COVID-19 Business Interruption Claims: First California Court of Appeal Decision Holds That Closure Orders Are Not ‘Direct Physical Loss’

California has been a hotbed of litigation regarding COVID-19 business interruption claims. The vast majority of the trial courts have held in favor of insurers and against businesses.

Now, the California Court of Appeal has weighed in. In a published decision, The Inns by the Sea v. California Mutual Insurance Company (November 15, 2021, Case No. D079036), the Fourth Appellate District held that a hotel’s business income loss resulting from the COVID-19 pandemic was not covered.

The plaintiff, The Inns by the Sea (‘Inns’), operated four lodging facilities in Northern California. Inns had a commercial property policy with California Mutual Insurance Company (‘California Mutual’).

In March 2020, local authorities issued orders requiring citizens to shelter in place and prohibited travel unless essential due to COVID-19. Inns closed its lodging facilities in response to the orders. Inns made a claim to California Mutual for business income loss.

California Mutual denied the claim on the basis that ‘[l]oss of business due to reasons other than covered physical damage is beyond the scope of the insurance policy.’