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By Samuel A. Lopez, USA Herald

[CALIFORNIA] - In a landmark decision with profound implications for the insurance industry, the California Supreme Court has ruled that COVID-19 does not constitute "direct physical loss or damage" to property under state law. This ruling, which could affect billions in insurance costs and millions of policies, leaves many businesses struggling to recoup their pandemic-related losses.

The case in question, Another Planet Entertainment, LLC v. Vigilant Insurance Co., centered on whether the presence of the COVID-19 virus on an insured’s premises could be considered a direct physical loss or damage to property. Another Planet Entertainment, a concert promoter, argued that the virus physically altered and damaged its properties, thereby triggering coverage under their commercial property insurance policy. However, the justices disagreed, stating that the mere presence of the virus does not meet the threshold for physical damage required to claim insurance benefits.

• Direct Physical Loss or Damage: Under California law, this requires a distinct, demonstrable, physical alteration to property. It must result in some injury to or impairment of the property.
• Civil Authority Coverage: This refers to insurance that covers loss of business income when a civil authority prohibits access to the insured’s property due to physical damage to nearby property.

The court emphasized that for an insurance claim to be valid under the "direct physical loss or damage" clause, there must be a tangible alteration to the property. They stated, "The mere fact that a property cannot be used as intended is insufficient on its own to establish direct physical loss to property."

This decision stems from a request by the US Court of Appeals for the Ninth Circuit, which sought clarification from the California Supreme Court. The federal trial judge had previously dismissed Another Planet’s claims of contractual breach, bad faith, and fraud, leading to this pivotal appeal.

As we navigate the aftermath of the COVID-19 pandemic, it is crucial for businesses to understand the limitations of their insurance policies. This ruling underscore the importance of clear policy language and the necessity for businesses to seek comprehensive coverage that explicitly addresses pandemic-related risks.