Endeavor Operating Co., LLC v. HDI Global Ins. Co. ( 2023 )

Filed 9/21/23
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
ENDEAVOR OPERATING B323865
COMPANY, LLC,
(Los Angeles County
Plaintiff and Appellant, Super. Ct. No.
21STCV23693)
v.
HDI GLOBAL INSURANCE
COMPANY et al.,
Defendants and
Respondents.
APPEAL from a judgment of the Superior Court of Los
Angeles County, Elaine Lu, Judge. Affirmed.
Latham & Watkins, Kirsten C. Jackson, Robert J. Gilbert,
David A. Barrett, Roman Martinez, Eric J. Konopka, Alexader G.
Siemers; The Law Offices of Dorn G. Bishop and Dorn G. Bishop
for Plaintiff and Appellant.
Zelle, Thomas J. D’Antonio, Kristin C. Cummings; Greines,
Martin, Stein & Richland, Laurie J. Hepler and Stefan C. Love
for Defendant and Respondent HDI Global Insurance Company.
Clyde & Co, Susan Koehler Sullivan, Douglas J. Collodel
and Gretchen S. Carner for Defendant and Respondent ACE
Insurance Company.
Clyde & Co and Kathryn C. Ashton for Defendant and
Respondent Interstate Fire & Casualty Company.
Dentons, Julia M. Beckley, Erin E. Bradham and Douglas
Janicik for Defendant and Respondent AIG Specialty Insurance
Company.
******
This appeal involves a poorly drafted commercial property
insurance policy, and whether the parties intended that policy to
cover economic losses stemming from a global pandemic that was
most assuredly outside the parties’ contemplation when they
drafted the policy. This appeal squarely presents two questions.
First, can the policy holder in this case—an entertainment
conglomerate that operates sports and other entertainment
ventures at venues around the globe—recover the economic losses
it suffered when the COVID-19 pandemic shut down many of
those venues without first establishing that there was “direct
physical loss or damage to property”? This question is one on
which the Courts of Appeal have split, and is pending before our
Supreme Court in John’s Grill, Inc. v. The Hartford Financial
2
Services Group, Inc. (2022) 86 Cal.App.5th 1195 (John’s Grill),
review granted Mar. 29, 2023, S278481, and Another Planet
Entertainment, LLC v. Vigilant Ins. Co. (9th Cir. 2022) 56 F.4th
730, request for certification granted Mar. 1, 2023, S277893.
Until that Court provides guidance, we side with the vast
majority of cases holding that direct physical loss or damage to
property, rather than mere loss of the property’s use, is a
prerequisite for coverage. We further hold that two of the clauses
in the policy here—namely, extension clauses dealing with orders
by civil authorities and with impediments to access—do not, by
their addition of the word “event,” eliminate the requirement of
direct physical loss or damage to property.
Second, has “direct physical loss or damage to property”
been sufficiently pled where, as here, the policy holder alleges
that the virus that causes COVID-19 has either been deposited
onto or “adsorbed” to the surface of the policy holder’s property?
The Courts of Appeal have split on this question as well, and that
question is pending before our Supreme Court in Shusha, Inc. v.
Century-National Ins. Co. (2022) 87 Cal.App.5th 250 (Shusha),
review granted Apr. 19, 2023, S278614. Until that Court
provides guidance, we side with those cases holding that the
ephemeral existence of COVID-19 or its predecessor virus on
property does not constitute “direct physical loss or damage to
property” as a matter of law.
As a result, we affirm the trial court’s judgment dismissing
the policy holder’s complaint on demurrer.
3
FACTS AND PROCEDURAL BACKGROUND
I. Facts
A. The insured
Endeavor Operating Company, LLC (Endeavor) is a
“holding company” that owns “various subsidiaries in the
entertainment, sports, and fashion business sectors.” Its
subsidiary entities include, among others, (1) IMG Events,
“which hosts sporting and cultural events at rented venues
worldwide”; (2) IMG Media, “which produces and distributes
sports programming and sells media rights and sponsorships”; (3)
William Morris Endeavor Entertainment, LLC, which is a “talent
agency . . . that represents artists, musicians, models,
performers, and content creators”; and (4) IMG Academy, which
is a “sports education academy.” Endeavor’s portfolio of events
includes the Wimbledon tennis tournament, New York Fashion
Week, and Ultimate Fighting Championship matches, and its
clients include Nobel laureates as well as the National Football
League.
B. The insurance policy
HDI Global Insurance Company (HDI) issued Endeavor a
commercial property insurance policy that was effective from
December 31, 2018 through December 31, 2019 (the policy).
Although HDI issued an extension to that policy that lasted until
January 31, 2020, and HDI, along with three other insurance
companies 1 (collectively, the insurers) issued a new policy
effective January 31, 2020 but not provided in writing until late
March 2020, the parties on appeal have effectively stipulated
1 Those other insurance companies are ACE American
Insurance Company, AIG Specialty Insurance Company, and
Interstate Fire & Casualty Company.
4
that the terms of the original, HDI-issued policy are controlling
here. 2 Those terms provide coverage that, at times, is up to $175
million per occurrence.
1. Main coverage provision
Consistent with its title as a “GlobalProperty Insurance
Policy” and with the bulk of Endeavor’s $665,149.78 annual
premium being allocated to “Commercial Property Coverage,” the
policy identifies the “Loss or Damage Insured” as “all risk of
direct physical loss or damage to property . . . .” (Italics added.)
Alas, the policy nowhere defines “direct physical loss or damage.”
2. Types of covered losses
The policy also defines the various “interest[s] of the
Insured” that it covers. As pertinent to this appeal, the policy
covers two types of losses. First, the policy covers losses suffered
to “[a]ll real and personal property” “owned, used, or intended for
use by” Endeavor (the property repair clause). Second, the policy
covers any resulting business interruption losses—which
encompass (1) loss of gross earnings “due to the necessary
interruption of business conducted by” Endeavor; and (2) loss of
gross profits “resulting from interruption of or interference with
[Endeavor’s] business”—but only if they “result[] from loss or
2 The reason for this effective stipulation is to neutralize
Endeavor’s allegations of a “possib[ility]” that the insurers
surreptitiously altered the terms of the new policy after the
COVID-19 outbreak but before the insurers provided Endeavor
with the written version of that policy in late March 2020. We
are able to accept this stipulation because we are affirming the
dismissal of Endeavor’s case on demurrer; had we reversed that
judgment, the parties would have been obligated to litigate on
remand which of the various policies applies.
5
damage” “to real and/or personal property” insured under the
policy (collectively, the business interruption clauses). 3
3. Extensions
The policy then sets forth three “Extensions of Coverage.”
Two of those are pertinent to this appeal. First, the policy
“extend[s]” coverage “to insure loss sustained during the period of
time when, as a result of loss, damage or an event not excluded
[by one of the policy’s enumerated exclusions,] access to property
is impaired by order or action of civil or military authority” (the
civil authority clause). (Italics added.) Second, the policy
“extend[s]” coverage “to insure loss sustained during the period of
time when, as a result of loss, damage or an event not excluded
[by one of the policy’s enumerated exclusions], ingress to or
egress from real or personal property is impaired” (the
ingress/egress clause). (Italics added.) In its “Limits of Liability”
section, the policy adds two further prerequisites “for coverage to
apply” under the civil authority and ingress/egress clauses—
namely, that (1) there be an “[i]nsured physical loss or damage”
to some property, and (2) this physical loss or damage to some
property “occur within [1 or 10] statute mile[s] from [Endeavor’s]
3 Although not addressed on appeal, Endeavor’s complaint
also alleged losses for “Extra Expense” incurred “in order to
continue as nearly as practicable the normal operation of” its
“business,” for “Loss of Rental Income and/or Loss of Rental
Value,” and for “Loss of Royalties, Fees and Commissions which
would have been earned.” Each of these types of covered losses
are also explicitly predicated upon “loss or damage” “to real
and/or personal property” insured under the policy. Endeavor’s
complaint further alleged losses for “expediting expenses” and
“claims preparation costs,” but neither type of loss is the focus of
this appeal.
6
premises.” 4 The “Limits of Liability” section caps coverage under
the civil authority and ingress/egress clauses to $25 million “per
occurrence,” and the policy elsewhere defines “occurrence” as a
“[l]oss, or a series of losses or several losses, which are
attributable directly or indirectly to one cause or disaster or to
one series of similar causes or disasters arising from a single
event.” (Italics added.)
4. Period of recovery
The policy also defines “[t]he length of time for which loss
may be claimed” under the business interruption, civil authority,
and ingress/egress clauses (the period of recovery clause). This
period of recovery starts with “the date of such loss or damage”
(even if the policy has already expired); the period ends at the
expiration of the (1) “time . . . required,” “with the exercise of due
diligence and dispatch[,] to rebuild, repair, or replace the
property that has been destroyed or damaged,” plus (2) the
“time” required to “restore [Endeavor’s] business to the condition
that would have existed had no loss occurred,” which is gauged in
part by whether Endeavor “has resumed [its] normal
operations”—but in any event no longer than 365 days.
5. Contamination/pollution exclusion
The policy also enumerates several exclusions from
coverage. Relevant to this appeal is the contamination/pollution
exclusion, which excludes a loss that would otherwise be covered
4 Verbatim, the policy states that the “[i]nsured physical loss
or damage must occur within one (10) statute mile from the
Insured’s premises in order for coverage to apply.” (Italics
added.) It is therefore unclear from the plain language of the
policy whether the parties intended the distance requirement to
be 1 mile or 10 miles.
7
if the “loss or damage” was “caused by, resulting from, or
contributed to or made worse by actual” or “threatened release,
discharge, . . . or dispersal of contaminants or pollutants.”
(Capitalization omitted.) The term “contaminants or pollutants”
is defined in the exclusion to encompass, among other things, a
“virus.”
C. The COVID-19 pandemic
In late 2019 or early 2020, the SARS-CoV-2 virus—which
causes COVID-19—was first identified in Wuhan, China. The
virus can spread by direct contact between humans, through
particles in the air, and by contact between a person and a
surface on which the virus has landed. When viral particles
make contact with a surface, they are either “deposited” onto the
surface (that is, they form “merely a physical presence” that “is
readily reversable”), or they are “adsorbed” to the surface (that is,
they form a “weak” “noncovalent chemical bond” that “is
relatively hard to detach”). While viral particles “left
undisturbed” can persist in some form on some surfaces for up to
28 days, both deposited and adsorbed particles can both be
inactivated and/or removed with a simple cleaning of the surface.
When COVID-19 outbreaks surged across the world,
“stadiums and concert venues closed, games and performances
were cancelled, and fans were prevented from attending in-
person events,” causing Endeavor’s operations to “all but gr[ind]
to a halt.” Endeavor suffered “substantial losses” estimated at
“hundreds of millions of dollars” when its “revenues” from ticket
sales, media distribution and sponsorship rights, and
representation fees all “plummeted.”
8
D. The insurers deny coverage
Endeavor submitted claims to the insurers for its COVID-
19-related economic losses. HDI denied coverage under the
policy, which expired before HDI sustained its alleged losses, and
the insurers otherwise responded that the new policy, effective
January 31, 2020, “‘does not appear [to] provide[] coverage for the
claimed loss.’”
II. Procedural Background
A. Complaint
On June 24, 2021, Endeavor sued the insurers for (1)
declaratory relief, and (2) breach of contract. Its complaint
alleges two theories for coverage. First, Endeavor alleges that it
suffered damage or loss to real property “as a result of direct
exposure” to the SARS-CoV-2 virus at “facilities” it “owned,
leased, and/or used” because “bonding” of the virus to surfaces at
those facilities caused “adverse physical alteration of property.” 5
Second, Endeavor alleges that it suffered damage or loss to real
property even where the virus was “neither actually present nor
suspected” because the “threat” and “danger” of locations
becoming “disease vector[s] for COVID-19” triggered government
shut-down orders that impaired access to Endeavor’s properties,
and precipitated economic loss. Endeavor nowhere identifies any
specific property that was damaged. Instead, the gravamen of
Endeavor’s claims for coverage appear to be for recovery of its
business losses, regardless of the averred theory.
B. Demurrer
The insurers demurred to the complaint. Following further
briefing and a hearing, the trial court issued its initial order
5 Endeavor also alleges damage based on the virus’s presence
in the air but has wisely abandoned that notion.
9
sustaining the demurrer without leave to amend. 6 The court
reasoned that Endeavor had sufficiently alleged direct physical
loss or damage to insured property, but that its claims were
“clearly and unambiguously barred by” the policy’s
contamination/pollution exclusion.
Three weeks later, the trial court issued an order granting
its own motion to reconsider its ruling in light of two new
appellate court decisions holding that the presence or potential
presence of the virus does not constitute direct physical loss or
damage. The parties submitted further briefing on that issue,
and Endeavor filed a motion for new trial in which, for the first
time, it expressly urged that its chief theory of liability is that the
word “event” in the civil authority and ingress/egress clauses
eliminated the requirement of any direct physical loss or damage
to property.
Following a consolidated hearing, the trial court issued an
August 2, 2022 ruling (1) sustaining the demurrer without leave
to amend, and (2) denying Endeavor’s motion for new trial. The
court modified its initial ruling to find that the “actual” or
“threatened presence” of COVID-19 or the SARS-CoV-2 virus
“does not constitute a physical loss or damage required to trigger
coverage for property insurance coverage,” but reaffirmed its
initial ruling that the contamination/pollution exclusion applied,
which in the court’s view obviated its need to address the
argument Endeavor raised for the first time in its new trial
motion.
Following the entry of judgment for the insurers, Endeavor
filed this timely appeal.
6 Endeavor also filed a motion to strike the insurers’
demurrer, which the trial court denied as procedurally improper.
10
DISCUSSION
Endeavor appeals the trial court’s ruling sustaining the
insurers’ demurrer without leave to amend.
In assessing whether the trial court erred in this ruling, we
ask two questions: “(1) Was the demurrer properly sustained;
and (2) Was leave to amend properly denied?” (Shaeffer v. Califia
Farms, LLC (2020) 44 Cal.App.5th 1125, 1134 (Shaeffer).) In
answering the first question, we ask “‘“whether the complaint
states facts sufficient to constitute a cause of action.”’” (Centinela
Freeman Emergency Medical Associates v. Health Net of
California, Inc. (2016) 1 Cal.5th 994, 1010; California Dept. of
Tax & Fee Administration v. Superior Court (2020) 48
Cal.App.5th 922, 929 (Tax & Fee Administration); see generally
Code Civ. Proc., § 430.10, subd. (e).) In undertaking this inquiry,
we accept as true “all material facts properly pled” in the
operative complaint (Winn v. Pioneer Medical Group, Inc. (2016)
63 Cal.4th 148, 152; Tax & Fee Administration, at p. 929) as well
as those facts appearing in the exhibits attached to it and
matters properly subject to judicial notice, 7 giving “‘“precedence”’”
to the facts in the exhibits and judicially noticed matters if they
“‘“contradict the allegations”’” (Gray v. Dignity Health (2021) 70
Cal.App.5th 225, 236, fn. 10; Brakke v. Economic Concepts,
Inc. (2013) 213 Cal.App.4th 761, 767). In answering the second
question, we ask “‘“whether ‘“‘there is a reasonable possibility
that the defect [in the operative complaint] can be cured by
amendment.’”’”’” (Shaeffer, at p. 1134; Loeffler v. Target
Corp. (2014) 58 Cal.4th 1081, 1100.) We review the trial court’s
ruling regarding the first question de novo, and review its ruling
7 Here, the trial court took judicial notice of the pertinent
policies.
11
regarding the second for an abuse of discretion. (Mathews v.
Becerra (2019) 8 Cal.5th 756, 768; People ex rel. Harris v. Pac
Anchor Transportation, Inc. (2014) 59 Cal.4th 772, 777; Branick
v. Downey Savings & Loan Assn. (2006) 39 Cal.4th 235, 242.)
Because Endeavor has made no effort to explain how it can
amend its complaint to state a cause of action (and we perceive
none), the correctness of the trial court’s ruling turns entirely on
whether Endeavor’s causes of action for declaratory relief and
breach of contract are precluded as a matter of law. (Davidson v.
City of Westminster (1982) 32 Cal.3d 197, 210.) Whether those
causes of action are precluded as a matter of law turns on three
questions: (1) Does the policy in this case require that there be a
“direct physical loss or damage to property”? If so, (2) can
Endeavor adequately plead such a “direct physical loss or damage
to property” by citing the risk of spread of COVID-19 or alleging
that the SARS-CoV-2 virus has been deposited on or adsorbed to
the surfaces of the venues Endeavor uses? And, if so, (3) does the
policy’s exclusion for contamination/pollution otherwise foreclose
coverage as a matter of law?
I. Does the Policy Require “Direct Physical Loss or
Damage to Property”?
This question is one of contract interpretation. Although
insurance policies are a type of contract, such that the
overarching goal when interpreting them is “‘“to give effect to the
parties’ mutual intentions”’” (Montrose Chemical Corp. of
California v. Superior Court (2020) 9 Cal.5th 215, 230 (Montrose);
Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th 315, 321
(Minkler)), California courts follow a three-step process when
interpreting insurance policies more specifically. First, courts
must follow the language set forth in the insurance policy if it is
12
“‘“clear and explicit.”’” (Minkler, at p. 321.) Second, and if the
text is not definitive, courts must examine whether the policy is
“‘ambiguous’”—that is, whether it is “‘susceptible of more than
one reasonable interpretation’” in light of the “‘“‘objectively
reasonable expectations of the insured.’”’” (Ibid.) Ambiguity is
not adjudged “in the abstract, or in isolation”; instead, “[t]he
policy must be examined as a whole, and in context, to determine
whether an ambiguity exists.” (Id. at p. 322; Producers Dairy
Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d 903, 916, fn. 7.) If
the language is unambiguous, courts must read the policy to
accord with the sole reasonable interpretation. (Minkler, at p.
321.) But if the language is ambiguous, the third step employs a
default presumption that any ambiguity is construed in favor of
the policy holder—in other words, that the “tie” goes to the policy
holder. (Ibid.; Montrose, at p. 230.) Because we are in as good a
position as the trial court to read an insurance policy, our review
of this contract interpretation question is de novo. (Yahoo Inc. v.
National Union Fire Ins. Co. etc. (2022) 14 Cal.5th 58, 67.)
A. Analysis
Because Endeavor’s claim against the policy is primarily to
recover business interruption losses under the business
interruption clauses (rather than to repair damaged property
under the property repair clause), Endeavor’s entitlement to
recover its financial losses turns on whether direct physical loss
or damage to property is a prerequisite to coverage under the
business interruption clauses.
We independently conclude that the insurance policy, when
viewed as a whole, unambiguously requires “direct physical loss
or damage to property” before Endeavor may recover under the
business interruption clauses. (Civ. Code, § 1641 [“The whole of a
13
contract is to be taken together, so as to give effect to every part,
if reasonably practicable, each clause helping to interpret the
other”]; Inns-by-the-Sea v. California Mutual Ins. Co. (2021) 71
Cal.App.5th 688, 707-708 (Inns-by-the-Sea) [“our task is to
interpret the Policy using the whole of its language”].) We reach
this conclusion for three mutually reinforcing reasons.
First, the business interruption clauses are, by their plain
language, predicated on some type of loss or personal property
damage. The “loss of gross earnings” clause requires that the loss
“result[] from loss or damage insured herein . . . to real and/or
property described in” the property repair clause. Along the
same lines, the “loss of gross profits” clause also requires that the
loss be “caused by loss or damage to real or personal property as
described in” the property repair clause.
Second, the period of recovery clause provides that business
interruption losses may be recovered starting with the date of
that loss and, critically, ending at the time it would reasonably
take to “rebuild, repair, or replace the property that has been
destroyed or damaged” plus any “additional length of time to
restore [Endeavor’s] business to the condition that would have
existed had no loss occurred.” Keying the endpoint for recovery of
business interruption losses to the time to repair property loss or
damage necessarily contemplates such loss or damage must first
occur. (Accord, United Talent Agency v. Vigilant Ins. Co. (2022)
77 Cal.App.5th 821, 833-834 (United Talent) [inferring property
damage/loss requirement from restoration clause keyed to repair
of property]; Inns-by-the-Sea, supra, 71 Cal.App.5th at pp. 694-
695 [same]; Starlight Cinemas, Inc. v. Massachusetts Bay Ins. Co.
(2023) 91 Cal.App.5th 24, 40 (Starlight) [same]; Mudpie, Inc. v.
14
Travelers Casualty Ins. Co. of Am. (9th Cir. 2021) 15 F.4th 885,
892 (Mudpie) [same].)
Third and lastly, Endeavor’s policy is a commercial property
insurance policy. As its very name implies, a property insurance
policy at its core contemplates coverage for loss or damage to
property. (Simon Marketing, Inc. v. Gulf Ins. Co. (2007) 149
Cal.App.4th 616, 622-623 (Simon Marketing) [“The self-evident
point is that property insurance is insurance of property. . . .
Given this premise, the threshold requirement for recovery under
a contract of property insurance is that the insured property has
sustained physical loss or damage”]; MRI Healthcare Center of
Glendale, Inc. v. State Farm General Ins. Co. (2010) 187
Cal.App.4th 766, 778 (MRI Healthcare) [“Coverage under
property insurance is ‘“triggered” by some threshold concept of
injury to the insured property’”].)
But do the civil authority and ingress/egress clauses create
ambiguity as to whether property loss or damage is a prerequisite
to coverage? They do not. As set forth above, those clauses
“extend[]” the policy’s business interruption coverage “to insure
loss sustained during the period of time when, as a result of loss,
damage or an event,” either (1) “access to property is impaired by
order or action of civil . . . authority,” or (2) “ingress to or egress
from real or personal property is impaired.” Admittedly, these
clauses—in the abstract—might be read to do away with the
property loss or damage prerequisite, but they cannot be read
that way within the context of the policy as a whole. That is
because the policy as a whole in this case elsewhere limits
recovery under these clauses to $25 million “per occurrence,” and
goes on to require that an “[i]nsured physical loss or damage . . .
15
occur” within a specified distance 8 “from the Insured’s premises
in order for coverage to apply.” Reading all of these provisions
together, the civil authority and ingress/egress clauses extend the
policy’s coverage by allowing coverage for business interruption
losses in instances not only where Endeavor’s property suffers
loss or damage, but also when someone else’s property within the
specified distance suffers loss or damage—as long as (1) a civil
authority blocks access to Endeavor’s property, or (2) ingress or
egress to Endeavor’s property is otherwise “impaired.” Similar
clauses are typically read to extend coverage to loss sustained by
a policy holder due to loss or damage to someone else’s property—
but not to do away with the property loss or damage requirement
entirely. (E.g., Dickie Brennan & Co. v. Lexington Ins. Co. (5th
Cir. 2011) 636 F.3d 683, 685 [civil authority clause requires
property loss or damage to adjacent property]; United Air Lines v.
Ins. Co. of State of Pa. (2d Cir. 2006) 439 F.3d 128, 131 [same].)
This reading of the civil authority and ingress/egress clauses also
dovetails neatly with the period-of-recovery clause in the policy in
this case. By defining the outer time limit for recovery of the
losses covered by the civil authority and ingress/egress clauses as
the time to “rebuild, repair or replace the property that has been
destroyed or damaged” and the “additional” time needed to
restore Endeavor’s business “to the condition that would have
existed had no loss occurred,” the civil authority and
ingress/egress clauses entitle Endeavor to coverage for losses up
to the point at which someone else’s property is repaired and after
that until such time as Endeavor has “resumed normal
8 As noted above, the policy is internally inconsistent on
whether the distance is 1 “statute mile” or 10 “statute miles.”
This conflict is immaterial to our analysis.
16
operations” after those operations were harmed by the ensuing
lack of access to Endeavor’s own property—with an outside cap of
365 days.
B. Endeavor’s arguments
Endeavor resists our conclusion that the policy in this case
requires some property loss or damage with what boils down to
three arguments.
1. Coast Restaurant decision
Endeavor asserts that a civil authority clause (and, by
analogy, an ingress/egress clause) in a property insurance policy
extends coverage to situations in which there is no damage or
loss to any property, as long as the policy holder experiences a
loss of use of its own property. For support, Endeavor cites Coast
Restaurant Group, Inc. v. Amguard Ins. Co. (2023) 90
Cal.App.5th 332 (Coast Restaurant). Although Coast Restaurant
did hold that “‘direct physical loss’” means the loss of use of
property without any need to also show “physical[] damage[] or
alter[ation]” (id. at p. 339), that is the minority view. Every other
California decision has rejected that view and instead held that
“‘direct physical loss or damage’” requires “physical alteration” of
the property, such that mere loss of the property’s use will
generally not suffice—except when the policy explicitly includes
loss of use due to a virus as qualifying for coverage. (Starlight,
supra, 91 Cal.App.5th at p. 38; United Talent, supra, 77
Cal.App.5th at pp. 830-831, 834; Inns-by-the-Sea, supra, 71
Cal.App.5th at pp. 699-700, 705-706; Musso & Frank Grill Co.,
Inc. v. Mitsui Sumitomo Ins. USA Inc. (2022) 77 Cal.App.5th 753,
760; Santa Ynez Band of Chumash Mission Indians v. Lexington
Ins. Co. (2023) 90 Cal.App.5th 1064, 1069 (Santa Ynez), review
granted July 12, 2023, S280353; Apple Annie, LLC v. Oregon
17
Mutual Ins. Co. (2022) 82 Cal.App.5th 919, 934-935 (Apple
Annie); see generally, Simon Marketing, supra, 149 Cal.App.4th
at p. 623 [directly physical loss or damage requires “‘a distinct,
demonstrable, physical alteration of the property’”]; cf. John’s
Grill, supra, 86 Cal.App.5th at pp. 1201-1203, 1213 [policy with
“customized trigger-of-coverage language that is virus-specific”
reaches “forms of property ‘loss’ that do not involve physical
alteration of property”]; Marina Pacific Hotel & Suites, LLC v.
Fireman’s Fund Ins. Co. (2022) 81 Cal.App.5th 96, 112 (Marina
Pacific) [policy with “communicable disease coverage” that
“explicitly contemplates that a . . . virus[] can cause damage or
destruction to property and that such damage constitutes direct
physical loss or damage”]; Amy’s Kitchen, Inc. v. Fireman’s Fund
Ins. Co. (2022) 83 Cal.App.5th 1062, 1065, 1068-1071 [same].)
Coast Restaurant departed from the majority view based
chiefly on its view that American Alternative Insurance Corp. v.
Superior Court (2006) 135 Cal.App.4th 1239 (American
Alternative) stands for the proposition that “loss of use” of
property is covered by a standard property insurance policy.
(Coast Restaurant, supra, 90 Cal.App.5th at pp. 340-341.) We
respectfully disagree with Coast Restaurant’s reading of
American Alternative. American Alternative held that a property
insurance policy that protected against “loss” of property
provided coverage against a government seizure of an insured
private airplane. (American Alternative, at pp. 1242-1243, 1246-
1249.) American Alternative’s conclusion in large part rested on
the fact that the policy holder there purchased an endorsement to
the policy that eliminated the usual exclusion for governmental
seizure or confiscation (thereby strongly suggesting that such
seizures remained covered by that policy); we consequently do not
18
read American Alternative as standing for the broader proposition
that “loss of use” more expansively constitutes direct property
loss or damage, particularly in cases—like this one—where the
policy owner was never completely dispossessed of its property.
We are also not alone in rejecting Coast Restaurant’s generous
reading of American Alternative. (Accord, Starlight, supra, 91
Cal.App.5th at pp. 38-39.)
Endeavor proposes two reasons why we should swim
against the current and side with Coast Restaurant rather than
the majority view.
First, it argues that Coast Restaurant is better reasoned
because it is consistent with two other California cases—namely,
American Alternative and Hughes v. Potomac Ins. Co. (1962) 199
Cal.App.2d 239 (Hughes), disapproved on another ground by
Sabella v. Wisler (1963) 59 Cal.2d 21, 34. We disagree. As we
have explained above, we do not read American Alternative as
support for the proposition that an insurance policy that covers
property loss or damage thereby includes, without more, loss of
the use of property. We also do not read Hughes as standing for
that proposition. Hughes held that a policy that insured “all
physical loss” to a “dwelling” covered the risk to a house when the
earth beneath it had washed away in a storm, even though the
house had yet to be damaged. (Hughes, at p. 248.) Although
Hughes acknowledged that the house could not be used while in
this state, Hughes’s rationale rested on ambiguity about whether
the term “dwelling” meant to denote only the structure or instead
the structure and the ground beneath it; Hughes subsequently
concluded that the policy would be illusory if not read to cover the
ground as well as the structure. (Ibid.) Hughes did not purport
to apply to policies not employing an ambiguous definition of
19
“dwelling” or to erect a ubiquitous “loss of use equals property
loss or damage” rule. We are not alone in declining to let Hughes
so far off the leash of its facts or rationale. (Accord, United
Talent, supra, 72 Cal.App.5th at p. 833; Mudpie, supra, 15 F.4th
at p. 891.)
Second, Endeavor argues that the majority view is poorly
reasoned because its holding that some distinct, demonstrable,
physical alteration of property is required comes from a treatise
(specifically, 10A Couch on Insurance (3d ed. 2016) § 148:46 (the
treatise)) that Endeavor says is analytically flawed and otherwise
inaccurately summarizes the law. Whether or not Endeavor’s
attack on the treatise might have had some persuasive force the
first time the treatise was presented to a court, it is not
persuasive at this point in time—that is, after a near unanimity
of courts has adopted the treatise’s rule as California law.
Endeavor’s attack is akin to a modern-day assault on Galileo’s
paper espousing that the earth orbits the sun; that horse left the
barn a long time ago. (Accord, Apple Annie, supra, 82
Cal.App.5th at p. 935 [“At this point in time, any analytical flaws
in the [treatise’s] formulation have become largely academic in
light of the now-existing wall of precedent . . . ”]; Starlight, supra,
91 Cal.App.5th at pp. 39-40 [same].)
2. Inclusion of the word “event”
Endeavor next makes a three-part argument that the
inclusion of the word “event” in the civil authority and
ingress/egress clauses effectively eliminates the direct physical
loss or damage requirement for coverage under those clauses.
Specifically, Endeavor argues that (1) those clauses “extend[]” the
policy “to insure loss sustained during the period of time when, as
a result of loss, damage or an event not excluded [by any of the
20
policy’s enumerated exclusions],” either “access to property is
impaired by order or action of civil . . . authority” or “ingress to or
egress from real or personal property is impaired” (italics added);
(2) the clauses’ use of the term of “event” as a distinct alternative
to “loss” or “damage” means that the insured loss need not be
preceded by any “loss” or “damage”; and (3) an “event” includes
the COVID-19 pandemic, 9 such that any losses stemming from a
civil authority order or denial of access are covered even if there
is no direct physical loss or damage to property.
We reject this argument for three reasons.
First, although the policy does not define “event,” it does
define “occurrence”—and in a way that inexorably links an
“event” to a “loss” otherwise covered by the policy (such that
there cannot be an “event” without an accompanying “loss” or
“damage” to property). In pertinent part, an “occurrence” is
defined as a “[l]oss, or a series of losses or several losses, which
are attributable directly or indirectly to one cause or disaster or
to one series of similar causes or disasters arising from a single
event.” 10 (Italics added.) This linkage makes sense: An event is
9 Elsewhere, Endeavor argues that an “event” happened
every time a civil authority issued a new order. This argument is
inconsistent with Endeavor’s chief argument as well as with the
definition of “occurrence” that looks to losses traced back to a
“single event,” and illustrates the convenient malleability—and
hence inherent unreasonableness—of Endeavor’s construction of
the civil authority and ingress/egress clauses.
10 The only other place “event” is mentioned in the policy is
the “Limits of Liability” cap of $15 million “per Occurrence for
Events owned, controlled, sponsored or managed by the Named
Insured Coverage (Property Damage/Time Element Combined).”
(Italics added.) In this context, “event” refers to the
21
what causes the loss or damage. (Accord, MRI Healthcare, supra,
187 Cal.App.4th at p. 779 [“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,” italics added].) Endeavor urges a broader
definition of “event” unmoored from any property loss or damage,
and in support cites United Pacific Ins. Co. v. McGuire Co. (1991)
229 Cal.App.3d 1560 (United Pacific) and London Market
Insurers v. Superior Court (2007) 146 Cal.App.4th 648 (London
Market). But these cases are unhelpful: United Pacific merely
held that an “‘event’” reaches beyond “‘accident[s]’” (United
Pacific, at p. 1565), and London Market held that an “event” did
not include the continuous manufacture of a product as the
parties did not intend “‘event’ to mean ‘“anything that happens”’”
(London Market, at p. 662). Indeed, London Market linked an
event to a “single injury-causing episode”—precisely the type of
linkage the policy here requires. (Id. at p. 662, italics added.)
Second, and more fundamentally, Endeavor’s reading is
inconsistent with the parties’ mutual intent repeatedly expressed
elsewhere throughout the policy. To be sure, Endeavor is correct
to note that treating “event” as being what precipitates a “loss” or
“damage” effectively robs the word “event” of any independent
meaning within the phrase “loss, damage or an event” in the two
clauses at issue. And courts are undoubtedly reluctant to
construe any words in a policy as surplusage. (AIU Ins. Co. v.
Superior Court (1990) 51 Cal.3d 807, 827; London Market, supra,
entertainment or sporting event, not a root cause of coverage.
The policy’s use of the same word to express different meanings
further weakens Endeavor’s position that the parties intended
“event” to have a specific meaning.
22
146 Cal.App.4th at pp. 669-670 [collecting cases].) But reading
the inclusion of the word “event” to eliminate any predicate
showing of direct physical loss or damage to property altogether
would effectively rob several other provisions applicable to the
civil authority and ingress/egress clauses of any meaning—most
specifically, (1) the provisions specifying that there be an
“[i]nsured physical loss or damage” within a specified distance of
Endeavor’s premises for the civil authority or ingress/egress
provisions to apply; (2) the period of recovery clause that
expressly applies to the civil authority and ingress/egress
provisions and ties the end point of recovery to the rebuilding,
repair or replacement of property as well as resumption of
business; and (3) the definition of “occurrence” linking an event to
loss. Given the policy’s repeated cross-references between these
specific clauses requiring property loss or damage as a
prerequisite to coverage under the civil authority and
ingress/egress clauses, we conclude that Endeavor’s contrary
interpretation that reads the words “or an event” in isolation is
unreasonable and hence does not render the policy ambiguous. 11
(Accord, Minkler, supra, 49 Cal.4th at p. 322 [clauses should not
be read in isolation].) At oral argument, Endeavor argued that
the requirement in the “Limits of Liability” section that an
“[i]nsured physical loss or damage” occur to someone else’s
property only applies when the coverage under the civil authority
and ingress/egress clauses is triggered by a “loss” or “damage”—
but not when coverage is triggered by an “event.” We reject this
11 The tension between Endeavor’s reading and our reading is
nevertheless why we have characterized this policy as “poorly
drafted”; we have found no way to read the policy in a way that
perfectly harmonizes all of its language.
23
reading. By its plain language, this “Limits of Liability” section
as a whole applies whenever the civil authority or ingress/egress
clauses as a whole provide coverage. There is no basis in the
policy’s language for splicing the “Limits of Liability” section—
that is, for applying the $25 million cap to “events,” but not
applying that section’s requirement of an “[i]nsured physical loss
or damage” within a specific distance of the insured’s premises.
And we decline to read the “Limits of Liability” section as not
applying at all when an “event” (rather than “loss” or “damage”)
triggers the civil liability or ingress/egress clauses because that
would mean the insurers have infinite liability for coverage
triggered by an “event”; such a reading is absurd.
Third, Endeavor did not plead this event-based theory in its
complaint or otherwise seek declaratory relief as to the meaning
of that term. Instead, the complaint repeatedly alleges that
Endeavor is entitled to coverage because its business losses
stemming from civil authority orders and ingress/egress
impairment are predicated upon damage or loss to Endeavor’s
property. Although Endeavor is permitted on demurrer to
articulate new theories for recovery even on appeal (Code Civ.
Proc., § 472c, subd. (a)), Endeavor has not articulated how its
complaint can be amended to allege any extrinsic evidence
supporting its reading of the policy. Endeavor first expressly
emphasized this “event” theory in its motion for new trial after
the trial court sustained the insurers’ demurrer. Its failure to do
so initially suggests that this theory was not within its
contemplation at the time the policy was drafted and executed.
Endeavor makes two further arguments in support of its
position.
24
Endeavor urges that the civil authority and ingress/egress
clauses “extend[]” the business interruption clauses, and hence
must do away with any predicate property loss or damage
requirement. But our reading of the civil authority and
ingress/egress clauses does extend the policy’s coverage: Because
of those clauses, the policy extends its business interruption
coverage (1) geographically, by entitling Endeavor to coverage not
only when its own property suffers direct physical loss or damage
but when someone else’s property does, if that other property is
within a specific distance of Endeavor’s premises; and (2)
temporally, by entitling Endeavor to business interruption losses
based on loss or damage to someone else’s property until such
time as Endeavor’s business “has resumed normal operations.”
Contrary to what Endeavor suggests, the fact that the civil
authority and ingress/egress clauses extend the policy’s coverage
does not mean that they must necessarily extend it as far as
Endeavor can imagine; they only extend coverage as far as the
policy language permits.
Next, Endeavor characterizes the civil authority and
ingress/egress clauses—and the policy as a whole—as granting
Endeavor “best-in-class protection” and “broad all-risk coverage,”
and by conferring “triple trigger” coverage. These self-serving
labels are nothing but advocacy, as the phrases have no meaning
tied to the policy itself. Indeed, Endeavor appears to have lifted
the “triple trigger” phrase from another context, where it refers to
which of many insurance companies may be sued for asbestos-
related injury. (See Armstrong World Industries, Inc. v. Aetna
Casualty & Surety Co. (1996) 45 Cal.App.4th 1, 42.) We
accordingly give these characterizations no weight whatsoever.
25
3. Absence of a virus exclusion
Endeavor lastly argues that the absence of a virus exclusion
in the policy means that losses stemming from shutdowns
occasioned by a virus must be included, notwithstanding the
language of the policy. This argument has been previously
rejected on the ground that “it improperly attempts to rely on the
absence of an exclusion to create an ambiguity in an otherwise
unambiguous” policy. (Inns-by-the-Sea, supra, 71 Cal.App.5th at
p. 709.) We could not say it better.
II. Endeavor Failed as a Matter of Law to Plead “Direct
Physical Loss or Damage to Property”
Having concluded that the policy requires that there be a
“direct physical loss or damage to property” (either Endeavor’s or
a third party’s within a specified distance of Endeavor’s
premises), we must now ask whether Endeavor has—or can—
adequately plead that requisite “direct physical loss or damage to
property” by alleging that SARS-CoV-2 viral particles were
deposited onto or adsorbed to the surfaces of its (unspecified)
properties. We conclude that the answer is, as a matter of law,
“no.”
The California courts are in accord that the phrase “direct
physical loss or damage to property” means a “‘distinct,
demonstrable, physical alteration’” of the insured property.
(Simon Marketing, supra, 149 Cal.App.4th at p. 623; MRI
Healthcare, supra, 187 Cal.App.4th at pp. 778-779; Starlight,
supra, 91 Cal.App.5th at p. 33; Santa Ynez, supra, 90 Cal.App.5th
at p. 1069; Best Rest Motel, Inc. v. Sequoia Ins. Co. (2023) 88
Cal.App.5th 696, 703; see generally, John’s Grill, supra, 86
26
Cal.App.5th at pp. 1209-1210 [summarizing cases].) 12 This is the
default definition to be applied where a policy does not provide a
different definition of “direct physical loss or damage.” The policy
here provides no different definition, and Endeavor does not
allege the existence of any extrinsic evidence supporting a
mutual intent to deviate from the default definition.
However, the courts are split on whether the presence of
the SARS-CoV-2 virus on insured property satisfies the default
definition. One line of cases holds, as a matter of law, that this
definition is not met by the ephemeral presence of the virus on
the surface of property. (United Talent, supra, 77 Cal.App.5th at
pp. 834, 838.) A competing line of cases holds that the definition
can be met on demurrer because a policy holder can allege that
the ephemeral presence of the virus on the surface of property
constitutes a “physical alteration” of that property and because
we are obligated to accept that allegation as true, no matter how
“improbable” it is. (Marina Pacific, supra, 81 Cal.App.5th at pp.
104-105, 108-112; Shusha, supra, 87 Cal.App.5th at pp. 262-263.)
We agree with the first line of cases, and do so for two
reasons.
First, we agree with United Talent that the ephemeral
presence of a virus on the surface of property does not “alter” or
“‘cause a physical change in the condition of the property’”
because “‘it may be wiped off surfaces using ordinary cleaning
materials, and it disintegrates on its own in a matter of days’” or
weeks. (United Talent, supra, 77 Cal.App.5th at pp. 834, 835,
quoting Sandy Point Dental, P.C. v. Cincinnati Ins. Co. (7th Cir.
12 For this reason, we again reject Endeavor’s continued
attack on the correctness of the Couch treatise underlying this
default definition.
27
2021) 20 F.4th 327, 335; accord, Inns-by-the-Sea, supra, 71
Cal.App.5th at p. 703, fn. 17 [collecting cases holding that
“‘contamination [of property] which is short-lived or does not
prevent the use of the structure does not qualify as direct
physical loss’”].) If, as some courts adopting this definition have
held, dust and debris from nearby road construction that lands on
the surface of insured property does not satisfy this definition
because it is easily cleaned, neither does the SARS-CoV-2 virus,
which is similarly easy to clean according to Endeavor’s own
allegations in the complaint. (Accord, Mama Jo’s, Inc. v. Sparta
Ins. Co. (11th Cir. 2020) 823 Fed.Appx. 868, 879.) This is why
the presence of SARS-CoV-2 is unlike the presence of other
substances—such as unpleasant odors, dangerous chemical
contamination, or asbestos—that permeate the property and
require substantial effort to remove. (United Talent, at p. 834;
Western Fire Ins. Co. v. First Presbyterian Church (Colo. 1968)
437 P.2d 52, 55-56 [gasoline saturating walls and floors of
building, causing strong odors and increased flammability; direct
physical loss or damage]; Mellin v. N. Security Ins. Co. (N.H.
2015) 115 A.3d 799, 803-804 [pervasive odor of cat urine that is
difficult to remove; direct physical loss or damage]; Essex Ins. Co.
v. BloomSouth Flooring Corp. (1st Cir. 2009) 562 F.3d 399, 401,
404-406 [same, as to “locker room” smell]; Farmers Ins. Co. v.
Trutanich (Or.Ct.App. 1993) 858 P.2d 1332, 1335 [same, as to
odor from a methamphetamine operation]; Yale Univ. v. CIGNA
Ins. Co. (D.Conn. 2002) 224 F.Supp.2d 402, 412-414 [asbestos and
lead contamination necessitating removal; direct physical loss or
damage]; Port Auth. v. Affiliated FM Ins. Co. (3d Cir. 2002) 311
28
F.3d 226, 235-236 [no pervasive contamination by asbestos
necessitating removal; no direct physical loss or damage].) 13
Second, we respectfully disagree with Marina Pacific and
Shusha that the general principle requiring factual allegations to
be accepted as true at the demurrer stage obligates us to ignore
that those allegations do not, as a matter of law, meet the
applicable definition triggering coverage. We agree with Marina
Pacific and Shusha that, at the demurrer stage, we must accept
as a scientific fact how the SARS-CoV-2 virus interacts with
surfaces. (T.H. v. Novartis Pharmaceuticals Corp. (2017) 4
Cal.5th 145, 156.) However, the trial court’s judgment for the
insurers is nevertheless correct here because we are concluding
that the type of viral interaction with surfaces alleged by
Endeavor (and accepted as true) 14 does not, as a matter of law,
satisfy the default definition of “direct physical harm or loss to
property.” (E.g., Childhelp, Inc. v. City of Los Angeles (2023) 91
Cal.App.5th 224, 236 [“‘[A] trial court may properly sustain a
13 There are a number of other cases that examine these types
of contamination in jurisdictions employing a definition of “direct
physical loss or damage” that includes mere “loss of use” (e.g.,
Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am. (D.N.J.
2014) 2014 U.S. Dist. LEXIS 165232, *16-*17; TRAVCO Ins. Co.
v. Ward (E.D. Va. 2010) 715 F.Supp.2d 699, 709-710; Schlamm
Stone & Dolan, LLP v. Seneca Ins. Co. (N.Y. Sup. Ct. 2005) 800
N.Y.S.2d 356, *5); because we agree with the majority of
California authority equating “loss of use” with “direct physical
loss or damage,” these other cases are irrelevant.
14 There is also a limit to what “improbable” allegations we
must accept as true. If, for instance, Endeavor had alleged that
the evil wizard Voldemort had cursed its property with a
pestilence spell, we would disregard that allegation.
29
general demurrer to a declaratory relief action without leave to
amend when . . . the controversy presented can be determined as
a matter of law’”]; accord, Inns-by-the-Sea, supra, 71 Cal.App.5th
at p. 714 [“Additional allegations about the science behind the
pandemic would not change th[e] analysis”].) And to the extent
Endeavor’s allegation is read as an allegation that the presence of
SARS-CoV-2 particles on surfaces satisfies the definition of
“direct physical loss or damage to property,” it is akin to an
allegation that Endeavor’s loss is covered by the policy; as such, it
is a conclusion of law that we may disregard on review of a
demurrer. (County of Santa Clara v. Superior Court (2023) 14
Cal.5th 1034, 1041.)
Endeavor’s parting argument is that we should be leery of
the trial court’s “shifting reasoning” between its two demurer
rulings. But whether the trial court’s reasoning changed is
irrelevant because our task is to evaluate the court’s ruling not
its reasoning. (People v. Chism (2014) 58 Cal.4th 1266, 1295, fn.
12; Kanter v. Reed (2023) 92 Cal.App.5th 191, 203.)
* * *
In light of our analysis that Endeavor cannot, as a matter
of law, allege coverage under the policy, we have no occasion to
reach the parties’ further arguments regarding whether the
contamination/pollution exclusion applies to bar coverage.
30
DISPOSITION
The judgment is affirmed. The insurers are entitled to
their costs on appeal.
CERTIFIED FOR PUBLICATION.
______________________, J.
HOFFSTADT
We concur:
_________________________, P. J.
LUI
_________________________, J.
CHAVEZ
31