Apple Annie, LLC v. Oregon Mutual Ins. Co. ( 2022 )

Filed 9/2/22
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION TWO
APPLE ANNIE, LLC,
Plaintiff and Appellant,
A163300
v.
OREGON MUTUAL (San Francisco County
INSURANCE COMPANY, Super. Ct. No. CGC-20-
585712)
Defendant and Respondent.
The COVID pandemic and ensuing lockdown have generated a host of
legal issues. One of the most momentous, in terms of the potential monetary
liability, is whether businesses ordered by government decree to close or
suspend operations could get compensation under the business income
coverage of the standard comprehensive commercial liability policy. The
issue has generated opinions from different Courts of Appeal, all of which
have held that the issue comes down to whether the insured can allege it
suffered “direct physical loss of or damage to [the insured] property.” Having
lost in the trial court, the insured here tells us “this appeal can be viewed as
a referendum on whether [those] decisions were correctly decided.” We
conclude that they were, add our agreement with the other cases, and thus
affirm the judgment on the pleadings for the insurer.
1
BACKGROUND
At all relevant times, plaintiff Apple Annie, LLC, operated restaurants
in Marin, San Francisco, and Santa Barbara counties. Defendant Oregon
Mutual Insurance Company issued Apple Annie a comprehensive commercial
liability and property insurance policy that, as relevant here, promised in
general to “pay for direct physical loss of or damage to Covered Property at
the [insured] premises,” and in particular to “pay for the actual loss of
Business Income you sustain due to the necessary suspension of your
‘operations’ during the ‘period of restoration.[1]. The suspension must be
caused by direct physical loss of or damage to property at the described
premises. The loss or damage must be caused by or result from a Covered
Cause of Loss.” The policy did not define “direct physical loss of or damage.”
The policy included two provisions that will have only glancing
provisions relevant to our analysis and conclusion.2
1 “ ‘Period of restoration’: [¶] a. Means the period of time that:
[¶] (1) Begins: [¶] (a) 72 hours after the time of direct physical loss or
damage for Business Income Coverage; or [¶] (b) immediately after the time
of direct physical loss or damage for Extra Expense Coverage; [¶] caused by
or resulting from any Covered Cause of Loss at the described premises, and
[¶] (2) Ends on the earlier of: [¶] (a) The date when the property at the
described premises should be repaired, rebuilt or replaced with reasonable
speed and similar quality; or [¶] (b) The date when business is resumed at a
new permanent location. [¶] b. Does not include any increased period
required due to the enforcement of any ordinance or law that:
[¶] (1) Regulates the construction, use or repair, or requires the tearing down
of any property . . . .”
2 This first, an exclusion, provides that “We will not pay for loss or
damage caused directly or indirectly by any of the following. . . . .
[¶] Ordinance Or Law [¶] The enforcement of any ordinance or law:
[¶] Regulating the construction, use, or repair of any property . . . . [¶] This
exclusion . . . applies whether the loss results from: [¶] An ordinance or law
that is enforced even if the property has not been damaged . . . . ” It is black-
letter insurance law that exclusions are only considered after it is established
2
According to Apple Annie’s complaint, in March 2020, first the Marin
and San Francisco Departments of Public Health, and then the Governor,
issued “Shelter in Place orders,”3 which Apple Annie alleged “caused [it] to
suspend business operations at all its locations, which resulted in an
immediate loss of business income.”4 Oregon Mutual denied Apple Annie’s
claim for its “business income loss.”
that coverage exists under the policy. (E.g., Waller v. Truck Ins. Exchange,
Inc. (1995) 11 Cal.4th 1, 16 (Waller); Rosen v. Nations Title Ins. Co.(1997)
56 Cal.App.4th 1489, 1497; Hallmark Ins. Co. v. Superior Court (1988) 201
Cal.App.3d 1014, 1017.) This policy language is mentioned only because it
will be of assistance in demonstrating why there is no coverage here.
The second is a provision that Oregon Mutual would pay for “the actual
loss of Business Income . . . caused by action of civil authority that prohibits
access to the described premises.” This provision was also pegged to “direct
physical loss of or damage to property.” Although this particular provision
features in some of the decisions discussed hereafter, it was not invoked here.
3 Apple Annie attached only the Governor’s March 19, 2020 order to its
complaint. Oregon Mutual asked the trial court to take judicial notice of the
Governor’s order, plus another made on March 4, 2020, and the closure
orders of the relevant health authorities in Marin and San Francisco
counties, but no ruling appears in the record. Oregon Mutual renewed the
request in this court, which Apple Annie did not oppose. Having already
granted the motion with respect to the Governor’s orders, and the Marin and
San Francisco orders, we now grant it as to the relevant orders by the Health
Officer of the Santa Barbara County Public Health Department, dated April
10 and April 24, 2020.
4As will be noted in a moment, this cause concluded in the trial court
when Oregon Mutual’s motion for judgment on the pleadings was granted
without leave to amend. Such a procedure is the functional equivalent of a
general demurrer and is evaluated according to identical standards, the most
important of which is that the pleader’s factual allegations are accepted as
true. (Angelucci v. Century Supper Club (2007) 41 Cal.4th 160, 165; Smiley v.
Citibank (1995) 11 Cal.4th 138, 145−146.) We mention this for two reasons.
First, Oregon Mutual states in its brief that, notwithstanding the
orders, “Apple Annie could [still] sell meals for takeout or delivery, but
3
Apple Annie’s action for breach of contract damages ended when the
trial court granted Oregon Mutual’s motion for judgment on the pleadings
and entered a judgment in its favor.
DISCUSSION
Apple Annie’s opening brief was filed on November 16, 2021. It
deployed cogent reasoning and analyzed a veritable mountain of
authorities—published and unpublished, state and federal—on the issue of
coverage.
The very same day, November 16, Division One of the Fourth District
Court of Appeal filed its opinion in Inns-by-the-Sea v. California Mutual Ins.
Co. (2021) 71 Cal.App.5th 688 (review denied Mar, 9, 2022, S272450) (Inns-
by-the-Sea). Noting that “hundreds of merit-based rulings have been issued
in both state and federal courts,” the court then summarized: “The
overwhelming majority of federal district court cases find no possibility of
coverage under commercial property insurance policies for a business’s
pandemic-related loss of income [citations], along with each federal appellate
court to consider the issue [citations], including the Ninth Circuit applying
customers could not sit and eat in its restaurants,” and its business was
merely “impeded.” However, the words “take-out,” “deliver,” or “delivery” are
used in some of the closure orders. Accordingly, we take Apple Annie’s
allegation that it “suspend[ed] business operations at all its locations” to
mean that all normal business activity of serving dining patrons in situ
ceased in the wake of the closure orders.
Second, all of the Courts of Appeal decisions discussed here involved
general demurrers. One consequence of this common posture is that the
reviewing courts were often considering scenarios and arguments based upon
the specific allegations of the insured’s complaint against the insurer. No
such individualized arguments are made here.
4
California law (Mudpie, Inc. v. Travelers Casualty Ins. Co. of America
(9th Cir. 2021) 15 F.4th 885).”5 (Id. at p. 692, fn. 1.)
After a comprehensive survey of the subject, the court concluded that a
business that closed pursuant to a government shut-down order had not
suffered “direct physical . . . damage to” the business’s property. This was a
matter of plain English:
“The words in the phrase ‘direct physical damage’ all have commonly
understood meanings. ‘Physical’ is defined as ‘having material existence:
perceptible especially through the senses and subject to the laws of nature.’
[Citation.] ‘Direct’ is defined as ‘proceeding from one point to another in time
or space without deviation or interruption,’ ‘stemming immediately from a
source,’ and ‘characterized by close logical, causal, or consequential
relationship.’ [Citations.] ‘Damage’ is defined as ‘loss or harm resulting from
injury to . . . property . . . .’ ” (Inns-by-the-Sea, supra, 71 Cal.App.5th 688,
699−700.)
The Inns-by-the-Sea court concluded that the Covid virus did not itself
cause “direct physical damage.” “ ‘[T]he presence of COVID-19 on Plaintiff’s
property did not cause damage to the property necessitating rehabilitation or
restoration efforts similar to those required to abate asbestos or remove
poisonous fumes which permeate property.[6] Instead, all that is required for
5 Apple Annie devotes considerable space in its briefs to exposing the
myriad “shortcomings” of Mudpie’s reasoning. There is scant point in taking
up this challenge because the Ninth Circuit was anticipating what would be
the position of the California courts. As those courts have now spoken, it is to
them that attention is more properly paid.
6 Among the cited examples of incorporeal contaminants that could
amount to “direct injury” were carbon monoxide, and odors from ammonia,
sulfuric gas, and “a past methamphetamine operation in a house.” (Inns-by-
the-Sea, supra, 71 Cal.App.5th 688, 701−702.)
5
Plaintiff to return to full working order is for the [government orders and
restrictions to be lifted].’ [Citation.] ‘This case . . . concerns an invisible virus
that is present throughout the world. . . . It is that general presence, and not
a specific physical harm to covered properties, that has caused governments
at all levels to consider restrictions. The question, therefore, is one of
“widespread economic loss due to restrictions on human activities, not the
consequence of a direct physical loss or damage to the insured premises.” ’ ”
(Inns-by-the-Sea, supra, 71 Cal.App.5th 688, 704.)7
Having concluded that the insured business suffered no “direct physical
damage” to its property, the court was equally unwilling to concede that the
insured being forced to suspend operations amounted to a “direct physical
loss” of its property. This conclusion had the support of considerable
authority, starting with a leading insurance treatise:
“The Couch treatise sets forth the generally recognized principle in the
context of first party property insurance that mere loss of use of physi-
cal property to generate business income, without any other physical impact
on the property, does not give rise to coverage for direct physical loss: ‘The
requirement that the loss be “physical,” given the ordinary definition of that
term, is widely held to exclude alleged losses that are intangible or incorpo-
real and, thereby, to preclude any claim against the property insurer when
the insured merely suffers a detrimental economic impact unaccompanied by
a distinct, demonstrable, physical alteration of the property.’ ” (Inns-by-the-
Sea, supra, 71 Cal.App.5th 688, 705−706, quoting 10A Couch on Insurance
7 The court did note that “Given our discussion, . . . it is possible that in
the context of real property, the ‘distinct, demonstrable , physical alteration’
referenced in the Couch treatise [citation], could include damage that is not
structural, but instead is caused by a noxious substance or an odor.” (Inns-
by-the Sea, supra, 71 Cal.App.5th 688, 706, fn. 19.)
6
(3d ed. 2016) § 148:46, pp. 148-96−148-98.) And here, the court was not blaz-
ing a new trail: “California law has repeatedly cited the Couch treatise in
adopting this rule. [Citations.]” (Inns-by-the-Sea, supra, at p. 706.)
Such, the court said, was also the conclusion of other courts: “[T]he
Business Income coverage applies when there is a suspension of operations
caused by ‘direct physical loss of’ property. As numerous courts have
observed, the words ‘direct’ and ‘physical’ preclude the argument that
coverage arises in a situation where the loss incurred by the policyholder
stems solely from an inability to use the physical premises to generate
income, without any other physical impact to the property. [Citations.] As
the federal Eighth Circuit Court of Appeals persuasively explained, because
the policy language requires ‘direct “physical loss” ’ to trigger coverage, ‘there
must be some physicality to the loss . . . of property—e.g., a physical
alteration, physical contamination, or physical destruction . . . . The policy
cannot reasonably be interpreted to cover mere loss of use when the insured’s
property has suffered no physical loss or damage.’ [Citation.] ‘The cases
consistently conclude that there needs to be some physical tangible injury . . .
to support “loss of property” or a physical alteration or active presence of a
contaminant to support “damage to” property.’ ” (Inns-by-the-Sea, supra,
71 Cal.App.5th 688, 706−707.)
Finally, the court deemed its conclusion fully harmonious with other
language in the policy: “The Policy’s reference to the ‘period of restoration’
further supports our conclusion that mere loss of use, without any other
physical impact to Inns’ property, is not sufficient to trigger the business in-
come coverage. The Policy states, ‘We will pay for the actual loss of Business
Income you sustain due to the necessary “suspension” of your “operations”
during the “period of restoration.” The “suspension” must be caused by direct
7
physical loss of or damage to property at [Inns’] premises . . . .’ (Italics
added.) Significantly, the ‘period of restoration’ is defined as ending on the
earlier of ‘(1) The date when the property at the described premises should be
repaired, rebuilt or replaced with reasonable speed and similar quality; or [¶]
(2) The date when business is resumed at a new permanent location.’
“The Policy’s focus on repairing, rebuilding or replacing property (or
moving entirely to a new location) is significant because it implies that the
‘loss’ or ‘damage’ that gives rise to Business Income coverage has a physi-
cal nature that can be physically fixed, or if incapable of being physically
fixed because it is so heavily destroyed, requires a complete move to a new lo-
cation. Put simply, ‘[t]hat the policy provides coverage until property “should
be repaired, rebuilt or replaced” or until business resumes elsewhere assumes
physical alteration of the property, not mere loss of use.’ ” (Inns-by-the-Sea,
supra, 71 Cal.App.5th 688, 707.)
Some five months later, on April 21, 2022, Division One of the Second
District agreed with the general conclusion reached in Inns-by-the-Sea—in
Musso & Frank Grill Co. Inc. v. Mitsui Sumitomo Ins. USA Inc. (2022)
77 Cal.App.5th 753 (Musso & Frank).8 Like Inns-by-the-Sea, this second
decision is germane because it also considered and rejected a claim made
here.
In our case, Apple Annie contends that “because the phrase ‘physical
loss of or damage to’ is phrased disjunctively, ‘loss of’ and ‘damage to’ must
each be given a separate meaning.” Apple Annie reasons: “Because of this
disjunctive framing, each concept must be accorded a separate, distinct
meaning. An interpretation of ‘loss of’ that assigns it the same meaning as
In light of the timing of Musso & Frank, and others that followed
8
shortly, we requested supplemental briefing, which has been received.
8
‘damage to’ would do violence to the language of the policy by rendering the
former term surplusage.” Apple Annie also insists that such an
interpretation would also contradict what is known as the “plain meaning
rule,” namely, an insurance policy and its terms are to be given their “plain
meaning or the meaning a layperson would ordinarily attach to it.” (Waller,
supra, 11 Cal.4th 1, 18.)
The Musso & Frank court rejected an identical contention, adopting the
reasoning of a federal Circuit Court that treated the argument as a strained
attempt to create an ambiguity that could be construed against the insurer.
(Musso & Frank, supra, 77 Cal.App.5th 753, 757−759, citing Oral Surgeons,
P.C. v. The Cincinnati Ins. Co. (8th Cir. 2021) 2 F.4th 1141.)9 We believe this
approach is sound. In any event, Apple Annie’s reasoning ultimately leads to
a dead end.
The plain meaning of this language is convincingly established in Inns-
by-the-Sea. To urge a differentiation is, in one sense, pointless, because the
9 Three more circuits have subsequently come to the same conclusion:
Goodwill Industries of Central Oklahoma, Inc. v. Philadelphia Indemnity Ins.
Co. (10th Cir. 2021) 21 F.4th 704, 711; Sandy Point Dental P.C. v. Cincinnati
Ins. Co. (7th Cir. 2021) 20 F.4th 327, 332; and Santo’s Italian Café, LLC v.
Acuity Ins. Co. (6th Cir. 2021) 15 F.4th 398, 404, 405−406. One expression is
cogently pertinent: “Goodwill also argues that the phrase ‘direct physical loss
of or damage to’ encompasses more than physical damage to property because
‘loss of’ and ‘damage to’ would otherwise be redundant. We disagree. The
phrase ‘loss of’ refers to dispossession of property—for example, via theft—
and therefore has a different meaning from the term ‘damage to.’ As the
Sixth Circuit explained, ‘[t]here is no need to read “physical loss” to include a
deprivation of some particular use of a property in order to give the phrase
independent meaning. That possibility could occur whenever a policy holder
is deprived of property without any damage to it, say a portable grill or a
delivery truck stolen without a scratch.’ ” (Goodwill Industries of Central
Oklahoma, Inc. v. Philadelphia Indemnity Ins. Co., supra, at p. 711, quoting
Santo’s Italian Café, LLC v. Acuity Ins. Co., supra, at p. 404.)
9
terms are often used in overlapping and redundant ways. (See Inns-by-The-
Sea, supra, 71 Cal.App.5th 688, 700 [“ ‘Damage’ is defined as ‘loss or harm
resulting from injury to . . . property . . . .’ ”]; cf. MRI Healthcare Center of
Glendale, Inc. v. State Farm General Ins. Co. (2010) 187 Cal.App.4th 766, 780
(MRI Healthcare) [“For there to be a ‘loss’ within the meaning of the policy,
some external force must have acted upon the insured property to cause a
physical change in the condition of the property, i.e., it must have been
‘damaged’ within the common understanding of that term,” original emphasis
omitted]; Windham at Carmel Mountain Ranch Assn. v. Superior Court
(2003) 109 Cal.App.4th 1162, 1175 [“In its common usage, ‘damage’ includes
harm, loss, injury, detriment, or diminution in value”]; Jarrett v. Allstate Ins.
Co. (1962) 209 Cal.App.2d 804, 811 [“The word ‘loss’ is one of common use in
insurance parlance. Webster defines ‘loss’ in connection with insurance as
‘injury, destruction, or damage . . .’ ”].)
Moreover, even if there were any distinction between loss and
damage,10 it would become relevant only after detriment has been caused by a
“direct physical” cause, which is not alleged here. (Cf. Ward General
Insurance Services Inc. v. Employers Fire Ins. Co. (2003) 114 Cal.App.4th 548,
554 [“direct physical” modifies both “loss of” and “damage to”]; Inns-by-The-
Sea, supra, at p. 699 [“ ‘the words “direct physical” . . . modify both “loss of”
and “damage to.” ’ . . . Inns must establish that either ‘direct physical . . .
10 “[T]he word ‘loss’ may refer to complete destruction while ‘damage’
connotes lesser harm that may be repaired.” (Sandy Point Dental, P.C. v.
Cincinnati Ins. Co., supra, 20 F.4th 327, 332; see Terry Black’s Barbeque,
L.L.C. v. State Automobile Mutual Ins. Co. (5th Cir. 2022) 22 F.4th 450, 456
[“ ‘Loss’ . . . ‘means . . . being . . . destroyed, ruin, or destruction.’ ”].) An
obvious instance of loss is when insured property is stolen.
10
damage to’ property at the premises or ‘direct physical loss of’ property at the
premises caused its suspension of operations,” quoting Ward].)
This construction comports not only with the plain meaning rule, but
also with the principle that courts will not strain to create an ambiguity that
can be construed against the insurer. (See, e.g., La Jolla Beach & Tennis
Club, Inc. v. Industrial Indemnity Co. (1994) 9 Cal.4th 27, 37; Deere & Co. v.
Allstate Ins. Co. (2019) 32 Cal.App.5th 499, 514; American Internat.
Underwriters Ins. Co. v. American Guarantee & Liability Ins. Co. (2010)
181 Cal.App.4th 616, 629.)
Whether a policy provision is ambiguous is an issue of law. (Waller,
supra, 11 Cal.4th 1, 18; Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986)
41 Cal.3d 903, 912; Energy Ins. Mutual Limited v. Ace American Ins. Co.
(2017) 14 Cal.App.5th 281, 291.) And, as demonstrated by Inns-by-the-Sea,
the fact that the policy does not define “direct physical loss of or damage to
property” does not automatically make it ambiguous. (See Foster-Gardner,
Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857, 868.) We conclude
that the phrase “direct physical loss of or damage to” covered property is not
ambiguous in the sense urged by Apple Annie—“the policy promises coverage
when there is either a ‘physical loss of’ the insured property or ‘damage to’ the
property. . . . Rather, it [‘loss of’] includes the loss of beneficial use of or
possession of the property.”
The very next day after Musso & Frank was filed, Division Four of the
Second District reached the same conclusion in United Talent Agency v.
Vigilant Insurance Co. (2022) 77 Cal.App.5th 821 (United Talent Agency or
UTA.) In the wake of Inns-by-the-Sea, the business-insured in United Talent
Agency mounted a frontal attack that it claimed would return to first
principles and original sources—an attack the Court of Appeal rejected:
11
“UTA acknowledges the holdings of Inns-by-the-Sea and similar cases
that follow the Couch treatise in holding that ‘physical loss’ involves a ‘dis-
tinct, demonstrable, physical alteration of the property.’ However, UTA as-
serts these cases and the Couch treatise are wrong in that Couch rejected the
majority position, adopted the minority position, and now, ‘[f]or nearly a
quarter of a century, Couch’s misstatement has snowballed as a self-fulfilling
prophesy.
“UTA further argues that in contrast to Couch, ‘California courts have
a long history of recognizing that “physical loss” can occur if a property is in-
herently dangerous and cannot be used.’ It cites Hughes v. Potomac Ins. Co.
(1962) 199 Cal.App.2d 239 [(Hughes)] and Strickland v. Federal Ins. Co.
(1988) 200 Cal.App.3d 792, [(Strickland)], which both considered the extent
to which homeowners’ insurance policies covered homes that became unstable
due to landslides. In Hughes, a nearby creek washed out a portion of the
ground supporting the house, leaving it ‘standing on the edge of and partially
overhanging a newly formed 30-foot cliff.’ (Hughes, supra, 199 Cal.App.2d at
p. 243.) In Strickland, the home was built on unstable, shifting ground,
which caused ongoing structural issues, although the house was not uninhab-
itable. (Strickland, supra, 200 Cal.App.3d at pp. 794−796.) However, the is-
sue in these cases was not loss of use of otherwise undamaged property. To
the contrary, the undermined ground beneath both houses placed the struc-
tures at serious risk. Moreover, the risk was inextricably linked to the in-
sured property.
“By contrast, the losses here arose from closures intended to limit the
spread of a virus that can carry great risk to people but no risk at all to a
physical structure. As the trial court observed in sustaining the demurrer,
UTA’s alleged loss ‘was not a physical deprivation of property, but rather an
12
interruption in business operations.’ The closure orders and other measures
imposed in an effort to reduce the spread of the virus among people had little
relationship to any particular location; rather, they were intended to reduce
people’s proximity to and interaction with one another, thereby reducing the
risk that an infected person could infect others. We therefore decline UTA’s
invitation to depart from the Couch treatise and the case law that relies upon
it.” (United Talent Agency, supra, 77 Cal.App.5th 821, 832−833.)
The United Talent Agency court, like the Inns-by-the-Sea court, found
reinforcement in the definition of “restoration” in the policy here (quoted at
fn. 1, ante):
“In addition, the ‘period of restoration’ language in the policies demon-
strates that coverage requires a physical loss requiring repair or replacement,
not simply loss of use. The policies covered ‘actual or potential impairment
of . . . operations’ ‘during the period of restoration,’ defined as beginning ‘im-
mediately after the time of direct physical loss or damage by a covered peril
to property,’ and continuing until ‘operations are restored,’ including ‘the
time required to . . . repair or replace the property.’ Reviewing a similar pol-
icy, Inns-by-the-Sea stated, ‘The Policy’s focus on repairing, rebuilding or re-
placing property (or moving entirely to a new location) is significant because
it implies that the “loss” or “damage” that gives rise to Business Income cov-
erage has a physical nature that can be physically fixed, or if incapable of be-
ing physically fixed because it is so heavily destroyed, requires a complete
move to a new location.’ (Inns-by-the-Sea, supra, 71 Cal.App.5th at p. 707.)
Thus, ‘[t]he definition of “period of restoration” provides an indication that
the phrase “direct physical loss of” property was not intended to include the
mere loss of use of physical property to generate income, without any other
physical impact to property that could be repaired, rebuilt or replaced.’ (Id.
13
at p. 708.) Several other courts have reached similar conclusions. (See, e.g.,
Mudpie, supra, 15 F.4th at p. 892 [‘To interpret the Policy to provide coverage
absent physical damage would render the “period of restoration” clause su-
perfluous’]; Sandy Point Dental, P.C. v. Cincinnati Ins. Co.[, supra,] 20 F.4th
327, 333 . . . ; Santo's Italian Cafe LLC v. Acuity Ins. Co.[, supra,] 15 F.4th
398, 403 . . . ; Goodwill Industries of Central Oklahoma, Inc. v. Philadelphia
Indemnity Ins. Co.[, supra,] 21 F.4th 704, 711 . . . .)
“We therefore follow the reasoning of Inns-by-the-Sea and similar cases
in acknowledging ‘the generally recognized principle in the context of first
party property insurance that mere loss of use of physical property to gener-
ate business income, without any other physical impact on the property, does
not give rise to coverage for direct physical loss.’ (Inns-by-the-Sea, supra,
71 Cal.App.5th at pp. 705−706.) UTA’s allegations of loss of use of insured
premises and dependent premises due to the closure orders and other pan-
demic-related limitations are insufficient to establish ‘direct physical loss or
damage’ entitling UTA to coverage under the relevant policies.” (United Tal-
ent Agency, supra, 77 Cal.App.5th 821, 833−834.)
Nor was the United Talent Agency court impressed by the insured’s ar-
gument that “the physical presence of the virus on UTA’s insured premises s
constituted ‘physical damage,’ ” (United Talent Agency, supra, 77 Cal.App.5th
at p. 834), concluding that it too was answered by Inns-by-the-Sea:
“Many courts have rejected the theory that the presence of the virus
constitutes physical loss or damage to property. As the Seventh Circuit
stated in rejecting a similar claim, ‘While the impact of the virus on the
world . . . can hardly be overstated, its impact on physical property is inconse-
quential: deadly or not, it may be wiped off surfaces using ordinary cleaning
materials, and it disintegrates on its own in a matter of days.’ (Sandy Point
14
Dental [v. Cincinnati Ins. Co.], supra, 20 F.4th at p. 335.) Or as the United
States District Court, Southern District of California stated, ‘If, for example,
a sick person walked into one of Plaintiffs’ restaurants and left behind
COVID-19 particulates on a countertop, it would strain credulity to say that
the countertop was damaged or physically altered as a result.’ [Citation.]
The majority of cases in California (and elsewhere) are in accord.
“As Inns-by-the-Sea noted, there are ‘some comparable elements be-
tween’ allegations that the virus physically altered property and cases in
which ‘a physical force rendered real property uninhabitable or unsuitable for
its intended use, without any structural alteration,’ because ‘the COVID-19
virus—like smoke, ammonia, odor, or asbestos—is a physical force.’ (Inns-by-
the-Sea, supra, 71 Cal.App.5th at p. 703.) However, Inns-by-the-Sea also
stated that courts have rejected claims that ‘short lived’ contamination that
can be addressed by simple cleaning constitutes direct physical loss. (Inns-
by-the-Sea, supra, 71 Cal.App.5th at p. 703, fn. 17.) Inns-by-the-Sea dis-
cussed Mama Jo’s Inc. v. Sparta Ins. Co. (11th Cir. 2020) 823 Fed.Appx.
868 [(Mama Jo’s)], a case involving construction-related dust, which required
only ‘cleaning and painting,’ and ‘no need for removal or replacement of
items.’ (Mama Jo’s, supra, 823 Fed.Appx. at p. 879.) The court stated that
‘under Florida law, an item or structure that merely needs to be cleaned has
not suffered a “loss” which is both “direct” and “physical.” ’ (Ibid.) Inns-by-
the-Sea also cited Kim-Chee LLC v. Philadelphia Indemnity Ins.
Co. (W.D.N.Y. 2021) 535 F.Supp.3d 152, 161, in which the court noted that
‘contamination that is temporary . . . is unlikely to qualify as a direct physical
loss to the insured premises.’ The Second Circuit has since affirmed that rul-
ing, stating, ‘Even assuming the virus’s presence at Kim-Chee’s tae-kwon-do
studio, the complaint does not allege that any part of its building or anything
15
within it was damaged—let alone to the point of repair, replacement, or total
loss. . . . [W]e agree with the district court that the virus’s inability to physi-
cally alter or persistently contaminate property differentiates it from radia-
tion, chemical dust, gas, asbestos, and other contaminants whose presence
could trigger coverage under Kim-Chee’s policy.’ [Citation.]” (United Talent
Agency, supra, 77 Cal.App.5th 821, 835−836, fn. omitted.)
And United Talent Agency concluded: “we agree with the majority of
the cases finding that the presence or potential presence of the virus does not
constitute direct physical damage or loss. While the infiltration of asbes-
tos . . . or environmental contaminants . . . constituted property damage in
that they rendered a property unfit for a certain use or required specialized
remediation, the comparison to a ubiquitous virus transmissible among peo-
ple and untethered to any property is not apt. Asbestos in installed building
materials . . . and environmental contaminants . . . are necessarily tied to a
location, and require specific remediation or containment to render them
harmless. Here, by contrast, the virus exists worldwide wherever infected
people are present, it can be cleaned from surfaces through general disinfec-
tion measures, and transmission may be reduced or rendered less harmful
through practices unrelated to the property, such as social distancing, vac-
cination, and the use of masks. Thus, the presence of the virus does not ren-
der a property useless or uninhabitable, even though it may affect how people
interact with and within a particular space.” (United Talent Agency, supra,
77 Cal.App.5th 821, 838.)
Most recently, on July 13, Division Seven of the Second District filed its
opinion in Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Ins. Co.
(2022) 81 Cal.App.5th 96 (Marina Pacific). There, after noting the holdings
of Inns-by-the Sea, United Talent Agency, and various other cases, the Court
16
of Appeal went on to hold for the plaintiff insured, on the basis it had pled the
element missing from the three earlier cases: it “adequately alleged direct
physical loss or damage.” Thus, the court held, Marina Pacific stated a claim
for breach of the insurance policy (Marina Pacific, supra, at p. 108), and con-
cluded: “Because the insureds adequately alleged losses covered by Fire-
man’s Fund’s policy, they are entitled to an opportunity to present their case,
at trial or in opposition to a motion for summary judgment. The judgment of
dismissal based on the trial court’s disbelief of those allegations, whether ul-
timately reasonable or not, must be reversed.” (Id. at p. 114.)
In sum, and in light of the foregoing, we cannot agree with Apple
Annie’s primary contention that the policy language—“direct physical loss or
damage to,” including its disjunctive phrasing—is ambiguous and “subject to
a reasonable construction that supports coverage.” Doing so, we reject what
may be the two most consequential aspects of Apple Annie’s position: (1) that
“no physical alteration is necessary to show that the policyholder has suffered
a ‘physical loss of’ insured property if the governmental authorities issue
orders that prohibit the policyholder from using the insured property for its
intended purpose,” and (2) that“ ‘physical loss of’ includes the loss of use of
the insured property, even if that loss is temporary.” (See Santo’s Italian
Cafe LLC v. Acuity Ins. Co., supra, 15 F.4th 398, 402 [“A loss of use simply is
not the same as a physical loss”].)11 Although the COVID virus has a
11 This rejection, however, must not be read as extending to the situa-
tions noted by the Inns-by-the-Seas court, namely a temporary dispossession
necessary to “abate asbestos or remove poisonous fumes which permeate
property,” or similar phenomena which “necessitat[e] rehabilitation or resto-
ration.” (Inns-by-the-Seas, supra, 71 Cal.App.5th 688, 704.)
Many years ago, this court recognized one such example, in Hughes, su-
pra, 199 Cal.App.2d 239, a decision much examined in the parties’ briefs—
and mentioned in Inns-by-the-Sea (“The central relevant California opinion”),
17
physical presence, and thus Apple Annie may have suffered economic loss
from the physical presence of the COVID virus, it has not suffered “direct
physical loss of or damage to [its] property.” (See Inns-by-the-Sea, supra,
71 Cal.App.5th 688, 704.)
Apple Annie’s remaining arguments do not require extended discus-
sion.
Musso & Frank, and United Talent Agency. There, confronted with a situa-
tion where sudden water erosion left the insureds’ home “standing on the
edge of and partially overhanging a newly formed 30-foot cliff,” (id. at p. 243),
we had no difficulty in concluding that the insureds had suffered damage to
their home. We rejected the insurer’s argument that there was no damage to
the dwelling itself, and hence no claim under the policy: “To accept appel-
lant’s interpretation of its policy would be to conclude that a building which
has been overturned or which has been placed in such a position as to over-
hang a steep cliff has not been ‘damaged’ so long as its paint remains intact
and its walls still adhere to one another. Despite the fact that a ‘dwelling
building’ might be rendered completely useless to its owners, appellant would
deny that any loss or damage had occurred unless some tangible injury to the
physical structure itself could be detected. Common sense requires that a
policy should not be so interpreted in the absence of a provision specifically
limiting coverage in this manner. Respondents correctly point out that a
‘dwelling’ or ‘dwelling building’ connotes a place fit for occupancy, a safe place
in which to dwell or live. It goes without question that respondents’ ‘dwelling
building’ suffered real and severe damage when the soil beneath it slid away
and left it overhanging a 30-foot cliff. Until such damage was repaired and
the land beneath the building stabilized, the structure could scarcely be con-
sidered a ‘dwelling building’ in the sense that rational persons would be con-
tent to reside there.” (Id. at pp. 248−249.)
In sum, a residence that lacks earth beneath it—like a residence filled
with noxious fumes, chemical contamination, or friable asbestos floating in-
side—has suffered “direct physical loss of or damage” that makes it unusable
for its intended purpose.
Apple Annie submits that the COVID virus should receive similar
treatment because it too “could be described as a ‘noxious substance.’ ” Our
previous discussion demonstrates why we cannot agree.
18
Apple Annie faults the trial court for relying on MRI Healthcare, supra,
187 Cal.App.4th 766, “because it involved different policy language.” It is
true that the policy in MRI Healthcare insured against “accidental direct
physical loss to its property” (id. at p. 778, emphasis added), but that does di-
minish the force of the court’s reasoning: “A direct physical loss ‘contem-
plates an actual change in insured property then in a satisfactory state, occa-
sioned by accident or other fortuitous event directly upon the property caus-
ing it to become unsatisfactory for future use or requiring that repairs be
made to make it so.’ [Citation.] The word ‘direct’ used in conjunction with
the word ‘physical’ indicates the change in the insured property must occur
by the action of the fortuitous event triggering coverage. In this sense, ‘di-
rect’ means ‘ “[w]ithout intervening persons, conditions, or agencies; immedi-
ate.” [Citation.]’ [Citation.] For loss to be covered, there must be a ‘distinct,
demonstrable, physical alteration’ of the property. (10A Couch on Insurance,
supra, § 148:46, p. 148–81.)” (MRI Healthcare, supra, 187 Cal.App.4th 766,
779.)
Apple Annie also goes after MRI Healthcare‘s reliance on the Couch
treatise and its treatment of “direct physical loss.” Adopting the conclusion of
a recent article—Lewis et al., “Couch’s ‘Physical Alteration’ Fallacy: Its Ori-
gins and Consequences” (2021) 56 Tort, Trial & Ins. Prac. L. J. 621—Apple
Annie urges us to accept that the Couch analysis is of “dubious provenance”
and has subsequently been “uncritically accepted” by courts. We cannot
agree with Apple Annie’s conclusions.
As already shown, an attack on the Couch formulation was rejected in
United Talent Agency. But there is a deeper ground. At this point in time,
any analytical flaws in the Couch formulation have become largely academic
in light of the now-existing wall of precedent confronting Apple Annie. When
19
originally published, the Couch formulation may not have reflected wide-
spread acceptance by the courts, but such acceptance has now been achieved.
As for its treatment in California, the Inns-by-the Seas, Musso & Frank, and
United Talent Agency decisions are notable, not for “uncritical acceptance” of
anything, but for the careful and conscientious examination shown by those
courts of the weighty issues before them. At this point in time, these deci-
sions constitute an independent intervening cause to any error in the Couch
formulation. In other words, it will not do to attack the Couch formulation—
one must now attack what the courts have done with it.
Apple Annie argues that “No exclusion stated in the Policy bars cover-
age as a matter of law because of the efficient-proximate-cause doctrine.” So
far as we can tell from the record, the words “efficient proximate cause” were
never used before the trial court. Moreover, as already noted, exclusions are
only considered when coverage exists (see decisions cited in fn. 2, ante), which
in this case it does not. (Cf. MRI Healthcare, supra, 187 Cal.App.4th 766, 782
[“[T]he ‘efficient proximate cause standard’ comes into play in determining
whether coverage exists when both excluded and covered perils interact to
cause a loss”].) The same reasoning applies to Apple Annie’s contentions re-
garding other policy exclusions.
Apple Annie makes a new argument in its supplemental brief, that its
policy “includes a definition of ‘property damage’ that specifically
contemplates the absence of physical alteration.” And in claimed support,
Apple Annie points to this definition: “17. ‘Property damage’ means: [¶]
a. Physical injury to tangible property . . . or [¶] b. Loss of use of tangible
property that is not physically injured.” This definition is, as Apple Annie
concedes, in the liability section of the policy. A similar argument was made,
and rejected, in United Talent Agency, which observed that cases involving
20
comprehensive liability coverage “are of limited benefit in determining the
scope of property insurance coverage. ‘[T]he cause of loss in the context of
property insurance is wholly different from that in a liability policy,’ and a
liability insurer ‘agrees to cover the insured for a “broader spectrum of risks”
than in property insurance.’ (MRI Healthcare, supra, 187 Cal.App.4th at
p. 779, fn. 6.)” (United Talent Agency, supra, 77 Cal.App.5th 821, 837.)
Finally, we note that, while Marina Pacific held for the insured, based
on its pleading, in its supplemental brief Apple Annie acknowledges that the
case does “not directly implicate Apple Annie’s theory of coverage.”
One other issue, injected late in this case in Apple Annie’s
supplemental brief, is whether Apple Annie should be granted leave to
amend.
By way of brief background, in opposition to Oregon Mutual’s motion
for judgment on the pleadings, Apple Annie did not request leave to amend,
nor did it do so in either of its briefs here. However, in its supplemental
brief, citing to Marina Pacific—and notwithstanding its acknowledgement
that Marina Pacific “does not directly implicate [its] theory of coverage”—
Apple Annie asserts that “Marina Pacific shows that there is a reasonable
possibility that any defect with [its] complaint can be cured by amendment,”
going on to say that “there is a reasonable possibility that Apple Annie could
amend its complaint to bring allegations similar to those brought by the
plaintiff in Marina Pacific.” And, referring to the trial court’s order here,
Apple Annie asserts that “COVID-19 was in and around Apple Annie’s
insured premises,” but the complaint did not allege that the presence of the
virus on the premises triggered coverage.
The case Apple Annie relies on, Aubry v. Tri-City Hospital Dist. (1992)
2 Cal.4th 962, holds that it “ordinarily constitutes an abuse of discretion to
21
sustain a demurrer without leave to amend if there is a reasonable possibility
that the defect can be cured by amendment.” (Id. at pp. 970−971, internal
quotation marks and cit. omitted.) And, of course, it is Apple Annie’s burden
to show such a reasonable possibility. (Campbell v. Regents of University of
California (2005) 35 Cal.4th 311, 320; Schifando v. City of Los Angeles (2003)
31 Cal.4th 1074, 1081.)
In this regard, at oral argument we asked counsel for Apple Annie—
able counsel with significant experience in insurance coverage issues—what
Apple Annie would, or could allege. And counsel’s candid response was that
as an officer of the court he could not “tell [us] what [he] would allege as an
amendment.” Given that, the fact that this case has been pending for
25 months, and the further fact that Marina Pacific has been extant for over
a month, we conclude that Apple Annie has not met the burden required of it
to obtain leave to amend, and we thus deny the belated request.
DISPOSITION
The judgment is affirmed.
22
_________________________
Richman, Acting P. J.
We concur:
_________________________
Stewart, J.
_________________________
Mayfield, J. *
Apple Annie, LLC v. Oregon Mutual Insurance Company (A163300)
*Judge of the Mendocino Superior Court, Judge Cindee Mayfield,
sitting as assigned by the Chief Justice pursuant to article VI, section 6 of the
California Constitution.
23
Trial Court: San Francisco County Superior
Court
Trial Judge: Honorable Richard B. Ulmer
Attorney for Plaintiff and Shernoff Bidart Echeverria;
Appellant, Apple Annie, LLC: Michael J. Bidart, Ricardo
Echeverria, Steven Schuetze,
Reid Ehrlich-Quinn; Hess Bower
Adams-Hess, PC; Randy M. Hess
Attorney for Defendant and Pacific Law Partners, LLP;
Respondent, Oregon Mutual Clarke Holland, David. B.A.
Insurance Company: Demo, Andrew P. Collier.
24