United Talent Agency v. Vigilant Insurance Company – Laws and Insurance Products

(COVID-19 related losses resulting from shutdown orders and the presence of the virus itself do not constitute “direct physical loss or damage”)

(July 2022) – In United Talent Agency v Vigilant Insurance Co., 77 Cal. App. 5th 821 (April 22, 2022), the California Court of Appeals for the Second District of California, Division Four, affirmed the trial court’s order affirming the objection of Vigilant Insurance Company (“Vigilant”) and Federal Insurance Company ( “Federal”) to United Talent Agency (“UTA”) first amended complaint for breach of contract, bad faith and declaratory judgment without leave to amend. UTA purchased property insurance policies from Vigilant and Federal, which included “additional business income and expense” provisions, as well as a “civil authorities” clause. The dispute between the parties arose from insurers’ denial of coverage for financial losses that UTA allegedly suffered as a result of the COVID-19 pandemic and focused on two sections of the policies.

The “additional business income and expense” provisions in the policies covered loss of business income and additional expenses incurred due to “depreciation of…operation”, if the depreciation was “caused by or resulted[ed] direct property damage caused by a covered peril to property. These provisions covered losses “during the recovery period”, defined as commencing “immediately after the time of direct physical loss or damage to property from a covered peril”, and continuing until “operations be restored”, including “the time necessary to … repair or replace the property.” The civil authority provision provided coverage for loss of income or expenses incurred “due to actual impairment of … operations, directly caused by the denial of access to ‘covered premises’ by a civil authority However, “the denial of access by a civil authority must be the direct result of direct physical loss or damage to property located outside the ‘covered premises’, provided that such property is within one mile” of covered premises.

In support of its claim for coverage under the additional business income and expense provisions, UTA made the following arguments on appeal:

First, UTA argues that the “danger posed by” the virus, which prompted the shutdown orders and other restrictions, caused “physical losses” because it “limited the use and operations of UTA on its insured sites”, including dependent commercial premises, such as concert halls, “thereby rendering them unusable for the purposes for which they are intended”. Second, UTA claims that the virus itself in or around UTA’s insured locations caused “physical damage”.

With respect to UTA’s loss of use claim, the Court of Appeal noted that “it is now widely established that the temporary loss of use of a property due to pandemic-related closing orders, without more, does not constitute a direct physical loss or damage “but rather a disruption of business operations.” “The Court of Appeals also held looked to the wording of the policy itself to support its conclusion that physical loss is required, finding that the language’s “recovery period” “provides an indication that the phrase ‘direct physical loss of property was not not intended to include the mere loss of use of a physical asset to generate income, without any other physical impact on the asset that could be repaired, rebuilt or replaced.” (quoting Inns-by-the-Sea v California Mutual Insurance Co., 71 Cal. App. 5th 688, 708 (2021).) Based on this, the Court of Appeals concluded the following with respect to UTA’s loss of use claim:

We therefore follow the reasoning of
Inns-by-the-sea and similar cases by recognizing “the generally accepted principle in the context of first party property insurance that the mere loss of use of physical property to generate business income, without further physical impact on the well, does not give rise to coverage for direct physical loss.” (Inns-by-the-sea, above, 71 Cal. App. 5th at pp. 705-706.) UTA’s claims regarding loss of use of insured premises and dependent premises due to shutdown orders and other pandemic-related limitations are insufficient to establish “direct physical loss or damage giving UTA the right to cover under the relevant law. Strategies.

The Court of Appeal also rejected UTA’s arguments that the presence or potential presence of the virus constitutes physical loss or property damage. In particular, the Court of Appeal rejected UTA’s assertions that its case was similar to the facts and found in AIU Insurance Co. v. Superior Court, 51 Cal. 3d 807 (1990) and Armstrong World Industries, Inc. v Aetna Casualty & Surety Co., 45 Cal. App. 4th 1 (1996), both of which involved Commercial General Liability (“CGL”) policies. The court distinguished these cases as follows:

[C]Aces involving CGL coverage are of limited value in determining the extent of property insurance coverage. “[T]The cause of loss under property insurance is totally different from that under a liability policy”, and a liability insurer “undertakes to cover the insured for a ‘wider range of risks’ than in property insurance. [MRI Healthcare Center of Glendale, Inc. v.
State Farm General Ins. Co.
(2010),187 Cal. App. 4th at 766,
779, n. 6]….

While the infiltration of asbestos as in amstrong or environmental contaminants as in
IAU constituted material damage in that they rendered a good unfit for a certain use or required specialized corrective measures, the comparison with a ubiquitous virus transmissible between people and not linked to a good is not relevant. Asbestos in installed building materials such as in amstrong and environmental contaminants as in IAU are necessarily linked to a place 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 disinfection measures, and transmission can be reduced or made less harmful through unrelated practices. with property, such as social distancing, vaccinations, and the use of masks. Thus, the presence of the virus does not render a property useless or uninhabitable, although it may affect how people interact with and in a particular space.

The Court of Appeal also noted that other courts have held that “cleaning or the use of minor corrective or preventive measures to help limit the spread of the virus does not constitute direct property damage or loss.” Accordingly, the Court of Appeal concluded that UTA had failed to establish that the presence of the virus constituted physical damage to the insured property.

In addition to its entitlement to coverage under the “additional business income and expense” provisions, UTA also argued that it was entitled to coverage under the “civil authorities” provision of the policies because the closure orders barred access to his insured properties. In response, the insurers argued that “the closure orders were issued to curb the spread of the virus, and not because of physical loss or property damage near UTA’s insured premises.” The Court of Appeal agreed with the insurers, finding that the order of the civil authority cannot itself cause the “physical loss or material damage”. “On the contrary, ‘physical loss or damage to property’ precedes and requires the issuance of the civil authority [order]. “The closure orders across the country were issued in response to the public health crisis resulting from the pandemic, and not as ‘the direct result of’ damage to property near UTA. The Court of Appeals held in further noted that “just as the presence of the virus does not constitute physical loss or damage to insured property, nor does it constitute physical loss or damage to property ‘far from’ or within one mile of the covered property. Neither the closure orders themselves nor UTA’s allegations suggest that the orders relate to any property within one mile of UTA’s covered premises.”

Accordingly, the Court of Appeal found no error in the trial court’s decision supporting the insurers’ objection and upheld the judgment.

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