La Cava is a restaurant in Sherman Oaks, a neighborhood in Los Angeles. La Cava purchased comprehensive insurance from Century-National, which included commercial property insurance and general liability coverage for a one-year period beginning November 22, 2019.
The policy states, in part, that Century-National will pay for actual loss of business income sustained due to the “necessary suspension” of operations. The policy provides that suspension “must be caused by direct physical loss of or damage to property” and defines suspension as “the slowdown or cessation of… business activities.” The policy also provides that Century-National “will pay for the actual loss of business income… sustain[ed] and necessary extra expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any covered cause of loss.”
La Cava was forced to shut down its premises in March 2020 due to the COVID-19 pandemic in accordance to local and state public health orders. In May 2020, restaurants were permitted to serve customers by moving dining outdoors, limiting group size, spacing tables, and other restrictions. However, in November 2020, the Los Angeles County Department of Health suspended outdoor dining at restaurants and the Governor did not lift the statewide stay-at-home orders to allow restaurants to open outdoor dining until January 25, 2021.
In March 18, 2020, two days after its initial suspension of operations, La Cava submitted a claim to Century-National for the loss of income suffered as a result of its closure. Three weeks later, Century-National denied La Cava’s claim.
La Cava sued Century-National for breach of contract, bad faith and violation of unfair competition law. La Cava alleged it suffered physical loss of or damage to its dining rooms and other property “caused by the actual presence of virus droplets in the air and on the surfaces in the vicinity of and in [its] restaurant.” La Cava also alleged in its complaint that three of its employees suffered from COVID-19 in December 2020 and January 2021; therefore, the virus was present in the restaurant which led to La Cava’s closure and constituted physical damage to its premises.
In addition to lost revenue, La Cava alleged it also “incurred substantial costs in an attempt to mitigate the suspension of its operations, including but not limited to expenses incurred for reconfiguration to outside dining and increased sanitation procedures. [La Cava] would not have incurred those costs but for the direct physical loss or damage caused by the coronavirus, COVID-19, and the [government] Orders.”
Century-National filed a demurrer to dismiss the lawsuit, arguing that La Cava could not allege its loss of business income was attributable to any physical alteration of La Cava’s property by the COVID-19 virus. The trial court granted Century-National’s demurrer without leave for La Caca to amend its complaint.
The Court of Appeal disagreed with the trial court, holding that La Cava adequately alleged it suffered direct physical loss or damage to its property caused by the COVID-19 virus after shutting down the restaurant in response to government closure orders. The Court of Appeal held that insured entities “are not required to provide [legal] authority at the pleading stage to support its position that contamination with the COVID-19 virus caused damage to the surfaces of its premises.” The Court also determined that Century-National’s denial of La Cava’s claim after “just three weeks and in the earliest days… of the novel COVID-19 virus” was not in good faith as a matter of law.
Shusha, Inc. v. Century-National Insurance. Co. (Cal. Ct. App. Dec. 14, 2022) 2022 WL 18110247.
Note:
LCW reported on a similar case in the December 2022 Private Education Matters. This case continues the trend that motions to dismiss are improper where there are allegations that COVID-19 physically altered the insured’s property.