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Appellate Court Issues Groundbreaking COVID Insurance Coverage Opinion in Favor of Policyholders

Appellate Court Issues Groundbreaking COVID Insurance Coverage Opinion in Favor of Policyholders

July 18, 2022
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In an opinion that is the first of its kind in the California appellate courts, the Second District Court of Appeal, Division 7, has ruled that certain COVID-19-related business losses may be covered by business-interruption insurance (BII) policy provisions.  Marina Pacific Hotels & Suites, LLC v. Fireman’s Fund Ins., No. B316501, 2022 WL 2711886 (Cal. Ct. App. July 13, 2022) (slip op.), available at

The groundbreaking opinion gives a leg up to policyholders struggling with pandemic-era debt and business losses.  The decision may also inspire the California Supreme Court, other California Courts of Appeal, and the U.S. Court of Appeals for the Ninth Circuit (among other reviewing courts nationwide) to give policyholders the opportunity to prove BII coverage in the context of the pandemic.

Marina Pacific is an exciting development in the law regarding COVID-19 BII coverage. Other important decisions are expected to be made in the coming months, and will be carefully watched by insurance practitioners, business owners, and the public as the courts continue to grapple with the fallout from the pandemic.

The Marina Pacific Court UnanimouslyDetermines that Policyholders Can Move Forward with COVID-19-Related Business Claims

In Marina Pacific, the owners of a restaurant and hotel group in Venice Beach, California, incurred virus-related losses due to the pandemic.  Id. at *1, slip op. at 5.  Their insurance policy provided:  “[W]e will pay for direct physical loss or damage to [the insured property] caused by or resulting from a covered cause of loss during the Policy Period.”  Id. at *1, slip op. at 3.  The policy  included a separate “communicable disease coverage,” defined as “any disease, bacteria, or virus that may be transmitted directly or indirectly from human or animal to a human.”  Id. at *2, slip op. at 4.  The policy also contained a “mortality and disease exclusion,” though it did not contain the ISO’s standard “exclusion of loss due to virus or bacteria.”  Id. at *10–11, slip op. at 25.

When their insurance company denied coverage, the plaintiffs sued for breach of contract, bad faith, and related statutory claims.  Id. at *2, slip op. at 5.  The trial court sustained the insurer’s demurrer, citing MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co., 187 Cal.App.4th 766 (2010), and the plaintiffs appealed.  Marina Pacific, 2022 WL 2711886, at *4–5, slip op. at pp. 9-11.

In a published opinion, the California Court of Appeal (Second District, Division 7), reversed and held that the trial court erred in sustaining the insurer’s demurrer without leave to amend.  Id. at *1, slip op. at 2-3.  Rather, the trial court should have deferred ruling on the merits until the summary judgment or trial stage.  Id.  The Court of Appeal disagreed that MRI Healthcare required the opposite result, finding that plaintiffs in MRI Healthcare “unquestionably” pleaded direct physical loss or damage to their covered property within MRI Healthcare’s definition of that term—i.e., a distinct, demonstrable, physical alteration of the property.  Id. at *7–8, slip op. at 17-18.  For example, the COVID-19 virus “not only lives on surfaces but also bonds to surfaces through physiochemical reactions involving cells and surface proteins, which transform the physical condition of the property.”  Id. at *8, slip op. at 18-19.

The Marina Pacific court also determined that the plaintiff’s “communicable disease coverage” expressly contemplated policy coverage in the event of a virus spreading.  Id. at *10, slip op. at 24.  Furthermore, the court held that the “mortality and disease exclusion” did not preclude coverage because the policy did not contain the ISO standard exclusion for “exclusion of loss due to virus or bacteria.”  Id. at *10-11, slip op. at 25-27.

The Court of Appeal acknowledged that it might be more “efficient” for trial courts to dismiss such cases based on “common sense and experience,” but the civil justice system requires judges to first consider the evidence.  Id. at *11, slip op. at 27.

Potential Immediate Impact of Marina Pacific

Marina Pacific reflects an emerging trend allowing policyholders to move forward with their claims for business-interruption insurance in the wake of the Coronavirus pandemic. Together with Cajun Conti LLC v. Certain Underwriters at Lloyd’s, London, No. 2021-0343, 2022 WL 2154863 (La. Ct. App. Jun. 15, 2022) (slip op.), and a growing number of trial court cases across the state and nation, continued developments are expected.  See (collecting nationwide cases regarding COVID-19 BII litigation).

These new cases buck an earlier trend favoring insurers, putting their stare decisis effect front and center of the discussion.  See, e.g.Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir. 2021) (pre-Marina Pacific case making Erie guess that California law would not hold COVID-19-related business losses covered); Musso & Frank Grill Co., Inc. v. Mitsui Sumitomo Ins. USA Inc., 77 Cal.App.5th 753 (2022); United Talent Agency v. Vigilant Ins. Co., 77 Cal.App.5th 821, 830 (2022); Inns-by-the-Sea v. Cal. Mut. Ins. Co., 71 Cal.App.5th 688, 706 (2021) (the “Musso & Frank line of cases”).

Precedential Effect of Marina Pacific in the California Courts of Appeal

Because there is no “horizontal stare decisis” in California, sister appellate courts are free to distinguish or depart from the reasoning of another California Court of Appeal opinion. See In re Marriage of Shaban, 88 Cal.App.4th 398, 409 (2001); In re K F Dairies, Inc., 224 F.3d 922, 924−25 (9th Cir. 2000).  Therefore, future California Court of Appeal panels may follow Marina Pacific, and may decline to follow the Musso & Frank line of cases.

Precedential Effect of Marina Pacific in the California Superior Courts

Similarly, now that Marina Pacific introduces a split of authority among the California Courts of Appeal, trial courts in California are free to decide which line of authority to choose—i.e., the Musso & Frank line of cases, or Marina Pacific—whichever the Superior Court judge feels is most persuasive.  See Auto Equity Sales, Inc. v. Superior Ct., 369 P.2d 937, 940 (Cal. 1962).

And of course, California courts are not obligated to follow the Ninth Circuit’s ruling in Mudpie, which is not binding on California state courts.  See, e.g.Venegas v. Cty. of L.A., 87 P.3d 1, 8–9 (Cal. 2004) (declining to follow Ninth Circuit precedent with which the court disagreed).

Precedential Effect of Marina Pacific in the Ninth Circuit

Generally, the Ninth Circuit adheres to the prior opinions of its three-judge panels.  If this “law-of-the-circuit rule” is followed, future Ninth Circuit three-judge panels would adhere to Mudpie (when they deem it applicable), even though Marina Pacific went the other way, until such time as the full Ninth Circuit revisits the issues en banc.

However, the law-of-the-circuit rule is not without its exceptions—especially when it comes to the federal court’s Erie guess about state law that is later called into doubt by that state’s appellate courts.  See, e.g.In re Watts, 298 F.3d 1077, 1083 (9th Cir. 2002); Stephan v. Dowdle, 733 F.2d 642, 642 (9th Cir. 1984).  Now that the Second District in Marina Pacific ruled in favor of policyholders, the Ninth Circuit in future and pending COVID-19 BII appeals (and there are many) will not necessarily be bound by its own prior precedents rejecting such insurance claims under California law (i.e., under Mudpie and its companion cases). 

Another possible outcome is that the Ninth Circuit, faced with a split of authority among the California Courts of Appeal, may prefer to wait and see if the California Supreme Court will act.  The Ninth Circuit may also certify the question to the California Supreme Court.  See Cal. R. Ct. 8.548.  At a minimum, Marina Pacific would allow the Ninth Circuit to revisit the issue en banc.  See Fed. R. App. P. 35(a).

The public along with the legal and insurance industries will be watching for further developments in this area post-Marina Pacific, as the law regarding COVID-19 BII coverage continues to take shape.

What’s Next? Beyond Marina Pacific

In addition to Marina Pacific, a great number of COVID-19 business-interruption appeals are making their way through California’s appellate courts.

In particular, the First District Court of Appeal has yet to issue an opinion on BII coverage for Coronavirus pandemic losses, but will have the opportunity to do so in the near future in a slate of pending cases.  See, e.g.Apple Annie LLC v. Ore. Mut. Ins. Co., No. A163300 (Cal. Ct. App. 1st Dist. Div. 2); Tarrar Enters. v. Assoc. Indem. Corp., No. A162795 (Cal. Ct. App. 1st Dist. Div. 2); Anchors & Whales LLC v. Crusader Ins. Co., No. A164412 (Cal. Ct. App. 1st Dist. Div. 2); John’s Grill, Inc. v. The Hartford Fin. Servs. Grp., Inc., No. A162709 (Cal. Ct. App. 1st Dist. Div. 4); Amy’s Kitchen, Inc. vs. Fireman’s Fund Ins. Co., No. 163767 (Cal. Ct. App. 1st Dist. Div. 4); Peanut Wagon Inc. v. Allanz Global Corp. & Specialty, No. A163136 (Cal. Ct. App. 1st Dist. Div. 5).

In addition, the California Supreme Court is currently weighing a petition for review in Musso & Frank,77 Cal.App.5th 753, petition for review filed, No. S274791 (May 27, 2022) (time extended to grant or deny review to August 25, 2022), which, as previously mentioned, heads a line of cases favoring insurance companies.  The split of authority that Marina Pacific created may inspire the California Supreme Court (in Musso & Frank or another petition for review presenting similar questions presented) to grant review—and possibly determine once and for all whether policyholders may prevail on mounting BII claims in the wake of the ongoing pandemic.  See Cal. R. Ct. 8.500(b)(1).