical Loss is Required

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.

BACKGROUND

Caribe owns and operates La Luz Ultralounge (“La Luz”), a restaurant and nightclub located in Bonita, California. Caribe purchased an insurance policy (“Policy”) from Topa for the policy period of May 18, 2019, through May 18, 2020.

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 alleges that its losses are covered under the Policy and identifies 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 commenced this litigation against Topa asserting that denial of coverage was a breach of contract and seeking declaratory judgment.

DISCUSSION

Topa argued the Policy provisions Caribe cites provide coverage only for “direct physical loss of or damage to” Caribe’s property and Caribe cannot recover under any of these provisions because it fails to allege “any ‘direct physical loss’ of or damage to” the insured premises. Caribe, on the other hand, insists that it has sustained “direct physical loss” of its property because it was “forced to suspend or reduce business at its location due to COVID-19” and the resultant safety orders.

Every Policy provision at issue contains language conditioning recovery on physical loss or damage to the property. Indeed, the Business Income provision states that coverage is contingent on “the necessary ‘suspension’ of [business] ‘operations'” caused by “direct physical loss of or damage to [the insured] property.” Thus, the question before the USDC became whether Caribe has alleged “physical loss or damage” sufficient to trigger coverage under one of these provisions.

Under California law, losses from inability to use property do not amount to direct physical loss of or damage to property within the ordinary and popular meaning of that phrase. Further, only a “distinct, demonstrable, physical alteration” of property will amount to physical loss or damage that may trigger coverage. MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766, 779 (2010). Detrimental economic impact alone is insufficient. Several courts in this jurisdiction have recently considered cases with facts nearly identical to this one, and these courts have reached a consensus — where an insurance policy conditions recovery on “direct physical loss or damage,” economic business impairments caused by COVID-19 safety orders do not fall within the scope of coverage.

The Policy provisions on which Caribe relies clearly condition recovery on physical loss or damage to the insured premises. Caribe alleges only that COVID-19 restrictions have prevented it from using its property for normal business operations which it claims is direct physical damage. However, Caribe did not sufficiently allege direct physical loss or damage such as would trigger coverage. Therefore, Caribe’s failure to allege direct physical loss or damage forecloses its claim to coverage under the Policy.

Nevertheless, Caribe contends “direct physical loss” should be read to encompass the type of economic business impairments it has suffered. Even if the Policy covered permanent dispossession, which it does not, Caribe has not alleged permanent dispossession, nor could it, as COVID-19 safety orders only temporarily restricted Caribe’s use of its premises.

While the Court was sympathetic that Caribe is suffering economically from the unprecedented COVID-19 pandemic, an economic business impairment does not qualify as a physical loss or damage to the premises.

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.

ZALMA OPINION

Insurance is nothing more than a contract whose terms and conditions must be enforced as written if they are unambiguous. Losing money is a real loss. When the plaintiff loses money due to an act that did not do any direct physical loss or damage, no promise made by the policy to provide indemnity to the insured was implicated. As sad as the 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.

? 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. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at https://www.zalma.com and [email protected].

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts; and the last two issues of ZIFL at https://zalma.com/zalmas-insurance-fraud-letter-2/