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

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(COVID-19 losses resulting from closure 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 Court of Appeals for the Second District of California, Division Four, upheld the trial court’s order upholding the objection of Vigilant Insurance Company (“Vigilant”) and Federal Insurance Company (” Federal”) to the United Talent Agency (“UTA”) first amended lawsuit for breach of contract, bad faith and declaratory relief without permission to amend. UTA purchased property insurance policies from Vigilant and Federal, which included “business income and additional expenses” provisions, as well as a “civil authority” provision. The parties’ dispute arose from insurers’ denial of coverage for financial losses allegedly suffered by UTA as a result of the COVID-19 pandemic and centered on two sections of the policies.

The “business income and additional expenses” provisions within the policies addressed loss of business income and additional expenses incurred due to “impairment of … operations,” if the impairment was “caused by or as a result of[ed] direct physical loss or damage from a covered peril to property.” These provisions covered losses “during the restoration period,” defined as beginning “immediately after the time of direct physical loss or damage from a covered peril to property.” , and continuing until “operations are restored,” including “the time necessary to…repair or replace the property.” The civil authority provision provided coverage for loss of income or expenses incurred “because of actual deterioration of… operations, directly caused by a civil authority’s prohibition of access to the “covered premises”. However, the “civil authority prohibition of access must be the direct result of the loss of or direct physical damage to property outside the “covered premises”, provided such property is within one mile” of the covered premises.

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

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First, UTA contends that the “danger posed” by the virus, which gave rise to the closure orders and other restrictions, caused “physical losses” because it “limited UTA’s use and operations of its secured locations,” including local dependent commercials, such as concert halls, “thus rendering them unusable for their intended purposes”. Second, UTA claims that the virus itself in or around UTA’s secured 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 closure orders, without further ado, does not constitute direct physical loss or damage, “but rather an interruption in business operations.” The Court of Appeal also looked to the language of the policy to support its conclusion that a physical loss is required, reasoning that the “restoration period” language “provides an indication that the phrase ‘direct physical loss of the Property was not intended to include the mere loss of use of physical property to generate income, without any other physical impact to the property that could be repaired, rebuilt, or replaced.” Inns-by-the-Sea v. California Mutual Insurance Co., 71 cal. app. 5th 688, 708 (2021).) On that basis, 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 recognized principle in the context of first-party property insurance that the mere loss of use of physical property to generate business income, without any other physical impact on the property, does not give rise to direct physical loss coverage.” (Inns by the sea, supra, 71 cal. app. 5th on pp. 705–706.) UTA’s allegations of loss of use of insured facilities and dependent facilities due to closure orders and other limitations related to the pandemic are insufficient to establish “direct physical loss or damage” giving it entitled to UTA coverage under the relevant provisions. policies

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The Court of Appeal also rejected UTA’s arguments that the presence or possible presence of the virus constitutes physical loss or damage to property. In particular, the Court of Appeal rejected UTA’s claims that its case was similar to the facts and held in AIU Insurance Co.v. High Court, 51 cal. 3d 807 (1990) and Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., 45 cal. app. 4th 1 (1996), both relating to commercial general liability (“CGL”) policies. The court distinguished those cases as follows:

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

While infiltration of asbestos as in amstrong or environmental contaminants such as
AIU constituted property damage in the sense that they rendered property unfit for a particular use or required specialized repair, the comparison to a ubiquitous virus transmissible between people and unattached to any property is inappropriate. Asbestos in installed building materials such as in amstrong and environmental contaminants such as AIU they are necessarily location-bound and require specific remediation or containment to render them harmless. Here, by contrast, the virus exists throughout the world wherever there are infected people, it can be cleaned from surfaces by general disinfection measures, and transmission can be reduced or made less harmful by non-property related practices such as social distancing, vaccination and the use of masks. Therefore, the presence of the virus does not render a property useless or uninhabitable, although it may affect how people interact with and within a particular space.

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

In addition to its right to coverage under the “additional business income and expenses” provisions, UTA also argued that it was entitled to coverage under the “civil authority” provision of the policies because the closure orders prohibited access to its properties. insured. In response, the insurers argued that “the closure orders were issued to reduce the spread of the virus, not for physical loss or property damage near UTA’s insured facilities.” The Court of Appeals agreed with the insurers, reasoning that the civil authority order alone cannot cause “physical loss or property damage.” “Rather, the ‘physical loss or damage to property’ precedes and requires the issuance of civil authority [order].” The nationwide closure orders were issued in response to the public health crisis stemming from the pandemic, not as a “direct result of” damage to property near UTAs. The Court of Appeals further noted that “thus as the presence of the virus does not constitute physical loss or damage to insured property, neither 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 facility.”

According to the Court of Appeal did not find any error in the decision of the court of first instance that supported the objection of the insurers and confirmed the sentence.

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