Court Opinion

ID: 9391360
Source: CourtListenerOpinion
Date Created: 2023-05-01 23:03:16.664187+00
Date Added: 2024-06-11T17:18:41.166658
License: Public Domain

Filed 5/1/23
               CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                SECOND APPELLATE DISTRICT

                        DIVISION SEVEN

STARLIGHT CINEMAS, INC.,            B313518
et al.,
                                    (Los Angeles County
       Plaintiffs and Appellants,   Super. Ct.
                                    No. 20SMCV01181)
       v.

MASSACHUSETTS BAY
INSURANCE COMPANY,

     Defendant and
Respondent.

      APPEAL from a judgment of the Superior Court of Los
Angeles County, Mark A. Young, Judge. Affirmed.
      Shernoff Bidart Echeverria, William M. Shernoff and
Travis M. Corby for Plaintiffs and Appellants.
      Hayes, Scott, Bonino, Ellingson, Guslani, Simonson &
Clause, Stephen M. Hayes, Charles E. Tillage; Greines, Martin,
Stein & Richland, Laurie J. Hepler and Stefan C. Love for
Defendant and Respondent.
                   __________________________
      Starlight Cinemas, Inc., Akarakian Theaters, Inc., Arman
Akarakian, and Daniel Akarakian (collectively, Starlight) appeal
from a judgment entered in favor of defendant Massachusetts
Bay Insurance Company (MBIC) after the trial court granted
MBIC’s motion for judgment on the pleadings without leave to
amend. Starlight, which owns and operates movie theaters in
Southern California, sued MBIC for breach of an insurance
contract and bad faith denial of coverage after MBIC denied
Starlight’s claim for losses sustained when it was compelled by
government orders to suspend operations during the COVID-19
pandemic.
      Starlight contends a policy term providing coverage for lost
business income due to a suspension of operations “caused by
direct physical loss of or damage to property” can be reasonably
construed to include loss of use of its theaters without any
physical alteration to the property, and the trial court therefore
erred in entering judgment for MBIC. We conclude Starlight has
not alleged a covered loss because the policy language requires a
physical alteration of the covered property, which was not
alleged. We affirm.

      FACTUAL AND PROCEDURAL BACKGROUND

A.     The Policy
       As alleged in the complaint, MBIC issued Starlight an “‘all
risk’” commercial property and general liability insurance policy

                                2
for a one-year period beginning August 19, 2019 (the policy).1 A
copy of the policy was attached to Starlight’s complaint.
        The policy included coverage for loss of business income
due to an interruption of operations (business interruption
coverage). Section A.1 of the “Business Income (and Extra
Expense) Coverage Form” provided in relevant part, “We will pay
for the actual loss of business income you sustain due to the
necessary ‘suspension’ of your ‘operations’ during the ‘period of
restoration.’ The ‘suspension’ must be caused by direct physical
loss of or damage to property at premises which are described in
the declarations and for which a business income limit of
insurance is shown in the declarations . . . .” (Capitalization
omitted and italics added.) “Operations” were defined, in
pertinent part, to mean “[y]our business activities occurring at
the described premises . . . .” “Suspension” was defined in part as
“[t]he slowdown or cessation of your business activities.” The
“period of restoration” was defined as the period beginning
“72 hours after the time of direct physical loss or damage . . .
[¶] . . . [¶] caused by or resulting from any covered cause of loss at
the described premises” and ending on the earlier of “[t]he date
when the property at the described premises should be repaired,
rebuilt or replaced with reasonable speed and similar quality” or
“the date when business is resumed at a new permanent
location.” (Capitalization omitted.) A policy endorsement
eliminated the 72-hour coverage delay, stating, “the period of
restoration begins at the time of direct physical loss or
damage . . . .”

1    Starlight Cinemas Inc., and Akarakian Theaters, Inc., were
named as insureds on the policy, and Arman Akarakian and
Daniel Akarakian were named as additional insureds.

                                  3
      The policy also included civil authority coverage.
Section A.5 of the “Business Income (and Extra Expense)
Coverage Form” provided that if “a covered cause of loss causes
damage to property other than the property at the [insured]
premises,” MBIC would pay for lost business income and extra
expenses “caused by action of a civil authority that prohibits
access to the [insured] premises” under two conditions: if “[a]ccess
to the area immediately surrounding the damaged property is
prohibited by civil authority as a result of the damage” and “[t]he
action of the civil authority is taken in response to dangerous
physical conditions resulting from the damage or continuation of
the covered cause of loss that caused the damage . . . .”
      The policy included an endorsement entitled “Exclusion of
Loss Due to Virus or Bacteria” (the virus exclusion) that provided
in pertinent part, “We will not pay for loss or damage caused by
or resulting from any virus, bacterium or other microorganism
that induces or is capable of inducing physical distress, illness, or
disease.” (Capitalization omitted.)

B.    The Complaint
      Starlight filed this action on September 1, 2020 against
MBIC and Starlight’s insurance broker, Maroevich, O’Shea &
Coughlan Insurance Services, Inc. (Maroevich). The complaint
alleged causes of action against MBIC for breach of contract and
breach of the implied covenant of good faith and fair dealing. The
complaint also alleged a cause of action against Maroevich for
negligence in procuring the policy for Starlight.2

2    Maroevich is not a party to the appeal, and the claim
against it has been stayed.

                                 4
       As alleged, Starlight owns and operates movie theaters
across Southern California. On March 16, 2020, in response to
the COVID-19 pandemic, the County of Los Angeles Department
of Public Health issued an order prohibiting all indoor public and
private gatherings and specifically ordering the closure of all
theaters. Over the next few days, the counties of Orange and
Riverside issued similar orders closing theaters. And on March
19 the Governor issued a statewide stay-at-home order banning
public and private gatherings. As a result of these orders
(collectively, the government orders), Starlight was required to
close its theaters and cease business operations. These closures
resulted in “a loss of functional use of [Starlight’s] premises and
an interruption of [its] business,” and the government orders
were the “predominant cause of the interruption of [Starlight’s]
business.”
       Starlight promptly submitted a claim to MBIC under the
policy, which was then in force. As alleged, MBIC “did not
conduct a fair, balanced and thorough investigation” of Starlight’s
claim. Instead, “[h]aving conducted no investigation
whatsoever,” MBIC (through its claims adjuster) denied the claim
by letter dated April 27, 2020.3 The denial letter recited several
policy provisions and stated, “[o]ur investigation and discussion
with you confirmed there were no direct physical damages
sustained to your described premises or property.” Business
interruption coverage did not apply to Starlight’s claim because
the policy language “requires that there is direct physical loss or
damage caused by a covered cause of loss, which results in a

3     A copy of the April 27, 2020 denial letter was attached to
the complaint.

                                5
partial or complete shutdown of your business,” and “[i]n this
event, there was no direct physical damage to property at your
premises that resulted in a shutdown from a covered loss.”
(Capitalization omitted.) Likewise, civil authority coverage did
not apply because “there was no physical loss or damage to
properties in your area from a covered cause of loss . . . .”
(Capitalization omitted.) Further, “because the policy excludes
coverage for loss or damage caused by or resulting from any
virus, any loss you sustained is not a loss resulting from a
covered loss[.]”
       Starlight’s first cause of action for breach of contract
alleged it “sustained a loss when [its] movie theaters were
required by the Government Orders to shut, and [Starlight]
suffered a functional loss of [its] premises and a suspension of
[its] business operations.” This was a covered loss under the
policy, and MBIC breached its contractual duty to pay the claim.4
The second cause of action for breach of the implied covenant of
good faith and fair dealing alleged MBIC engaged in bad faith by,
among other things, “failing to conduct a prompt, fair, balanced
and thorough investigation of [Starlight’s] claim” and “failing to
conduct an investigation to determine the efficient proximate
cause” of Starlight’s loss before denying the claim.
       On October 2, 2020 MBIC answered the complaint with a
general denial and asserted numerous affirmative defenses,
including that the policy “afforded no coverage” or any coverage
was barred by policy exclusions.

4      The complaint did not expressly allege that the virus
exclusion was inapplicable; it alleged, however, that “the [v]irus
[e]xclusion does not refer to pandemics, and the [p]olicy nowhere
mentions the term ‘pandemic.’”

                                 6
C.     MBIC’s Motion for Judgment on the Pleadings
       On December 11, 2020 MBIC filed a motion for judgment
on the pleadings. MBIC argued that under California law, the
phrase “direct physical loss of or damage to property” in an
insurance contract requires a physical alteration of the insured
property, citing the holding in MRI Healthcare Center of
Glendale, Inc. v. State Farm General Ins. Co. (2010)
187 Cal.App.4th 766 (MRI Healthcare). MBIC relied on the
language in MRI Healthcare that a “direct physical loss” as used
in an insurance policy precludes business interruption coverage
where “‘the insured merely suffers a detrimental economic impact
unaccompanied by a distinct, demonstrable, physical alteration of
the property.’” (Id. at p. 779.) In basing its insurance claim on
the government orders, Starlight alleged only a “loss of functional
use” of its theaters, not any physical alteration. Further,
numerous federal district courts in California had dismissed
claims by insureds over denial of coverage for lost income
stemming from COVID-19 government closure orders after
finding that identical policy language required a physical
alteration of the insured property. (See, e.g., 10E, LLC v.
Travelers Indemnity Co. (C.D.Cal. 2020) 483 F.Supp.3d 828, 835-
836 [“[u]nder California law, losses from inability to use property
do not amount to ‘direct physical loss of or damage to property’”];
Mark’s Engine Co. No. 28 Restaurant, LLC v. Travelers
Indemnity Co. (C.D.Cal. 2020) 492 F.Supp.3d 1051, 1055 [“An
insured cannot recover by attempting to artfully plead
impairment to economically valuable use of property as physical
loss or damage to property.”].)
       MBIC also argued Starlight could not allege entitlement to
coverage under the civil authority provision because the policy

                                7
language required the action by the civil authority that caused
the loss to be made in response to dangerous physical conditions
resulting from damage to nearby property. Further, even if
Starlight were able to bring its claims within the scope of
business income coverage, the virus exclusion precluded coverage
because Starlight’s loss was “‘caused by or resulting from a[]
virus.’” Finally, Starlight’s cause of action for breach of the
implied covenant of good faith and fair dealing was derivative of
its contract claim and failed because MBIC had good cause to
deny coverage.
       In its opposition Starlight argued (as it does on appeal) the
policy does not define the terms “direct,” “physical,” “loss” or
“damage,” as used in the phrase “direct physical loss of or
damage,” rendering the phrase ambiguous, and therefore the
language should be construed in favor of coverage to include a
loss of use of property due to the government orders, even absent
physical alteration of the property. In addition, the virus
exclusion was inapplicable because the government orders, not
the COVID-19 virus, were the predominating proximate cause of
Starlight’s loss. In fact, Starlight “never alleged that a ‘virus or
bacteria’ caused [its] loss, or that the coronavirus was present at
any of [its] locations.” Starlight did not address MBIC’s
argument the losses were not covered by the civil authority
coverage.5

5     Starlight also does not address civil authority coverage on
appeal, and therefore, the issue is forfeited. (See People v. Duff
(2014) 58 Cal.4th 527, 550, fn. 9, [“the claim is omitted from the
opening brief and thus waived”]; Quiles v. Parent (2018)
28 Cal.App.5th 1000, 1013 [“‘Failure to raise specific challenges
in the trial court forfeits the claim on appeal.’”].)

                                 8
       After a hearing, on March 12, 2021 the trial court granted
MBIC’s motion without leave to amend. Citing MRI Healthcare,
supra, 187 Cal.App.4th at page 779, the court found the term
“‘direct physical loss’” was not ambiguous and not amenable to
Starlight’s proffered interpretation that it included loss of use
without a “‘distinct, demonstrable, physical alteration’” of the
property. Starlight “[did] not allege there was a physical
alteration of the movie theaters or any other actual change,” and
therefore failed to state a claim for breach of contract or breach of
the implied covenant of good faith and fair dealing. The court
observed that during oral argument, Starlight requested leave to
amend the complaint because there might be evidence of physical
alterations that would be covered by the policy.6 The court
denied leave to amend “because, even if there was some degree of
physical alteration, the cause of action would still be barred by
the [v]irus [e]xclusion provision.” On March 30, 2021 the court
entered judgment in favor of MBIC and awarded MBIC its costs
in an amount to be determined.
       Starlight timely appealed.

6      At the hearing, Starlight’s attorney requested leave to
amend the complaint because of the rapidly changing law
surrounding COVID-19 pandemic-related insurance claims and
the “possibility after we consult with our clients that maybe they
did have to do some physical alteration as a result of the
government order shutdown. They may have to take out some
seats to accommodate social distancing. We just didn’t inquire of
our client about physical alteration because we were convinced
that the loss of use of the premises is what is meant by loss—
direct physical loss.”

                                  9
                         DISCUSSION

A.      Standard of Review
        “‘A judgment on the pleadings in favor of the defendant is
appropriate when the complaint fails to allege facts sufficient to
state a cause of action. [Citation.] A motion for judgment on the
pleadings is equivalent to a demurrer and is governed by the
same de novo standard of review.’” (People ex rel. Harris v. Pac
Anchor Transportation, Inc. (2014) 59 Cal.4th 772, 777; accord,
Ventura Coastal, LLC v. Occupational Safety and Health Appeals
Bd. (2020) 58 Cal.App.5th 1, 14.) “‘“We treat the pleadings as
admitting all of the material facts properly pleaded, but not any
contentions, deductions or conclusions of fact or law contained
therein.”’” (Tarin v. Lind (2020) 47 Cal.App.5th 395, 403-404;
accord, Burd v. Barkley Court Reporters, Inc. (2017)
17 Cal.App.5th 1037, 1042.) “‘If a judgment on the pleadings is
correct on any theory of law applicable to the case, we will affirm
it regardless of the considerations used by the superior court to
reach its conclusion.’” (Environmental Health Advocates, Inc. v.
Sream, Inc. (2022) 83 Cal.App.5th 721, 729; accord, Bucur v.
Ahmad (2016) 244 Cal.App.4th 175, 185.)
        “‘Denial of leave to amend after granting a motion for
judgment on the pleadings is reviewed for abuse of discretion.’”
(Environmental Health Advocates, Inc. v. Sream, Inc., supra,
83 Cal.App.5th at p. 729; accord, Ott v. Alfa-Laval Agri, Inc.
(1995) 31 Cal.App.4th 1439, 1448.) An abuse of discretion occurs
if “‘there is a reasonable possibility that the defect can be cured
by amendment.’” (Loeffler v. Target Corp. (2014) 58 Cal.4th 1081,
1100 [reviewing an order sustaining demurrer without leave to
amend]; accord, Ko v. Maxim Healthcare Services, Inc. (2020)

                                10
58 Cal.App.5th 1144, 1150.) “The question whether the trial
court ‘abused its discretion’ in denying leave to amend ‘is open on
appeal even though no request to amend such pleading was
made.’” (Sierra Palms Homeowners Assn. v. Metro Gold Line
Foothill Extension Construction Authority (2018) 19 Cal.App.5th
1127, 1132 [reviewing an order sustaining a demurrer].) “‘“The
plaintiff has the burden of proving that [an] amendment would
cure the legal defect, and may [even] meet this burden [for the
first time] on appeal.”’” (Sierra Palms, at p. 1132; accord, Ko, at
p. 1150; see Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962,
971.)

B.     Interpretation of Insurance Contracts
       “In general, interpretation of an insurance policy is a
question of law that is decided under settled rules of contract
interpretation.” (State of California v. Continental Ins. Co. (2012)
55 Cal.4th 186, 194; accord, Shusha, Inc. v. Century-National Ins.
Company (2022) 87 Cal.App.5th 250, 259, review granted
February 28, 2023, S278614 (Shusha).) “The principles
governing the interpretation of insurance policies in California
are well settled. ‘Our goal in construing insurance contracts, as
with contracts generally, is to give effect to the parties’ mutual
intentions. [Citations.] “If contractual language is clear and
explicit, it governs.” [Citations.] If the terms are ambiguous [i.e.,
susceptible of more than one reasonable interpretation], we
interpret them to protect “‘the objectively reasonable expectations
of the insured.’” [Citations.] Only if these rules do not resolve a
claimed ambiguity do we resort to the rule that ambiguities are
to be resolved against the insurer.’” (Minkler v. Safeco Ins. Co. of
America (2010) 49 Cal.4th 315, 321; accord, Yahoo Inc. v.

                                 11
National Union Fire Ins. Co. etc. (2022) 14 Cal.5th 58, 67;
Montrose Chemical Corp. of California v. Superior Court (2020)
9 Cal.5th 215, 230; Shusha, at p. 259.)
       “To further ensure that coverage conforms fully to the
objectively reasonable expectations of the insured, . . . in cases of
ambiguity, basic coverage provisions are construed broadly in
favor of affording protection, but clauses setting forth specific
exclusions from coverage are interpreted narrowly against the
insurer. The insured has the burden of establishing that a claim,
unless specifically excluded, is within basic coverage, while the
insurer has the burden of establishing that a specific exclusion
applies.” (Minkler v. Safeco Ins. Co. of America, supra, 49 Cal.4th
at p. 322; accord, Montrose Chemical Corp. of California v.
Superior Court, supra, 9 Cal.5th at p. 230.)

C.     Insurance Coverage for Business Losses Due to Pandemic-
       related Government Orders
       At the time the trial court granted MBIC’s motion, no
California appellate court had addressed whether business
income losses caused by government orders issued in response to
the COVID-19 pandemic were covered by commercial property
insurance. Multiple California appellate courts have now
addressed this question. Although the courts have reached
different conclusions regarding the sufficiency of the insureds’
allegations of covered losses, all but one have held the policy
language “physical loss of or damage to property” requires a
physical alteration of the covered property.
       In the first of these cases, Inns-by-the-Sea v. California
Mutual Ins. Co. (2021) 71 Cal.App.5th 688 (Inns-by-the-Sea), a
hotel operator sued its insurer over the denial of a claim for loss

                                 12
of business income, alleging it ceased operations at its properties
due to county health orders requiring residents to shelter in place
and prohibiting nonessential travel. (Id. at p. 693.) Division One
of the Fourth Appellate District affirmed the trial court’s order
sustaining the insurer’s demurrer without leave to amend,
concluding, as alleged, hotel operations were not suspended due
to “‘direct physical loss of or damage to’” the hotels, as required
under the subject policy. (Id. at pp. 699, 705.) The court rejected
the hotel operator’s argument that its allegation of “‘loss of use,
function, and value of its property’” was sufficient for coverage
regardless of whether the COVID-19 virus was physically
present, concluding “[c]ase law and the language of the [p]olicy as
a whole establish that the inability to use physical property to
generate business income, standing on its own, does not amount
to a ‘“‘suspension’” . . . caused by direct physical loss of’’ property
within the ordinary and popular meaning of that phrase.” (Id. at
p. 705.)
        The Inns-by-the-Sea court reasoned that outside the context
of the COVID-19 pandemic, “‘[t]he requirement that the loss be
“physical,” given the ordinary definition of that term, is widely
held to exclude alleged losses that are intangible or incorporeal
and, thereby, to preclude any claim against the property insurer
when the insured merely suffers a detrimental economic impact
unaccompanied by a distinct, demonstrable, physical alteration of
the property.’” (Inns-by-the-Sea, supra, 71 Cal.App.5th at
pp. 705-706, quoting 10A Couch on Insurance (3d ed. 2016)
§ 148:46, pp. 148-96 to 148-98.) The Inns-by-the-Sea court also
relied on MRI Healthcare, supra, 187 Cal.App.4th at pages 779
through 780, in which Division Eight of this district concluded
the failure of an MRI machine to function, after it was “‘ramped

                                  13
down’” to enable a roof repair to address storm damage, was not a
covered loss because “there was no ‘distinct, demonstrable [or]
physical alteration’ of the MRI machine.” Further, the policy’s
definition of a “‘period of restoration’” as beginning “‘when the
property at the described premises should be repaired, rebuilt or
replaced with reasonable speed and similar quality’” was
“significant because it implies that the ‘loss’ or ‘damage’ that
gives rise to [b]usiness [i]ncome coverage has a physical nature
that can be physically fixed . . . .” (Inns-by-the-Sea, at p. 707.)
       In Musso & Frank Grill Co. v. Mitsui Sumitomo Ins. USA
Inc. (2022) 77 Cal.App.5th 753 (Musso & Frank), Division One of
this district likewise held that a restaurant operator did not
suffer “direct physical loss of or damage” to property as a result of
the COVID-19 pandemic and related government orders.
Affirming an order sustaining the insurer’s demurrer to the
complaint without leave to amend, the court cited Inns-by-the-Sea
and several federal court decisions, including a Ninth Circuit
decision applying California law in Mudpie, Inc. v. Travelers
Casualty Insurance Company of America (9th Cir. 2021)
15 F.4th 885, 894 (Mudpie), and concluded, “there is no real
dispute” that “[u]nder California law, a business interruption
policy that covers physical loss and damages does not provide
coverage for losses incurred by reason of the COVID-19
pandemic.’” (Musso & Frank, supra, 77 Cal.App.5th at p. 760.)
Division Four of this district reached the same conclusion in
United Talent Agency v. Vigilant Ins. Co. (2022) 77 Cal.App.5th
821 (United Talent), explaining, “It is now widely established
that temporary loss of use of a property due to pandemic-related
closure orders, without more, does not constitute direct physical
loss or damage.” (Id. at pp. 830-831; see id. at p. 833 [“As the

                                 14
trial court observed in sustaining the demurrer, [the plaintiff’s]
alleged loss ‘was not a physical deprivation of property, but
rather an interruption in business operations.’”].)
       We first considered a coverage dispute arising from the
COVID-19 pandemic in Marina Pacific Hotel & Suites, LLC v.
Fireman’s Fund Insurance Company (2022) 81 Cal.App.5th 96
(Marina Pacific). In that case, a hotel operator alleged the
presence of the COVID-19 virus on the insured’s premises caused
physical damage to its property, which in turn led to covered
losses. (Id. at p. 110.) Reversing the trial court’s order
sustaining the insurer’s demurrer without leave to amend, we
assumed for purposes of our opinion (but did not decide) that the
undefined policy term “direct physical loss or damage” meant
there must be an external force that acted on the insured
property causing a “distinct, demonstrable, physical alteration of
the property,” as stated in MRI Healthcare, supra,
187 Cal.App.4th 766. (Marina Pacific, at p. 108.) We concluded
the hotel’s complaint adequately alleged physical alteration of the
premises, explaining, “Assuming, as we must, the truth of those
allegations, even if improbable, absent judicially noticed facts
irrefutably contradicting them, the insureds have unquestionably
pleaded direct physical loss or damage to covered property within
the definition articulated in MRI Healthcare—a distinct,
demonstrable, physical alteration of the property.” (Marina
Pacific, at p. 109.) We distinguished Inns-by-the-Sea, supra,
71 Cal.App.5th at page 703 and Musso & Frank, supra,
77 Cal.App.5th at page 759 on the basis that both cases involved
only allegations of loss of use of the insured property as a result
of government-ordered closures to limit the spread of COVID-19,
“rather than, as expressly alleged here, a claim the presence of

                                15
the virus on the insured premises caused physical damage to
covered property, which in turn led to business losses.” (Marina
Pacific, at p. 110.)7 We reached a similar conclusion in Shusha,
supra, 87 Cal.App.5th at page 266, review granted, holding that a
restaurant’s allegations that it suspended operations due to both
physical alteration of its premises by the presence of the COVID-
19 virus and government closure orders were sufficient to survive
a demurrer. As in Marina Pacific, our analysis assumed but did
not decide that under California law the policy term “direct
physical loss of or damage to property” required a physical
alteration of the property to trigger business income coverage.
(Shusha, at p. 261.)
       In Apple Annie, LLC v. Oregon Mutual Ins. Co. (2022)
82 Cal.App.5th 919 (Apple Annie), Division Two of the First
Appellate District reviewed Inns-by-the-Sea, Musso & Frank,
United Talent, and Marina Pacific in considering whether a
restaurant had stated a claim for insurance coverage based on its
allegation that a suspension of operations due to county shelter-
at-home orders constituted a covered loss. Affirming a judgment
on the pleadings in favor of the insurer, the court concluded,
“[W]e cannot agree with Apple Annie’s primary contention that
the policy language—‘direct physical loss or damage to,’ including
its disjunctive phrasing—is ambiguous and ‘subject to a
reasonable construction that supports coverage.’ Doing so, we
reject what may be the two most consequential aspects of Apple

7     Unlike the claims at issue in Inns-by-the-Sea and Musso &
Frank (and the claim here), the hotel operator in Marina Pacific
did not seek coverage for loss of temporary use of its property due
to the pandemic-related closure orders. (Marina Pacific, supra,
81 Cal.App.5th at p. 111, fn. 13.)

                                16
Annie’s position: (1) that ‘no physical alteration is necessary to
show that the policyholder has suffered a “physical loss of”
insured property if the governmental authorities issue orders
that prohibit the policyholder from using the insured property for
its intended purpose,’ and (2) that ‘“physical loss of” includes the
loss of use of the insured property, even if that loss is
temporary.’” (Apple Annie, at p. 935.) A few weeks later, in
Tarrar Enterprises, Inc. v. Associated Indemnity Corp. (2022)
83 Cal.App.5th 685, 687, the same court rejected an insured’s
argument that county shelter-in-place orders forcing him to close
his office caused direct physical loss of or damage to his property.
However, the court reversed the trial court order sustaining the
insurer’s demurrer without leave to amend because the insured’s
appellate brief set forth proposed amendments with some detail.
(Id. at pp. 688-689.)
       Most recently, Division Three of the Fourth Appellate
District decided in Coast Restaurant Group, Inc. v. Amguard Ins.
Co. (April 10, 2023, G061040) __ Cal.App.5th __ [2023 Cal.App.
Lexis 269, at pp. *1-2] (Coast) that business interruption
insurance potentially provided coverage for a restaurant’s losses
as a result of the government closure orders issued in response to
the COVID-19 virus. However, the court affirmed the trial
court’s order sustaining the insurance company’s demurrer on the
basis a virus exclusion precluded coverage as a matter of law.
(Ibid.) The restaurant alleged in its amended complaint that the
government closure orders forced the restaurant “‘to shut its
doors for in person dining and resulted in a loss of functional use
of its premises and an interruption of its business.’” (Id. at *3.)
The insurance policy attached to the amended complaint
provided coverage for loss of income sustained as a result of

                                17
suspension of operations “‘“caused by direct physical loss of or
damage to property at the described premises.”’” (Id. at *4.)
Further, the policy paid for losses incurred during a “‘“period of
restoration,”’” which was defined as the period beginning
72 hours after the “‘direct physical loss or damage’” and ending
on the earlier of when the property was repaired, rebuilt, or
replaced, or “‘[t]he date when business is resumed at a new
permanent location.’” (Id. at *4-5.) The policy also contained an
exclusion for loss or damage caused by “‘[t]he enforcement of any
ordinance or law . . . [r]egulating the construction, use or repair
of any property’” and any virus that “‘is capable of inducing
physical distress, illness or disease.’” (Id. at *5.)
      The Court of Appeal in Coast concluded the restaurant
“suffered a covered loss under the policy because the
governmental restrictions . . . deprived the appellant of important
property rights in the covered property.” (Coast, supra, __
Cal.App.5th at p. __ [2023 Cal.App. Lexis 269 at p. *12].) The
court explained the government orders “physically affected the
property because they affected how the physical space of the
property and the physical objects (chairs, tables, etc.) in that
space could or could not be used.” (Ibid.) In reaching its
conclusion, the court relied on American Alternative Ins. Corp. v.
Superior Court (2006) 135 Cal.App.4th 1239, 1246 (American
Alternative). (Coast, at pp. __ - __ [2023 Cal.App. Lexis 269
pp. *12-13].) In American Alternative, the Court of Appeal
affirmed the grant of summary adjudication in favor of the
owners of an airplane on their claim against their insurers for
reimbursement of expenses incurred in recovering possession of
the airplane after the sheriff seized it as part of a civil forfeiture
action. (American Alternative, at pp. 1242-1243.) The aviation

                                 18
insurance policy at issue stated the insurer “‘shall pay for
physical damage to the scheduled aircraft including
disappearance of the scheduled aircraft.’ . . . ‘“Physical damage”
means direct and accidental physical loss of or damage to the
scheduled aircraft.’” (Ibid., italics omitted.) The American
Alternative court held coverage was available based on the term
“‘physical damage’” because “[o]n its face, such a coverage
promise could reasonably extend to governmental seizure or
confiscation.” (Id. at p. 1246, italics omitted.) The Coast court
concluded that, as in American Alternative, the COVID-19
government closure orders “temporarily deprived appellant of its
right to use the covered property for on-site dining, which would
be a ‘loss’ under the coverage provisions.” (Coast, at p. __ [2023
Cal.App. Lexis 269 at p. *13].)
       The Supreme Court has now granted review in the most
recent published decision addressing the sufficiency of allegations
that losses arising from pandemic-related closure orders are
covered by business income coverage, John’s Grill, Inc. v. The
Hartford Financial Services Group, Inc. (2022)
86 Cal.App.5th 1195, review granted March 29, 2023, S278481.8

8      The Supreme Court also recently granted requests for
certification by the Ninth Circuit on two questions of California
law: First, “Can the actual or potential presence of the COVID-
19 virus on an insured’s premises constitute ‘direct physical loss
or damage to property’ for purposes of coverage under a
commercial property insurance policy?” (Another Planet
Entertainment, LLC v. Vigilant Insurance Company (9th Cir.
2022) 56 F.4th 730, request for certification granted Mar. 1, 2023,
S277893); second, “Is the virus exclusion in [the restaurant’s]
insurance policy unenforceable because enforcing it would render

                                19
In John’s Grill, Division Four of the First Appellate District
observed as to prior business loss coverage cases that “a nearly
uniform line of cases in California and across the country holds
that temporary loss of use of property due to the COVID-19
pandemic does not constitute ‘direct physical loss of or damage to’
property for purposes of first party insurance coverage.” (Id. at
p. 1201.) However, the court reversed the order sustaining the
demurrer to the restaurant’s claim for wrongful denial of
coverage, explaining that, in contrast to the prior COVID-19
business interruption cases, the policy at issue specifically
provided coverage “for loss or damage by . . . virus,” including the
cost to remove the virus. (Id. at p. 1214.) And, the court noted, a
special definition in the policy clarified that “‘[d]irect physical
loss or direct physical damage to’ property can be ‘caused by’
‘virus . . . .’” (Ibid.) The court concluded, “Because the . . . Virus
Coverage Endorsement contains an additional affirmative grant
of coverage, and because there is a special definition of ‘loss or

illusory a limited virus coverage provision allowing for the
possibility of coverage for business losses and extra expenses
allegedly caused by the presence and impacts of COVID-19 at an
insured’s properties, including the loss of business due to a civil
authority closure order?” (French Laundry Partners, LP v.
Hartford Fire Insurance Company (9th Cir. 2023) 58 F.4th 1305,
1307, request for certification granted Mar. 29, 2023, S278492.)
And, as noted, the Supreme Court has granted review in Shusha,
supra, 87 Cal.App.5th at page 266, in which we concluded a
restaurant adequately alleged it had suffered direct physical loss
or damage to its property caused by the COVID-19 virus to
withstand a demurrer.

                                 20
damage’ in the triggering clause for that additional coverage, we
cannot simply import the reasoning of the Mudpie line of cases.”
(Id. at p. 1218.)

D.     The Trial Court Properly Entered Judgment on the
       Pleadings
       Starlight’s complaint alleged it was forced to suspend
business operations due to government orders in response to the
COVID-19 pandemic, resulting in “a loss of the functional use” of
its theaters, or, as alternatively alleged, “a functional loss” of its
property. Starlight did not allege that the COVID-19 virus was
present in its theaters or that there was any physical alteration
of its property as a result of either the virus or the government
orders. As discussed, most California appellate courts have held
the allegation of temporary loss of use of property resulting from
pandemic-related government closure orders—without any
physical loss of the property—is not sufficient to support a claim
against an insurer for business income coverage under a policy
that requires the suspension be caused by “direct physical loss of
or damage to” insured property. (Apple Annie, supra,
82 Cal.App.5th 919; United Talent, supra, 77 Cal.App.5th 821;
Musso & Frank, supra, 77 Cal.App.5th 753; Inns-by-the-Sea,
supra, 71 Cal.App.5th 688; but see Coast, supra, __ Cal.App.5th
at pp. __ - __ [2023 Cal.App. Lexis 269 at pp. *1-2, 13].) We too
previously assumed without deciding that this policy language
meant the insured needed to allege an external force acted on the
insured property causing a “distinct, demonstrable, physical
alteration of the property,” as stated in MRI Healthcare, supra,
187 Cal.App.4th 766. (Marina Pacific, supra, 81 Cal.App.5th, at
p. 108; see Shusha, supra, 87 Cal.App.5th at p. 261, review

                                 21
granted.) Now that we are presented with the question of
interpretation of the “direct physical loss” language in an
insurance policy, we conclude, consistent with the reasoning in
the “now-existing wall of precedent” (other than Coast) that the
policy language requires a physical alteration of the covered
property. (See Apple Annie, at p. 935.)
      We disagree with our colleagues in Coast, supra, __
Cal.App.5th at p. __ [2023 Cal.App. Lexis 269, at p. *13] that a
temporary deprivation of an insured’s right to use covered
property constitutes a covered loss under policy language
covering a “direct physical loss of or damage to property.” Coast’s
reliance on American Alternative to support this argument is
misplaced. Although American Alternative involved policy
language similar to the one at issue here and in Coast, the loss of
use of the property due to seizure resulted in the aircraft owners
losing their physical possession of the property. By contrast, here
and in Coast, there were no allegations the government
physically dispossessed the insureds of their property; rather, the
government closure orders prohibited the insureds from
operating—that is, using—their property for a business purpose.9
As MBIC points out, if a Starlight manager had left a film

9      The Court of Appeal in Coast, supra, __ Cal.App.5th at
pp. __ to __ [2023 Cal.App. Lexis 269 at pages *15 to 16] rejected
the argument that American Alternative was distinguishable on
the basis the insured in that case lost actual possession of the
airplane, explaining the policy did “not distinguish between a
partial loss or a total loss.” The policy here likewise does not
specifically require a total loss of use of the property, but we read
the coverage language requiring a “direct physical loss of” the
property to require a “physical loss” of the property, not just a
loss of use of the property, partial or otherwise.

                                 22
projector on, she could go into the theater to turn the projector
off, or to retrieve her personal property (even potentially to show
a movie to her family). As MBIC contends, the government
orders “would have posed no physical impediment to these
activities, and probably not even a legal impediment.”10
       Starlight contends that because the words “physical loss of
or damage to” are phrased in the disjunctive, “loss of” and
“damage to” must each have a separate meaning. But this
argument ignores the word “physical,” which modifies the phrase
“loss of.” As the court explained in Apple Annie, “[E]ven if there
were any distinction between loss and damage, it would become
relevant only after detriment has been caused by a ‘direct
physical’ cause, which is not alleged here. [Citations.] [¶] This
construction comports not only with the plain meaning rule, but
also with the principle that courts will not strain to create an
ambiguity that can be construed against the insurer.” (Apple
Annie, supra, 82 Cal.App.5th at pp. 929-930, footnote omitted.)
       Starlight also argues we should not follow Inns-by-the-Sea,
supra, 71 Cal.App.5th at pages 586 to 587 and MRI Healthcare,
supra, 187 Cal.App.4th at page 779 because both courts gave
undue weight to the Couch on Insurance treatise in holding direct
physical loss of or damage to property requires a material

10    The district court in 10E, LLC v. Travelers Indemnity Co. of
Connecticut, supra, 483 F.Supp.3d at page 836 rejected a similar
argument that under California law “‘loss,’ unlike ‘damage,’
encompasses temporary impaired use.” The court explained that
even if the policy covered permanent dispossession, the plaintiff
restaurant’s allegations were insufficient because the COVID-19
public health orders imposed limitations on use of the dining
room, but the plaintiff remained in possession. (Ibid.)

                                23
alteration of the property.11 Starlight cites a recent law journal
article12 criticizing Couch’s interpretation of the policy language
on the basis Couch relied on only five cases that concluded there
was a physical-alteration requirement (and two that did not), yet
it claimed this was a “‘widely held’” view. Starlight argues a
different “well-respected” insurance treatise (Windt, Insurance
Claims and Disputes (6th ed. 2013) §§ 11:40-11:41) construed the
same language and concluded “the ‘loss of property’ requirement
can be satisfied by any ‘detriment,’ and a ‘detriment’ can be
present without there having been a physical alteration of the
object.” Regardless of the reasoning underlying the Couch
treatise’s analysis, “[a]t this point in time, any analytical flaws in
the Couch formulation have become largely academic in light of
the now-existing wall of precedent . . . . When originally
published, the Couch formulation may not have reflected
widespread acceptance by the courts, but such acceptance has
now been achieved.” (Apple Annie, supra, 82 Cal.App.5th at
p. 935.)

11     Starlight also attempts to distinguish MRI Healthcare,
supra, 187 Cal.App.4th at page 771 on the basis the insurance
policy at issue covered loss to property instead of loss of property,
arguing the former language “connotes some physical alteration
of the property,” while the latter refers to interference with a
possessory interest. However, the MRI Healthcare holding made
no such distinction, instead focusing on the fact coverage was
provided only for a direct “physical” loss, which the court
concluded contemplated an actual change in the property. (Id. at
p. 779.)
12    Richard P. Lewis et. al., Couch’s “Physical Alteration”
Fallacy: Its Origins and Consequences (2021) 56 Tort Trial & Ins.
Prac. L.J. 621.

                                 24
       Finally, Starlight argues the court in Inns-by-the-Sea,
supra, 71 Cal.App.5th at page 708 relied too heavily on the
definition of “period of restoration,” as the period when the
property “should be repaired, rebuilt or replaced with reasonable
speed and similar quality,” to justify its holding that physical loss
of or damage to property requires a physical alteration. Starlight
contends it is unrealistic to expect all provisions of a lengthy
insurance policy to operate seamlessly, and the Inns-by-the-Sea
court conflated the terms “‘physical . . . damage to’” and “‘physical
loss of’” to avoid rendering the language defining “‘period of
restoration’” superfluous. Although the policy is 230 pages long,
the phrase “period of restoration” is used in the business
interruption coverage section, with the phrase clearly defined
only eight pages later in the “Definitions” section. The definition
of “period of restoration,” by recognizing there will be a period of
physical repair to the property, is, at a minimum, consistent with
requirement of a physical alteration to trigger a covered loss.13

13     Because Starlight failed to allege a covered loss to support
its breach of contract cause of action, it does not state a claim for
bad faith denial of coverage. (Musso & Frank, supra,
77 Cal.App.5th at p. 761 [“Because Musso & Frank cannot
establish a breach of contract, it follows necessarily that it cannot
prove a breach of the covenant of good faith and fair dealing.”];
United Talent, supra, 77 Cal.App.5th at p. 841; see Waller v.
Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 36 [“if there is no
potential for coverage . . . , there can be no action for breach of the
implied covenant of good faith and fair dealing because the
covenant is based on the contractual relationship between the
insured and the insurer”].)
       Further, because the policy did not provide coverage for
loss of use absent a physical alteration, we do not reach whether

                                  25
                        DISPOSITION

     The judgment is affirmed. MBIC is to recover its costs on
appeal.

                                    FEUER, J.
We concur:

             SEGAL, Acting P.J.

             ESCALANTE, J.*

the virus exclusion excluded coverage. (See Apple Annie, supra,
82 Cal.App.5th at p. 924, fn. 2 [“It is black-letter insurance law
that exclusions are only considered after it is established that
coverage exists under the policy”].) Likewise, because Starlight
only seeks leave to amend to avoid the virus exclusion (arguing in
its opening brief that if it were granted leave to amend it “could
have clarified in its complaint that it only closed because of the
Government Orders, not because of any virus or related
prophylactic measures”), it has not met its burden to support
leave to amend. (Sierra Palms Homeowners Assn. v. Metro Gold
Line Foothill Extension Construction Authority, supra,
19 Cal.App.5th at p. 1132.)

*     Judge of the Los Angeles County Superior Court, assigned
by the Chief Justice pursuant to article VI, section 6 of the
California Constitution.

                               26