California court forces insurer to play ball in COVID-19 insurance lawsuit

California court forces insurer to play ball in COVID-19 insurance lawsuit

One of the threshold issues in COVID-19 insurance coverage cases that have been brought across the country is whether the policyholder’s claims meet the applicable pleading standard in alleging that the virus caused physical loss or damage. In many cases, the courts have been wrong, forcing policyholders to meet a higher standard than necessary. But recently, a California federal judge righted those wrongs by recognizing the correct pleading standard in this case, namely whether the allegations lay out a plausible claim for relief. Ashcroft vs. Iqbal, 556 U.S. 662, 679 (2009). The Court here correctly recognized that the policyholder, the Los Angeles Lakers, met this standard of pleading when it alleged that the COVID-19 virus could cause physical loss or damage by physically altering property. .

In its complaint, the Los Angeles Lakers alleged that the virus physically altered its property by altering its chemical and physical property conditions, creating viral vectors that required corrective action before the property was safe again. Los Angeles Lakers, Inc. v. Fed. Ins. Co., 591 F. Supp. 3d 672 (CD Cal. 2022), complied with after re-examination, 2022 WL 16571193 (CD Cal. 26 Oct. 2022). The Court agreed that these Lakers allegations adequately pleaded physical alteration to support a property damage claim. The insurer requested reconsideration of the decision, and the Court strongly upheld its earlier decision, explaining its rationale as follows:

The Court does not have the necessary scientific expertise to conclude, based solely on the FAC’s allegations. . . that it is implausible that Lakers property was physically altered by the virus, which the Lakers have rightly alleged. Therefore, the Court, in the March 17 order, found the Lakers’ theory to be plausible. Whether the Lakers can actually prove their theory will be determined at summary judgment or trial.

To support its rationale, the Court looked at the development of California’s state right of appeal, ultimately focusing on a more recent decision in which the California Court of Appeals for the Second District came to the same conclusion as here in Marina Pac. Hotel and Suites, LLC v. Fireman’s Fund Ins. Co., 81 Cal. App. 5th 96 (2022). Similar to the Los Angeles Lakers, the assured of Marina Pacific alleged that COVID-19 “not only lives on surfaces, but also binds to surfaces through physicochemical reactions involving surface cells and proteins, which transform the physical state of the property”. The court held that the policyholder “unquestionably pleaded direct physical loss or damage to covered property within the meaning of the definition articulated [by California courts]– a distinct and demonstrable physical alteration of the property. ID. at 109. Coming to its conclusion, the Los Angeles Lakers Recognized by court Marina Pacificcriticism of an earlier appeal decision in California, United Talent Agency vs. Vigilant Ins. Co., 77 cal. App. 5th 821 (2022). The court criticized united talent agencydetermined “without evidence” that COVID-19 does not damage the property, even though the insured alleged that it did.

These decisions show why the development of state law continues to matter even though the state standard of pleading is lower than the federal standard of pleading. California, unlike the federal courts, does not have a pleading standard of plausibility, but instead requires that a court consider the facts alleged in a pleading to be true, “although improbable”. Marina Pac., 81 Cal. App. 5th to 110. This is important, particularly in the context of COVID-19 insurance cases, as the lower threshold may provide policyholders with the opportunity to dismiss a motion to dismiss and continue to prove their claims. In retrospect, this proved prudent, as scientific evidence, when it could be presented, showed that it could support policyholders’ claims. See Baylor Coll. of Med. v. XL Ins. Am., Inc.No. 2020-53316-A (Tex. Dist. Ct. Harris Cty. Aug. 31, 2022) (jury deciding COVID-19 caused physical loss or harm after presentation of expert testimony).[1]

These recent rulings should be encouraging for policyholders with COVID-19 insurance claims. This California decision follows other more recent cases which have recognized the need for scientific evidence to assess these claims, and that a motion to dismiss based solely on the pleadings is inappropriate when there are claims that the virus has physically altered the property. See, for example, Huntington Ingalls Indus., Inc. v. Ace Am. Ins. Co., 2022 VT 45, ¶¶ 45-46 (Vt. 2022 Sep 23) (possession of scientific evidence is necessary to assess whether the virus can physically alter property).[2]

Although earlier cases have held policyholders to a higher standard of pleading than required in COVID-19 insurance cases, more recent decisions reflect a change in direction, giving cause for optimism. Now the ball is really in the “court” of the courts to apply it correctly and allow the discovery of medical and scientific evidence before making a decision on the ability of COVID-19 to cause loss or damage.

Full review in Los Angeles Lakers, Inc. v. Fed. Ins. Co.2022 WL 16571193 (CD Cal. 26 Oct 2022) can be found here.

[1] We have already covered the Baylor College of Medicine verdict in a previous article.

[2] The Huntington Ingalls decision was also discussed in a previous article.

Copyright © 2022, Hunter Andrews Kurth LLP. All rights reserved.National Law Review, Volume XII, Number 325

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