Exhibit 23
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JAMIE L. SETTERQUIST CSR 13362

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THE SUPERIOR COURT OF THE STATE OF CALIFORNIA 

 FOR THE COUNTY OF MONTEREY 

________________________________

The Inns by the Sea ) 

 ) 

vs. ) CASE NO. 20CV001274

 ) 

California Mutual Insurance ) 

Company )

________________________________) 

 

REPORTER'S TRANSCRIPT OF PROCEEDINGS 

 

MONDAY, AUGUST 4, 2020 

BEFORE THE HONORABLE LYDIA M. VILLARREAL, JUDGE

APPEARANCES:

FOR PLAINTIFF: SAM FERGUSON

(APPEARING ON COURT CALL) ATTORNEY AT LAW

MICHAEL J. REISER 

ATTORNEY AT LAW

FOR DEFENDANT: RYAN Z. KELLER

(APPEARING ON COURT CALL) ATTORNEY AT LAW

STEVEN HAYES

ATTORNEY AT LAW

REPORTED BY: JAMIE L. SETTERQUIST CSR 13362

OFFICIAL COURT REPORTER

MONTEREY COUNTY SUPERIOR COURT
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JAMIE L. SETTERQUIST CSR 13362

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MONTEREY, CA; Monday, August 6, 2020; 9:24 A.M.

P R O C E E D I N G S 

THE COURT: Inns by the Sea versus California 

Mutual Insurance Company. 

MR. KELLER: Good morning Your Honor. Ryan 

Keller on the phone for Defendant, California Mutual 

Insurance Company. I also have Steven Hayes from my 

office on the phone. 

THE COURT: I appreciate you doing it, but 

it's easier for me if I do it. Sam Ferguson for Inns by 

the Sea?

MR. FERGUSON: Good morning. Sam Ferguson for 

Inns by the Sea. 

THE COURT: Thank you very much. Steven Hayes 

for California Mutual? 

MR. HAYES: Good morning, your Honor. 

THE COURT: And who is going to be speaking on 

behalf of California Mutual? Will it be Mr. Hayes or 

Mr. Keller? 

MR. KELLER: Mr. Keller, your Honor. 

THE COURT: Thank you very much. Mr. Keller 

on behalf of The Inns by the Sea. 

MR. REISER: Good morning, your Honor. 

Michael Reiser. 
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JAMIE L. SETTERQUIST CSR 13362

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THE COURT: And who will be speaking on behalf 

of plaintiffs?

MR. FERGUSON: Sam Ferguson of the Meade Law 

Firm will be speaking on behalf of Inns by the Sea as 

plaintiffs. 

THE COURT: All right. Thank you so much. So 

I have gone over what you filed, and let me just start 

by saying the economic damage caused by COVID is just 

heartbreaking, and this case is yet one more of the 

heartbreak. 

There are two things that are of concern to 

me. It seems to me that the language of the policy 

supported the defendant's position that it talks about 

the business suspension must be caused by direct 

physical loss of or damage to property at the premises, 

and it seems that the cases for the most part are -- 

seek to address some sort of physical destruction or 

physical change in usefulness, and I am not sure that 

COVID creates that physical change. 

Now, what I think gives me pause is that I am 

trying to understand the other cases that have been 

referenced by the plaintiffs, and that is that smoke 

damage is considered physical damage, persistent E. Coli 

infestation is physical, gasoline vapors are physical, 

carbon monoxide saturation is physical, and certainly 
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JAMIE L. SETTERQUIST CSR 13362

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large quantities of asbestos in the air is considered 

physical. 

So I am just wondering whether or not COVID is 

enough like these other things such that it should be 

covered. 

So that is sort of my thoughts, and let me 

just start with Mr. Ferguson. 

MR. FERGUSON: Thank you, your Honor. To 

directly address your concerns here, I think there is an 

important way we can view all of the cases you mentioned 

of smoke damage, E. Coli, gas vapors, carbon monoxide, 

and one way to view those cases is view the atmosphere 

in the air within the insured property as part of the 

physical premises of the property. I think this is 

exactly what the Oregon Shakespeare case does, which as 

you mentioned the case of smoke infestation of the 

Oregon Shakespeare Festival, and one way to think about 

coronavirus, there is actually a contamination of the 

air within the physical spaces that results in a change 

on the molecular level of the composition of the air and 

space. 

What these cases hold is that when there is a 

physical change or when there is a physical invasion of 

a harmful substance that renders a space functionally 

useless, you have direct physical loss of or damage to 
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JAMIE L. SETTERQUIST CSR 13362

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property within insurance coverage.

And now, your Honor, I certainly sympathize 

with your struggle over whether coronavirus is similar 

enough to smoke, E. Coli, gas vapors, carbon monoxides, 

and asbestos, but it does seem to me that those concerns 

raise a factual question of what are the characteristics 

of coronavirus? How present was it on this premises? 

How dangerous was it and what quantities? Those are all 

factual questions that can be addressed in discovery.

And with respect to the demurrer, the 

defendants are making a legal point here. They are 

saying under no circumstances does our policy -- does 

our insurance policy provide coverage for the insured in 

the absence of tangible alteration to the property. 

Now, I think as we point out in our brief -- 

and I won't belabor the point -- that is not actually 

consistent with the language of their own policy, and 

one of the primary interpretative goals in looking at 

the insurance policy is you need to make sure that every 

word in that policy makes sense. You can't reach an 

interpretation of a policy that renders superfluous 

language. 

To point out the obvious, defendant excludes 

from coverage the mere presence of bacteria. Now, that 

exclusion only makes sense if it is against a backdrop 
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JAMIE L. SETTERQUIST CSR 13362

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of damage that goes beyond tangible alteration of the 

property. There would be no reason to exclude the 

presence of bacteria if the policy only covered tangible 

alteration to property. 

So, your Honor, I think that addressed your 

concern, and I will leave it there for now. I am happy 

to speak more at length about other issues, but I will 

leave it there for right now. 

THE COURT: Well, let me ask you another 

question about that. When I was struggling with the 

smoke damage, gasoline vapors, et cetera, the 

distinction in my mind -- and I don't know if this is 

one that is valid or not, Mr. Ferguson -- the 

distinction in my mind is that when California shut 

down, when the Governor ordered us all to shelter in 

place and businesses to close, it wasn't necessarily 

because there was COVID at your hotels. It was because 

there was a fear that COVID might arrive at your hotels, 

and there was a fear by having people move around the 

state, that that would cause us all to infect each 

other. 

So even if we assume that COVID infects the 

air, which I get your point on that, I think the science 

supports you on that, but I guess the question I have 

is, was that the cause? 
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JAMIE L. SETTERQUIST CSR 13362

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MR. FERGUSON: So, your Honor, to address your 

concerns here, I think it is important to understand 

that there are two independent possible sources of 

coverage here. The first is the business interruption 

insurance coverage, which would be triggered by the 

physical presence of coronavirus on the insured 

premises. That is our property, and that is what we 

allege is our burden to prove that once we get into 

discovery.

But I think on the allegations, we certainly 

have met the requirements for the complaint that we have 

alleged that there was coronavirus on the premises, 

which caused physical loss of or damage to the premises. 

The other independent source coverage that we 

have under this policy is civil authority coverage, and 

that doesn't require that there even be coronavirus on 

our property. It merely requires that there is direct 

physical loss of or damage to property somewhere else, 

and that the civil authority take action based on the 

presence of coronavirus on another property. 

Now the coronavirus is widespread in both of 

the county orders. The San Mateo County order and 

Monterey County order mentioned there is coronavirus 

virus within both of the counties. They mention 

specific case numbers. They mention case numbers up in 
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JAMIE L. SETTERQUIST CSR 13362

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the Bay Area. It is clear in our mind that the local 

county authority and the Governor are responding to the 

physical presence of coronavirus in enacting the shelter 

in place order.

And to underscore the point, this is about the 

physical presence of coronavirus. I think those orders 

are designed to require people to avoid direct, physical 

contact with the virus. That is the key issue here. 

150,000 people in this county have died because they 

have come into physical contact with the virus. 

I think that the virus is certainly physical, 

and the orders are in response to the physical presence 

of the virus that is at other locations and inside the 

insured premises. 

THE COURT: Okay. So let me make sure I am 

understanding you. So the business income is lost 

because of the civil authority shutdown. Doesn't that 

also require a direct physical loss, and don't we still 

come back to the same problem of whether or not COVID 

causes a physical loss? 

MR. FERGUSON: Yes; that is correct, your 

Honor. To trigger the civil authority coverage, it is 

our burden in discovery to show that there was 

coronavirus on another property. 

And what is interesting about the civil 
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JAMIE L. SETTERQUIST CSR 13362

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authority coverage in this insurance policy is it is 

written incredibly broadly. Typically, in other civil 

authority provisions, there is actually a proximity 

requirement. In our case, there actually is no such 

proximity requirement. 

So we believe that there was the physical 

presence of coronavirus that caused a loss of or damage 

to property essentially anywhere within two counties. 

And as a result of that, the civil authority within the 

county's order to ensure premises to be shut down. 

So when you look at the claim for civil 

authority in the context of this case and the context of 

the policy that is in front of you, we think that we 

sufficiently allege that there is direct physical loss 

of or damage to other premises, and if we can carry that 

burden after the demurrer in discovery, then we win this 

case. 

But I think all you have to do right now is 

ask yourself, can the coronavirus cause direct physical 

loss of or damage to any property? And again, we would 

submit that under the 16 cases we cited, the test is 

whether there is a presence of a hazardous substance, 

and whether the quantity of that substance renders the 

property dangerous to human health and renders the 

property unusable, we think that there is no tangible 
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JAMIE L. SETTERQUIST CSR 13362

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alteration to the property required under this policy. 

So our burden to invoke code civil authority 

coverage is to show that somewhere within the County of 

Monterey or the County of San Mateo that there was 

coronavirus in such concentration that some property was 

rendered uninhabitable or unusable because of the 

concentration of coronavirus. And we certainly think we 

can meet that burden in discovery, but for now, the 

Court has to merely analyze whether we alleged enough to 

meet that bar. 

THE COURT: Thank you. Mr. Keller? 

MR. KELLER: Yes, your Honor. So I think that 

your analysis is spot-on and exactly how you should be 

looking at these issues. So let me first address the 

issue that gave you pause. 

So the courts outside of California, as you 

mentioned, got into issues like asbestos and carbon 

monoxide, and those are, as you point out, ultimately 

not just directed at losses. It also needs to have the 

business income loss be caused by that direct physical 

loss. Like the carbon monoxide situation, it's, 

Everybody out of the building. You are going to die 

from carbon monoxide. 

The asbestos, there is direct health problems. 

There is a smell that is related to a lot of those 
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JAMIE L. SETTERQUIST CSR 13362

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claims that you are referring to. And so to have 

everybody out of the building, that causes the business 

income loss. 

Here, the Court need not turn a blind eye to 

the realities of the pandemic and the business situation 

where the businesses are open while this pandemic is 

still ongoing, and that's a result of the fact that it 

is designed to keep people socially distanced and reduce 

the spread of the pandemic, and that is why the the 

shelter is in place so they don't prohibit access of 

civil authority coverage requires to even allow the 

hotels to keep people there, which they couldn't in the 

case of a carbon monoxide, asbestos situation. 

And further, those cases, again, are outside 

of California. The direct physical requirement as 

prefix to the insurance agreement have to be considered 

under the context for MRI Healthcare, and MRI Healthcare

says that it's excluded and accompanied by demonstrable 

physical alteration of the property. 

So I believe that when you follow the analysis 

of the policy language under the California case in MRI 

Healthcare, that it is not a business income loss caused 

by direct physical damage to property, and the plaintiff 

has certainly not alleged that. At most, they've 

alleged a physical presence on the property of the virus 
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JAMIE L. SETTERQUIST CSR 13362

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and not that that has caused the business income loss, 

nor can they because as I noted, they could have had 

people there. They chose to cease and close down based 

on the counties' orders, and that was the cause of their 

loss. 

THE COURT: Well, let me just correct you. I 

don't think they chose to shut down. They were ordered 

to shut down.

MR. KELLER: Yes. They followed the shelter 

in place orders, and they -- what I meant by that was 

there was some level of operations that they could have 

had under the county order such as maybe economically 

disadvantaged individuals that they still could have 

provided shelter to. To completely shut down was not a 

complete mandate by the counties. 

But irrespective of that finer point, there is 

no direct physical damage to property that caused the 

business income loss. 

THE COURT: Well, Mr. Ferguson, I completely 

disagree with Mr. Keller that anyone had a choice. I 

think we were all trying to follow the orders we were 

given, but in spite of that issue, having looked at the 

MRI case -- and I certainly agree with your 

representation that once you get to the facts of the MRI

and the ramping up, the ramping down and all that, it 
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JAMIE L. SETTERQUIST CSR 13362

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really is not at all like our case here. 

However, I do think -- and help me with this, 

Mr. Ferguson -- I do think the MRI case is intended to 

be the framework by which we analyze these cases, and 

that case pretty much says that because of the need for 

a physical damage, that it precludes any claim in which 

the insured suffered a detrimental economic impact 

without the distinct, demonstrable physical alteration 

of the property. Help me out with that, Mr. Ferguson. 

MR. FERGUSON: Yes. So a couple points on 

MRI, your Honor. First, the term 'physical, as the MRI

court understands it is, losses that are intangible or 

incorporeal. That is what it is using to distinguish 

against physical, and I don't think that we alleged an 

intangible or incorporeal loss here. 

We allege there are specific, physical 

microbes within our property that are contaminating the 

air that are hazardous to human health that are 

rendering it unusable. And I think to adopt the 

definition of direct physical loss of or direct physical 

damage to property, that it excludes the situation where 

you have an invasion by a physical force into the 

atmosphere of your property onto all the surfaces of 

your property and says that is not direct physical loss 

of or damage to property, it can't be the case. 
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JAMIE L. SETTERQUIST CSR 13362

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When an insured purchased insurance, they are 

expecting that when there is a physical catastrophe that 

shuts down their operation, the insurance coverage will 

kick in and cover that, and I think that to the extent 

that MRI case suggests that there has to be tangible 

alteration in the sense that it is perceptible to the 

eye or to touch, that is simply dicta in that case. 

This Court is not required to follow MRI Healthcare on 

that rationale. 

MRI Healthcare actually could have said what 

we are saying here. It could have said physical damage 

actually does include the physical invasion by hazardous 

substances that renders a property unusable, and the 

outcome would have been exactly the same in MRI 

Healthcare, and I am pointing that out to say that 

discussion of the meaning of direct physical loss of or 

damage to property wasn't central. 

One other point about MRI Healthcare is the 

language of coverage in that case and the relevant 

policy is actually different. The language of coverage 

in that policy, direct physical loss to or damage to 

property. In our case, it is direct physical loss 

of...property, and we think that difference in language 

is critical as we have suffered a direct physical loss 

of our property because it's been invaded, contaminated, 
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JAMIE L. SETTERQUIST CSR 13362

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polluted by the hazardous substance that renders it 

unfit for human use, and the government saw the same 

hazard was present and ordered us to shut down our 

operations as a consequence of that. 

And, your Honor, I think you previously had 

characterized the shutdown orders as requiring people to 

distance. And while that is part of the orders, they 

actually do go further than that, and this is critical. 

This is paragraph three of the Monterey order: All 

businesses within the facility in the county except 

essential businesses are required to cease all activity 

at facilities located within the county. That is a 

direct shutdown and a closure of our business that 

prohibits access to the business, which we think is 

enough to trigger the civil authority coverage. 

Mr. Keller has made the point that there were 

very specific uses that we could have made about 

properties under these orders. We could have sheltered 

homeless people and possibly allowed a limited number of 

individuals to use the hotel as a residence. 

What he is trying to do is read into the civil 

authority provision in our policy of requiring that 

there be a total prohibition of access to the insured 

premises. Well, that word 'total' doesn't actually 

appear in our insurance policy. All it says is the 
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JAMIE L. SETTERQUIST CSR 13362

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government prohibits access to your premises and has 

done so as a consequence of a direct physical loss of or 

damage to the properties elsewhere, then insurance 

coverage kicks in.

I hope that addresses your concerns about MRI, 

your Honor. 

THE COURT: It is helpful. Thank you. 

Mr. Keller, anything you would like to close with? 

MR. KELLER: Yes, your Honor. So at the end 

of the day, the virus, whether it is present on the 

property or not, does not cause the business income 

loss, which it is required to under the policy, and it 

is not a direct physical loss as -- not a direct 

physical damage to property as described by MRI 

Healthcare. 

And at the end of the day, they cannot allege 

that there was a direct physical damage to property that 

was, in fact, the cause of their business income loss. 

Thank you. 

THE COURT: Any last words, Mr. Ferguson? 

MR. FERGUSON: Yes, your Honor. Thank you. 

One last word is, I would urge the Court to reread Ward, 

which is the other case that California Mutual cites 

with the idea that you need a tangible alteration. 

But what is critical in the Ward case is that 
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JAMIE L. SETTERQUIST CSR 13362

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you have to analyze the scope of coverage within the 

context of the claims that are asserted. And so, you 

know, language that might appear unambiguous in the 

context of one particular claim might eventually appear 

ambiguous in the context of another claim. 

So the two cases the defendant cites, Ward and 

MRI, are in such different factual circumstances of 

their own that I think, given the claims that we are 

asserting, the scope of the coverage within the policy 

has to be viewed within the lens of the claims that we 

are asserting. 

And given the claims that we are asserting, I 

think that the insurance policy is, at a minimum, 

subject to two reasonable constructions. One is that as 

the defendants assert that there has to be physical 

alteration to the property. The other is the 

construction. 

We think this is a reasonable interpretation, 

and given the Court's struggle with how to resolve this 

case, we think it's clear that reasonable minds can 

differ on this. If that is the case, the tie goes to 

the plaintiff as ambiguities are construed in favor of 

the insured. 

And, your Honor, one last point. California 

Mutual actually has a virus exclusion that they include 
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in other policies. We raised this in the complaint. In 

fact, in their reply, they cite the Michigan case where 

the insurance policy issue in that case also had a virus 

exclusion. This is a well-known exclusion that is 

included in many, many, many policies throughout the 

country, and many of the cases in the wave of COVID 

litigation in the last few months are going to be 

decided on that virus exclusion angle. 

Our client has dutifully paid almost $40,000 a 

a year in insurance premiums to California Mutual under 

a policy that does not have a virus exclusion. This is 

critical, your Honor. The fact that California Mutual 

and the insurance industry at large has a virus 

exclusion very strongly suggests to us that they believe 

a virus -- the presence of a virus can cause direct 

physical loss of or damage to property. That was not 

included in this policy. 

California Mutual very easily could have 

tacked on the word 'virus' using a comma after the word 

'bacteria' in the bacteria exclusion. They could have 

included the presence of virus from the insurance 

policy, and they failed to do so. 

So California Mutual having failed to define 

the central term in this case, direct physical loss of 

or damage to property, and having failed to include a 
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virus exclusion, we think the Court should adopt the 

plaintiff's very reasonable construction of this 

insurance policy and find that our allegation that there 

is physical presence of coronavirus and hazardous 

concentration on our property is sufficient to trigger 

business income interruption insurance coverage, as well 

as the fact that there is coronavirus-inhabited 

concentration on other properties triggered the 

government to close our facilities. 

Or in the alternative, we are also entitled to 

civil authority coverage. And I think with that, your 

Honor, we would submit. 

THE COURT: All right. The Court is going to 

take this under submission. It seems to me that if the 

Court decides to sustain the demurrer, that the motion 

to strike is moot, so I don't want to hear argument on 

that. 

Anyway, I just want to spend more time 

thinking about it, and I appreciate your thoughtful 

argument. If for any reason I decide that I need 

additional argument, I will let you know, but otherwise, 

I hopefully will be able to let you know very soon. 

Thank you. 

MR. FERGUSON: Thank you, your Honor. 

MR. KELLER: Thank you, your Honor. 
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MR. FERGUSON: Should there be any additional 

briefing or legal issues you should like us to address, 

we would be happy to do so. 

THE COURT: This is Mr. Ferguson talking? 

MR. FERGUSON: I am sorry. Mr. Ferguson, yes, 

your Honor. 

THE COURT: Thank you very much.

(Whereupon, the proceedings adjourned at 9:55 

a.m.)
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STATE OF CALIFORNIA ) 

 ) SS. 

COUNTY OF MONTEREY ) 

 I, Jamie L. Setterquist, an official reporter 

for the Superior Court of the State of California, in 

and for the County of Monterey, do hereby certify:

 That, as such reporter, I reported 

stenographically the above proceedings on Monday, August 

4, 2020, and that the above and foregoing transcript, 

consisting of pages numbered from 1 to 19, inclusive, 

contain a true and correct transcript of all of said 

proceedings. 

 

 Dated at Salinas, California, this August 7, 

2020.

 

 JAMIE L. SETTERQUIST CSR 13362 

 OFFICIAL COURT REPORTER