This is Not a Ruling on Evidence & Is Not a Win for Insureds

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In Marina Pacific Hotel And Suites, LLC, et al. v. Fireman’s Fund Insurance Company, B316501, California Court of Appeals, (July 13, 2022) the Court of Appeals was faced with a ruling on a demurrer without leave to amend when the complaint alleged all elements required to allege a cause of action.

For more than two years the courts understanding of COVID-19, the infectious disease caused by the SARS-CoV-2 virus and its many variants, has evolved. Courts now think they know how it spreads, how to protect against it and how best to treat those who have it. When a pleading alleges facts sufficient to constitute a cause of action, what we think we know-beliefs not yet appropriately subject to judicial notice- has never been a proper basis for concluding, as a matter of law, those alleged facts cannot be true and, on that ground, sustaining a demurrer without leave to amend.


The owners of Hotel Erwin and Larry’s (a restaurant adjacent to the hotel) in Venice Beach and its owners and operators (collectively insureds)-sued Fireman’s Fund Insurance Company alleging the COVID-19 virus was present on, and had physically transformed, portions of the insured properties-“direct physical loss or damage” within the meaning of Fireman’s Fund’s first-party commercial property insurance policy. The trial court sustained Fireman’s Fund’s demurrer to the insureds’ first amended complaint without leave to amend and dismissed the lawsuit, ruling the COVID-19 virus cannot cause direct physical loss or damage to property for purposes of insurance coverage.

The Court of Appeal noted that the trial court’s decision: “[m]ight be the correct outcome following a trial or even a motion for summary judgment.” However, it concluded the decision was error at the nascent phase of the case created by a demurrer.

The Fireman’s Fund (Allianz) Policy

Fireman’s Fund issued its commercial property insurance policy for the period July 1, 2019 to July 1, 2020 to provide coverage for the plaintiffs in this litigation-were named insureds. A copy of the policy was attached to the pleading.

The policy’s general property coverage provision states, “[W]e will pay for direct physical loss or damage to [the insured property] caused by or resulting from a covered cause of loss during the Policy Period.”

The policy also included “communicable disease coverage” (with a policy limit of $1 million), providing the insurer would pay “for direct physical loss or damage” to insured property “caused by or resulting from a covered communicable disease event,” including costs necessary to repair or rebuild insured property damaged or destroyed by the communicable disease and to “[m]itigate, contain, remediate, treat, clean, detoxify, disinfect, neutralize, cleanup, remove, dispose of, test for, monitor and assess the effects [of] the communicable disease.”

The First Amended Complaint

The first amended complaint alleged, in part, the insureds, beginning in March 2020, had suffered loss arising from direct physical loss or damage to covered property based on the existence of COVID-19. They asserted that “COVID-19 is a covered cause of loss under the Policy because it is not excluded or limited thereunder” and, on information and belief, that “the presence of COVID-19 on property, including on and within Insured Properties (i.e., an external force), caused and continues to cause physical loss and/or damage to property by causing, among other things, a distinct, demonstrable or physical alteration to property” and “by transforming the physical condition of property at Insured Properties and within the covered radius,” causing the properties to remain in an unsafe and hazardous condition.

The physical loss or damage to property, the insureds alleged, required the closure or suspension of operations at Hotel Erwin and Larry’s or portions of those properties at various times and caused them to incur extra expense, adopt remedial and precautionary measures “to attempt to restore and remediate the air and surfaces at the Insured Properties, dispose of property damaged by COVID-19 and limit operations at the Insured Properties.”

Fireman’s Fund’s Demurrer and the Insureds’ Response

Fireman’s Fund demurred to the first amended complaint and argued the insureds had failed to allege facts showing direct physical loss or damage to covered property, a contractual prerequisite for a valid claim to benefits under the policy.

The court found, quoting the mortality and disease exclusion, that the Fireman’s Fund policy “contains an express virus exclusion provision.” “This provision expressly excludes coverage of any direct physical loss or damage resulting from a virus; it is beyond dispute that COVID-19 is a virus.”


Governing Law: Interpretation of Insurance Policies

In general, interpretation of an insurance policy is a question of law that is decided under settled rules of contract interpretation

The insureds’ appeal requires analysis of the allegations in their first amended complaint primarily in terms of one insuring provision -coverage for business interruption due to “direct physical loss or damage to” covered property-and one exclusion-for “mortality and disease.”

The Insureds Adequately Alleged Direct Physical Loss or Damage Caused by the COVID-19 Virus and a Cause of Action for Breach of Contract by Fireman’s Fund

The elements of a cause of action for breach of contract are

  • the existence of the contract,
  • plaintiff’s performance or excuse for nonperformance,
  • defendant’s breach, and
  • the resulting damages to the plaintiff.

Fireman’s Fund’s demurrer did not challenge elements (1), (2) or (4), contending only it did not breach its obligation to pay benefits under the policy because the insureds, having failed to allege any direct physical loss or damage to property, failed to allege a covered loss.

To reiterate, with respect to covered loss, the insureds alleged in their first amended complaint COVID-19 (that is, the SARS-CoV-2 virus that causes the disease) not only lives on surfaces but also bonds to surfaces through physicochemical reactions involving cells and surface proteins, which transform the physical condition of the property. The virus was present on surfaces throughout the insured properties, including the hotel lobby, kitchens at both the hotel and restaurant, employee breakroom, service elevator and parking garage, as well as on the properties’ food, bedding, fixtures, tables, chairs and countertops.

Because of the nature of the pandemic, the virus was continually reintroduced to surfaces at those locations. As a direct result, the insureds were required to close or suspend operations in whole or in part at various times and incurred extra expense as they adopted measures to restore and remediate the air and surfaces at the insured properties. The insureds specifically alleged they were required to “dispose of property damaged by COVID-19 and limit operations at the Insured Properties.”

Assuming, as the court must accept as true: “the truth of those allegations, even if improbable, absent judicially noticed facts irrefutably contradicting them, the insureds have unquestionably pleaded direct physical loss or damage to covered property within the definition articulated in … a distinct, demonstrable, physical alteration of the property.” (emphasis added)

The Plaintiffs also adequately alleged that physical loss or damage caused a slowdown in, or cessation of, the operation of the insureds’ business while the covered property was restored or remediated, thereby triggering their business interruption (“business income and extra expense”) coverage.

Even if there had been evidence subject to proper judicial notice to establish that disinfecting repaired any alleged property damage, it would not resolve whether contaminated property had been damaged in the interim, nor would it alleviate any loss of business income or extra expenses.

Fireman’s Fund’s argument and the trial court’s conclusion that the COVID-19 virus cannot cause direct physical loss or damage to property are directly undermined by the policy’s plain language establishing communicable disease coverage. Fireman’s Fund asserts the insureds must allege an obvious physical alteration, for example, “broken chairs, dented walls, or smashed windows,” to adequately allege direct physical loss or damage. Because it is undisputed the COVID-19 virus (or presumably any communicable disease) does not cause such damage.

Construing the policy provisions together, as the appellate court  must, this language precludes the interpretation that direct physical loss or damage categorically cannot be caused by a virus

The Mortality and Disease Exclusion

If, as the trial court ruled and Fireman’s Fund argues on appeal, the policy’s mortality and disease exclusion bars all loss or damage caused by a virus, then it would be immaterial whether the first amended complaint alleged facts showing direct physical loss or damage to property from the COVID-19 virus.

The policy issued to the insureds did not contain this virus or bacteria exclusion. Instead, as discussed, the exclusion provided only that the insurer would not pay for loss, damage or expense caused by, or resulting from, “[m]ortality, death by natural causes, disease, sickness, any condition of health, bacteria, or virus.” Particularly when compared to the all encompassing language of the ISO virus exclusion, the most reasonable interpretation of this language is that it precludes coverage for losses related to death from any of the listed causes-that is, it excludes losses resulting from a death caused by a virus or other disease, and not more broadly any otherwise covered losses resulting from a virus or a disease. At the very least, the language is ambiguous.

Absent extrinsic evidence of the parties’ expectations-hardly surprising given the preliminary stage of the proceedings-the exclusion must be interpreted narrowly, at least for now.

If all losses caused by a virus were excluded, even those indirectly resulting from the virus, as Fireman’s Fund contends, the communicable disease coverage would be meaningless. The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other. We do so by holding the mortality and disease exclusion does not bar the insured’s claims in this lawsuit.

The Court of Appeal acknowledged it might be more efficient if trial courts could dismiss lawsuits at the pleading stage based on the judges’ common sense and understanding of common experience rather than waiting to actually receive evidence to determine whether the plaintiff’s factual allegations can be proved. But that is not how the civil justice system works in California.

Because the insureds adequately alleged losses covered by Fireman’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 is reversed, and the cause remanded with directions to the trial court to vacate its order sustaining the demurrer without leave to amend and to enter a new order overruling the demurrer. The insureds are to recover their costs on appeal.


Although press reports consider this decision to be a win for the plaintiffs, it is not. It is a statement that the Plaintiffs adequately pleaded a cause of action that, if proved with admissible evidence, can result in coverage and that the Plaintiffs are entitled to try to prove their case. At best it is a decision that the mere allegation of direct physical loss is sufficient to avoid a demurrer but that evidence is required to avoid a motion for summary judgment or a trial.

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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at and

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