By Jeff Sistrunk

Law360 (October 19, 2020, 6:38 PM EDT) -- A California hotel operator has asked the state's highest court to bypass an intermediate appellate court and immediately review its appeal of a decision absolving its insurer from having to cover its losses amid the COVID-19 pandemic, saying the case involves an issue of "great public importance" that is present in many similar coverage actions.

The Inns by the Sea, which operates five boutique hotels along the Golden State's central coast, said in a Friday petition for transfer that the California Supreme Court should directly tackle its appeal of a state judge's August ruling dismissing its suit against California Mutual Insurance Co., which is currently pending before a midlevel appellate court in San Jose.

The Inns said its case is a strong candidate for immediate transfer to the California high court because it involves a key question that lies at the heart of countless suits concerning the availability of coverage for businesses' losses due to government-mandated COVID-19 shutdowns — whether the novel coronavirus is capable of causing "direct physical loss of or damage to property" under the terms of a standard "all-risk" policy. All-risk policies' coverage for lost business income is typically conditioned on the policyholder suffering a direct physical loss of or damage to its insured property.

"The meaning and scope of this phrase is a threshold legal question affecting tens of thousands of California small businesses seeking relief from their insurers during this pandemic," The Inns' attorneys wrote. "This case thus presents an opportunity to resolve a critical aspect of the COVID-19 litigation tsunami swelling the dockets of California's trial courts."

If the California Supreme Court takes up the case and renders a definitive ruling on the direct physical loss or damage issue, that decision would serve as a guiding light for the state's trial and appellate courts going forward, The Inns contended.

"Until this court provides an interpretation of the phrase 'physical loss of or damage to' property, insurers and policyholders alike will expend considerable resources waging war over the scope of the meaning of that phrase during which time many more thousands of businesses will close with their employees losing their jobs and health insurance," the hotel operator argued. "And California courts, already stretched thin by COVID-19, will be further extended by this litigation process."

The Inns filed suit against California Mutual in Monterey County court on April 20, after the insurer denied coverage for losses it says it suffered when it closed its hotels after state and local officials issued shelter-in-place orders.

The hotel operator sought coverage under the business income provision of its all-risk policy with California Mutual, as well as the "civil authority" prong, which covers losses that occur when an order by an authority such as a state or local government prohibits the policyholder from accessing its property. For civil authority coverage to apply, the order must result from direct physical loss of or damage to a property other than the policyholder's.

The Inns took the stance that the presence of the novel coronavirus can cause direct physical loss of or damage to property because the virus renders property "unsafe and unfit for its intended purpose." California Mutual, on the other hand, asserted that the phrase requires "direct, tangible, and perceptible alteration" to property.

California Mutual moved to throw out The Inns' complaint on June 18. Following oral arguments, Judge Lydia M. Villareal issued a brief decision on Aug. 4 granting the insurer's motion, without explaining her reasoning. The Inns then appealed.

Ryan Z. Keller of Hayes Scott Bonino Ellingson Guslani Simonson & Clause LLP, who represents California Mutual, told Law360 that "we think, regardless of the forum, that the petitioner has failed to allege direct physical loss as required to trigger coverage."

"Shelter-in-place orders caused their closure, not any damage to property, so this policy does not insure this type of claim," Keller said in a phone interview on Monday. "There was no tangible physical alteration to property. The federal courts within California have essentially uniformly agreed there is no direct physical loss in these cases."

An attorney for The Inns did not immediately respond to a request for comment.

The Inns is represented by Michael J. Reiser, Matthew Reiser and Isabella Martinez of Reiser Law, Scott P. DeVries of Hunton Andrews Kurth LLP and Tyler Meade and Samuel I. Ferguson of The Meade Firm PC.

California Mutual is represented by Mark G. Bonino, Ryan Z. Keller and Stephen M. Hayes of Hayes Scott Bonino Ellingson Guslani Simonson & Clause LLP.

The case is The Inns by the Sea v. California Mutual Insurance Co., case number S265034, before the Supreme Court of the State of California.

--Editing by Michael Watanabe.

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