By Shawn Rice

Law360 (February 26, 2021, 9:31 PM EST) -- A dental appliance manufacturer asked the Ninth Circuit on Thursday to revive its COVID-19 business-interruption suit against Continental Casualty Co., saying a trial judge ignored important California case law suggesting microscopic substances can cause damage or loss to property.

Selane Products Inc. said in its opening brief that U.S. District Judge Mark C. Scarsi shouldn't have dismissed — for a second time — its suit, seeking business income, extra expense and civil authority coverage under the Continental policy for losses from the pandemic and shutdown orders by the state and local government.

Selane argued that California courts' decisions in AIU Insurance Co. v. Superior Court and Armstrong World Industries Inc. v. Aetna Casualty & Surety Co. , which were both distinguished by Judge Scarsi, support its allegations that the coronavirus causes "direct physical loss of or damage to property," triggering Continental's coverage obligations.

"[T]he presence of SARS-CoV-2 causes a distinct, demonstrable, and physical alteration to property, including to the surfaces to which it attaches and the airspace it occupies," Selane said.

Judge Scarsi dismissed with prejudice Selane's second attempt at bringing claims on behalf of a putative class of Continental policyholders for breach of contract, bad faith, declaratory relief and violation of the Business and Professions Code Section 17200.

Judge Scarsi held Selane's "negligible additions" in its amended complaint don't change his previous ruling that the COVID-19 pandemic and its impacts don't constitute "direct physical loss of or damage to property." In reaching that conclusion, the judge didn't consider whether a microbe exclusion barred coverage for the losses.

In Thursday's opening brief, Selane challenged that decision, saying AIU and Armstrong hold that "the presence of harmful substances causes physical loss or damage to property." Judge Scarsi, however, held the policies in AIU and Armstrong, unlike Selane's, included the "loss of use" of tangible property.

Selane argued that the pandemic posed an "imminent and pervasive threat" resulting in government closure orders. Judge Scarsi said this argument has been rejected because a "direct physical loss or damage to property" must have caused a civil authority action, not that the action itself was the loss or damage.

Selane also said it was telling that Continental didn't include a virus exclusion in its policy. Continental knew about these pandemic risks — even disclosing such risks to investors in U.S. Securities and Exchange Commission filings — but "deliberately chose not to incorporate standard virus or pandemic exclusions" in the policy.

In asking the Ninth Circuit to revive its case, Selane noted an Illinois federal court's recent ruling that allowed restaurants, theaters and bars to proceed on claims their insurer wrongfully refused to pay COVID-19 business-interruption losses.

"Continental had for years marketed its policies specifically to small businesses like Selane, touting the broad coverage they provide and promising California's small businesses 'superior protection in an unpredictable business environment,'" Selane said, asking that the insurer now be held to its promises.

Counsel for both sides did not immediately return messages seeking comment Friday.

Selane is represented by Kirk Pasich, Shaun H. Crosner, Michael S. Gehrt and Jacquelyn M. Mohr of Pasich LLP, and Raymond C. Silverman and Jay L.T. Breakstone of Parker Waichman LLP.

Continental is represented by Geoffrey David Godwin and Thomas Lloyd of Squire Patton Boggs LLP, and H. Christopher Boehning, Aimee Woodward Brown, Daniel H. Levi and Kannon K. Shanmugam of Paul Weiss Rifkind Wharton & Garrison LLP.

The case is Selane Products Inc. v. Continental Casualty Co., case number 21-55123, in the U.S. Court of Appeals for the Ninth Circuit.

--Editing by Breda Lund.

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