By Melissa M. Modzelewski,[1] Olivia C. Tawa,[2] and Charles F. Gfeller[3]
Legal ramifications come to fruition in post-pandemic times.
As the new year begins, we near the four-year anniversary of when the world shut down due to the Covid-19 pandemic. The world continues to experience a “new normal.” However, while it seems many aspects of life have reverted back to as they were in pre-Covid-19 pandemic times, many legal ramifications and issues remain.
The world came to halt in March of 2020 due to the Covid-19 pandemic affecting everyone in some fashion. Many small businesses had to close their doors. Millions lost their lives. Professional sports arenas had to cease operations.
The matter of San Jose Sharks, LLC v. Superior Court of Santa Clara County, et al., a case brought by a group of plaintiffs, including the National Hockey League (the “NHL”), the San Jose Sharks, LLC, and additional NHL member teams, exemplifies unprecedented coverage disputes that arose as a result of the Covid-19 pandemic. 98 Cal. App. 5th 158 (2023), review filed (Jan. 30, 2024). The plaintiffs brought suit against Factory Mutual Insurance Company (“Factory Mutual”) alleging that the losses they incurred as a consequence of the Covid-19 pandemic were covered by a commercial insurance policy issued by Factory Mutual. Specifically, the plaintiffs claimed they lost earnings as a result of canceled hockey games and limited fan access to games, and that such losses were covered under the Factory Mutual policy. The plaintiffs argued that because they paid their required premiums, provided timely notice of the losses, and submitted a proof of loss, their Covid-19 related losses should be covered under their respective policies.
By way of background, the trial court determined the claims were adequately plead by the plaintiffs, determining they sufficiently stated a claim for relief. However, the trial court did grant Factory Mutual’s motion to strike “in large part, concluding that [the] plaintiffs failed ‘to allege covered physical loss or damage to property due to Covid-19.’” Id. at 316. The trial court declined to address Factory Mutual’s contention that the contamination exclusion barred the plaintiffs’ claims for coverage. The plaintiffs appealed the matter to the Sixth District Court of Appeals in California challenging the trial court’s findings, ultimately reviewing the plaintiffs’ petition.
The review at the appellate level was twofold. First, the Court had to determine whether the plaintiffs adequately plead their claim for covered physical loss or damage to property due to Covid-19. Second, the Court had to interpret the terms of the insurance agreements, which the plaintiffs argued were ambiguous. As the case itself cites, “[w]hile insurance contracts have special features, they are still contracts to which the ordinary rules of contract interpretation apply.” Id. (internal citations and quotation marks omitted). Insurance agreements, much like contracts, need to be read as a whole when interpreting them. One cannot read terms or exclusions of a policy on their own with an independent lens, and instead, they must be read as a whole to interpret their true intent.
What constitutes physical damage to property? The plaintiffs argued that the Covid-19 virus simply existing in the air and on the surfaces of their arenas sufficed as physical damage to their arenas. The appeals court, based upon other trial court rulings in making its determination, stated that it relied upon the plaintiffs’ factual allegations and, thus, determined there was physical loss and/or damage as defined within the terms of the agreements/policies. Therefore, if the Covid-19 virus was in the air or on the surfaces of the arenas, the arenas had suffered physical damage to their property. Other trial court cases identified that the Covid-19 virus bonded with surfaces causing physical damage to property and thus, sufficed as physical damage. Additionally, the plaintiffs alleged that the Covid-19 virus actually altered the molecular structure of property at their arenas. Factory Mutual did not contest this argument so the appeals court assumed the truth of the plaintiffs’ factual allegation as claimed.
The court then looked to whether said physical damage to property fell within the confines of the contamination exclusion contained in the policies. The plaintiffs agreed that the contamination exclusion did not allow them to recover for diminution to the property at their arenas; however, they contested whether the exclusion applied to their lost earnings. The court agreed with Factory Mutual, in that the language of the exclusionary provision was not ambiguous and, as a result, the policy did not provide coverage for physical loss or damage in the form of Covid-19 viral contamination.
Ultimately, the court of appeals (Judge Lie), held that the plaintiffs sufficiently stated a claim that the presence of Covid-19 in and at their properties did constitute “physical loss or damage” within the meaning of their policies, but further held that the provisions contained in their policies under the business-interruption and civil-authority sections unambiguously excluded physical loss or damage in the form of viral contamination, including earnings lost due to such damage, from the scope of coverage.
This case was a win for insurers. Specifically, the holding in this case is significant for those insurers who insure recreational facilities, sports arenas, and professional sports teams. The National Hockey League, the San Jose Sharks, LLC, and additional NHL member teams, as the plaintiffs here, attempted to recoup their lost revenue as a result of a global pandemic. However, as has been the case in various other settings around the country, this Court did not agree and found that there was no business interruption coverage triggered by the pandemic.
[1] Melissa M. Modzelewski is an Associate at Gfeller Laurie, LLP. She can be reached at mmodzelewski@gllawgroup.com.
[2] Olivia C. Tawa is an Associate at Gfeller Laurie, LLP. She can be reached at otawa@gllawgroup.com.
[3] Charles F. Gfeller is a Partner at Gfeller Laurie, LLP. He can be reached at cgfeller@gllawgroup.com.
