An organic and vegetarian food manufacturer should be allowed to amend its Covid-19 business interruption lawsuit to allege coverage under its communicable disease policy, a California appeals court has ruled, overturning a lower court ruling that dismissed the case.
Petaluma, Calif.-based Amy’s Kitchen Inc., which has facilities in California, Oregon and Idaho, purchased a comprehensive property policy from Allianz SE unit Fireman’s Fund for a one-year period ending in July 2020, according to the decision of the California Court of Appeal in San Francisco in Amy’s Kitchen Inc. v. Fireman’s Fund Insurance Co .
The policy included coverage extensions for communicable diseases and for loss avoidance and loss mitigation, the ruling said. The communicable disease coverage extension states that the firefighter will pay for direct physical loss or damage caused by, or resulting from, a “covered communicable disease event”; including cleanup costs.
It defines a “communicable disease event” as one in which a public health authority has ordered a location to be “evacuated, decontaminated, or disinfected” due to an outbreak of a contagious disease.
Amys filed suit against Fireman’s Fund in California state court in Santa Rosa after the insurer denied coverage under its policy, claiming there was no “direct physical damage to the covered property.”
The court ruled in Allianz’s favor, without granting Amy leave to amend her complaint, stating that the company had failed to allege direct physical loss or damage to property, as required by the communicable disease extension, and that its claims under the loss avoidance or mitigation extension also failed.
A three-judge court panel said the court “properly upheld” the insurer’s denial of coverage, “but for the wrong reason, and wrongly denied Amy leave to amend.”
“The trial court held that the phrase “direct physical loss or damage,” as used in the communicable disease extension, must be interpreted to require, in other contexts, a “distinct, demonstrable physical change in the property” or a “physical change in the condition of the property.” , says the judgment.
“By focusing on that single phrase, and on how it has been interpreted in various policy provisions, the court erred,” the ruling said.
“Although the ‘definitions’ section of the policy defines over 80 terms, it does not define ‘direct physical loss or damage’ or any of its elements. Nor does the operative clause define that phrase,” it said.
None of the cases cited by the insurer “focus on the reasonable interpretation of a communicable disease extension where coverage is triggered by a communicable disease event that causes costs” to mitigate the effects of the disease, it said.
The lower court “never considered whether Amy’s could change to properly allege a “contagious disease event,”” it said, reversing the lower court ruling and remanding the case for further proceedings.
Insurance attorney John P. Phillips, a partner with DLA Piper LLP in San Francisco, said: “We are pleased that the Court of Appeals upheld Fireman’s Fund’s demurrer to the complaint. However, we respectfully disagree with the Court of Appeals’ decision to review the issue of leave to amend de novo .”
Lawyers for the company did not respond to a request for comment.