'Mere Threat' Of Virus Not Enough To Cause Property Damage

By Daphne Zhang
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Law360 (November 9, 2020, 11:34 PM EST) -- A California federal judge Monday axed a suit from 12 Hawaiian souvenir stores seeking COVID-19 loss coverage from Allianz insurance units, ruling that the "mere threat of coronavirus" does not cause a direct physical loss of or damage to covered properties.

U.S. District Judge William H. Orrick freed a group of Allianz units from having to cover the Hawaiian souvenir store chain's claimed business interruption due to the pandemic and government closure orders. But he gave the policyholders 20 days to amend their complaint.

Judge Orrick said he agrees with "the overwhelming majority of courts" that have addressed similar policies, siding with Allianz that "a mere threat" of virus exposure is not enough to allege physical damage to trigger coverage. The stores also presented no facts regarding Allianz's alleged misrepresentation of the policy, the judge said.

"Sand People pleads that coronavirus was rapidly spreading and feasibly in Hawaii but fails to allege both its presence in any of its properties and a manifestation of imminent threat of contamination in any of its properties," Judge Orrick said Monday.

Water Sports Kauai Inc., doing business as Sand People, sued three Allianz units in June after the insurer refused to cover its business interruption loss claims. In an August dismissal motion, Allianz said the chain lost income entirely from its own decision to respond to government orders but not due to physical damage.

Sand People has argued that its case is different from the bulk of district court COVID-19 coverage suits because it specifically alleges that it shut down because of COVID-19's "rapid spread and imminent threat" to its businesses, and the policy does not have a virus exclusion.

The souvenir chain relied on Port Authority of New York and New Jersey v. Affiliated FM Ins. Co. , arguing that the Third Circuit has held that property owners suffer a physical loss when there is the presence of "large quantities of asbestos in the air of a building."

Judge Orrick disagreed on Monday, saying that the chain ignored that the same ruling held that property owner suffers no loss if asbestos presented on the property "is not in such form or quantity as to make the building unusable."

"The mere presence of asbestos, or the general threat of future damage from that presence, lacks the distinct and demonstrable character necessary for first-party insurance coverage," the judge said, citing the Third Circuit ruling. "There must be sufficient evidence of the presence of the contaminant at the property plus an imminent threat from it."

Sand People never alleged that "an actual physical exposure caused them to close a particular store or set of stores," the judge added. It did not show any previous rulings granting coverage "based only on a 'would have been exposed' allegation because of a contaminant's rapid spread," the judge said.

Judge Orrick also rebuffed the chain's argument that it does not need to demonstrate a "material alteration" of its property. Courts have routinely held that there needs to be "physical tangible injury" such as "a total deprivation" to show property loss, and "a physical alteration or active presence of a contaminant" to allege property damage, the judge said.

However, Sand People identified nothing to be fixed or replaced at any of its properties as required by the policy, Judge Orrick added. The chain stores also failed to demonstrate the presence of any contaminant that could make its properties unusable, he said.

Representatives for the parties could not be immediately reached for comment Monday.

Water Sports is represented by Alexandra Louise Foote of Wendel Rosen Black & Dean LLP, Fabrice Nijhof Vincent, Jacob Henry Polin and Robert Jay Nelson of Lieff Cabraser Heimann & Bernstein LLP.

The Allianz carriers are represented by Gregory George Sperla, John P. Phillips and Rob Hoffman of DLA Piper LLP.

The case is Water Sports Kauai Inc. v. Fireman's Fund Insurance Co. et al., case number 3:20-cv-03750, in the U.S. District Court for the Northern District of California.

--Editing by Bruce Goldman.

For a reprint of this article, please contact reprints@law360.com.

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