Court Opinion

ID: 6499684
Source: CourtListenerOpinion
Date Created: 2022-07-13 18:01:36.952755+00
Date Added: 2024-06-11T09:16:22.261036
License: Public Domain

Filed 7/13/22
                CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                SECOND APPELLATE DISTRICT

                        DIVISION SEVEN

MARINA PACIFIC HOTEL                B316501
AND SUITES, LLC, et al.,
                                    (Los Angeles County
       Plaintiffs and               Super. Ct. No.
       Appellants,                  20SMCV00952)

       v.

FIREMAN’S FUND
INSURANCE COMPANY,

       Defendant and
       Respondent.

       APPEAL from a judgment of the Superior Court of
Los Angeles County, Craig D. Karlan, Judge. Reversed and
remanded with directions.
       Barnes & Thornburg, David P. Schack, Matthew B.
O’Hanlon and Jonathan J. Boustani for Plaintiffs and Appellants
Marina Pacific Hotel & Suites, LLC, Venice Windward, LLC,
Larry’s Venice, L.P. and Erwin H. Sokol.
       DLA PIPER, John P. Phillips, Joseph Davison and Brett
Solberg for Defendant and Respondent.
                       _____________________
       For more than two years our understanding of COVID-19,
the infectious disease caused by the SARS-CoV-2 virus and its
many variants, has evolved.1 Today we think we know how it
spreads, how to protect against it and how best to treat those who
have it. Perhaps we do. But even so, when a pleading alleges
facts sufficient to constitute a cause of action, what we think we
know—beliefs not yet appropriately subject to judicial notice—
has never been a proper basis for concluding, as a matter of law,
those alleged facts cannot be true and, on that ground, sustaining
a demurrer without leave to amend. Yet that is precisely what
occurred here.
       The owners of Hotel Erwin and Larry’s (a restaurant
adjacent to the hotel) in Venice Beach—Marina Pacific Hotel &
Suites, LLC; Venice Windward, LLC; Larry’s Venice, L.P.; and
Erwin H. Sokol, as trustee of the Frances Sokol Trust
(collectively insureds)—sued Fireman’s Fund Insurance Company
alleging the COVID-19 virus was present on, and had physically
transformed, portions of the insured properties—“direct physical
loss or damage” within the meaning of Fireman’s Fund’s first-
party commercial property insurance policy—but Fireman’s Fund
refused to pay policy benefits for covered losses incurred as a
result. The trial court sustained Fireman’s Fund’s demurrer to
the insureds’ first amended complaint without leave to amend
and dismissed the lawsuit, ruling the COVID-19 virus cannot
cause direct physical loss or damage to property for purposes of

1   For ease of reference we refer, as do the parties, to the
“COVID-19 virus.”

                                2
insurance coverage. That might be the correct outcome following
a trial or even a motion for summary judgment. It was error at
this nascent phase of the case. We reverse.
      FACTUAL AND PROCEDURAL BACKGROUND
      1. The Fireman’s Fund (Allianz) Policy2
       As alleged in the operative first amended complaint,
Fireman’s Fund issued its commercial property insurance policy
no. USC007058190 for the period July 1, 2019 to July 1, 2020 to
provide coverage for Hotel Erwin and Larry’s. Marina Pacific
Hotel & Suites, LLC; Venice Windward, LLC; Larry’s Venice,
L.P.; and Erwin H. Sokol, as trustee of the Frances Sokol Trust—
plaintiffs in this litigation—were named insureds. A copy of the
policy was attached as Exhibit A to the pleading.
       The policy’s general property coverage provision states,
“[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.” The policy provided business
interruption coverage (with a $22 million limit) for “the actual
loss of business income and necessary extra expense you
sustain due to the necessary suspension of your operation
during the period of restoration arising from direct physical
loss or damage to [covered] property.” The terms printed in
boldface type were separately defined. As pertinent here,
“covered cause of loss” was defined as “risk of direct physical loss
or damage not excluded or limited in the Coverage Form”;
“business income” was defined as the net profit or loss before

2     The policy attached to the first amended complaint and
cited by both the insureds and Fireman’s Fund is identified as
“Allianz Global Corporate & Specialty® Allianz Insurance Policy.”
Fireman’s Fund is a member of the Allianz Group.

                                 3
income taxes from the business’s operations; “suspension” as “the
slowdown or cessation” of operations and also meant that part or
all of the premises had been rendered untenable. “Period of
restoration” meant “the period of time that begins immediately
after the time of direct physical loss or damage caused by or
resulting from a covered cause of loss to the property” and
ends when the property “should be repaired, rebuilt, or replaced
with reasonable speed and like kind or quality.”
        The policy also included “communicable disease coverage”
(with a policy limit of $1 million), providing the insurer would
pay “for direct physical loss or damage” to insured property
“caused by or resulting from a covered communicable disease
event,” including costs necessary to repair or rebuild insured
property damaged or destroyed by the communicable disease
and to “[m]itigate, contain, remediate, treat, clean, detoxify,
disinfect, neutralize, cleanup, remove, dispose of, test for, monitor
and assess the effects [of] the communicable disease.” In
addition, business interruption coverage was provided for
suspension of operations during a period of restoration, provided
the suspension was “due to direct physical loss or damage to
property at a location caused by or resulting from a covered
communicable disease event.” “Communicable disease” was
defined as “any disease, bacteria, or virus that may be
transmitted directly or indirectly from human or animal to a
human.” “Communicable disease event” was defined as “an event
in which a public health authority has ordered that a location
be evacuated, decontaminated, or disinfected due to the outbreak
of a communicable disease at such location.”
        As one of the exclusions applicable to all coverages
(property coverage, business income and extra expense coverage

                                  4
or any extensions of coverage), the policy, under the heading
“Mortality and Disease,” provided the insurer would not pay for
any loss, damage or expense caused directly or indirectly by, or
resulting from, “[m]ortality, death by natural causes, disease,
sickness, any condition of health, bacteria, or virus.”
      2. The First Amended Complaint
       The insureds filed their complaint against Fireman’s Fund
on July 21, 2020—four months after the COVID-19 pandemic
first gripped the United States and three weeks after the end of
the policy period—and the operative first amended complaint on
August 31, 2021, alleging causes of action for breach of contract,
tortious breach of contract, elder abuse and unfair competition.
All four causes of action were based on Fireman’s Fund’s denial of
coverage and refusal to pay (or to advance) policy benefits for
losses claimed by the insureds as a result of the pandemic.
       The first amended complaint alleged, in part, the insureds,
beginning in March 2020, had suffered loss arising from direct
physical loss or damage to covered property based on the
existence of COVID-19. They asserted that “COVID-19 is a
covered cause of loss under the Policy because it is not excluded
or limited thereunder” and, on information and belief, that “the
presence of COVID-19 on property, including on and within
Insured Properties (i.e., an external force), caused and continues
to cause physical loss and/or damage to property by causing,
among other things, a distinct, demonstrable or physical
alteration to property” and “by transforming the physical
condition of property at Insured Properties and within the
covered radius,” causing the properties to remain in an unsafe
and hazardous condition.

                                5
       Also on information and belief the insureds alleged COVID-
19 spreads through three primary modes of transmission:
airborne transmission (droplets of saliva or nasal discharge of an
infected individual, which are released by a cough, sneeze, speech
or similar modes and inhaled by others); aerosols (smaller
droplets that can linger in the air for hours and reach others
further away); and fomite transmission—indirect contact with
surfaces or objects where the virus has been disseminated by a
person with COVID-19. The first amended complaint continued,
“Both porous and nonporous surfaces or objects can harbor
COVID-19 and serve as vehicles of transmission. Once this
occurs, the transfer of COVID-19 may and does readily occur
between inanimate and animate objects, or vice versa. A study
by the Virology Journal showed that COVID-19 can survive on
surfaces up to 28 days, serving as a vehicle for transmission
during that time span.” Citing several journal articles, the
insureds alleged the COVID-19 virus does not simply live on the
surface of objects. Rather, “it also actually bonds and/or adheres
to such objects through physico-chemical reactions involving,
inter alia, cells and surface proteins” and “caus[es], among other
things, a distinct, demonstrable or physical alteration to
property.”
       The insureds alleged COVID-19 had been present in and
before March 2020 on a variety of physical objects in the insured
properties, including furniture, countertops, walls, bedding,
appliances and food and other packaged items, as well as in the
air. The presence of the virus was not due to a single episode.
Rather, “because COVID-19 is a pandemic and is statistically
certain to be carried by a number of individuals who visit the
Insured Properties and other properties within the covered

                                6
radius daily, COVID-19 is continually reintroduced to the air and
surfaces of those locations.” Further, they alleged, in response to
multiple employees of Hotel Erwin testing positive, “various
public health authorities have ordered that Hotel Erwin be
evacuated, decontaminated, or disinfected,” and specifically
alleged one employee had been ordered by the Los Angeles
County Department of Health–Environmental Health Division to
“evacuate the hotel and quarantine.”
      The physical loss or damage to property, the insureds
alleged, required the closure or suspension of operations at Hotel
Erwin and Larry’s or portions of those properties at various times
and caused them to incur extra expense, adopt remedial and
precautionary measures “to attempt to restore and remediate the
air and surfaces at the Insured Properties, dispose of property
damaged by COVID-19 and limit operations at the Insured
Properties.” In addition, access to the insured properties, the
insureds alleged, had at times been prevented or limited by
governmental orders issued “in response to the direct physical
loss and/or damage caused by COVID-19 to other property within
the covered radius [as defined by the policy].”
      Finally, the insured alleged they gave timely notice of the
loss under the policy and had performed all conditions on their
part under the policy except as excused by Fireman’s Fund’s
conduct and breaches of contract. Fireman’s Fund, despite
notice, breached the policy by denying coverage and refusing to
pay any policy benefits.3

3     The insureds’ second cause of action alleged Fireman’s
Fund breached the implied covenant of good faith and fair
dealing contained in the policy by, among other grounds,
“[w]rongfully, intentionally, unreasonably and in bad faith

                                 7
      3. Fireman’s Fund’s Demurrer and the Insureds’ Response
       Fireman’s Fund demurred to the first amended complaint
on August 19, 2021. It argued the insureds had failed to allege
facts showing direct physical loss or damage to covered property,
a contractual prerequisite for a valid claim to benefits under the
policy. In support Fireman’s Fund explained that courts across
the country had ruled the pandemic does not equate to physical
loss or damage and argued loss of use alone does not constitute
direct physical loss or damage. Because various public agency
orders (from Governor Newsom and the County and City of
Los Angeles) permitted the insureds’ properties to remain open,
Fireman’s Fund contended the policy’s civil authority coverage

refus[ing] to honor its obligations under the Policy,” and by
“[f]raudulently misrepresent[ing] and falsely promis[ing] that it
would indemnify and pay the losses incurred by Plaintiffs under
the Policy for covered losses when it had no intention of doing so.”
      The third cause of action for financial elder abuse alleged
Sokol is an “elder” as defined by Welfare and Institutions Code
section 15610.27 and a “senior citizen” as defined by Civil Code
section 1761, subdivision (f), and Fireman’s Fund perpetrated
“financial abuse” within the meaning of Welfare and Institutions
Code section 15610.30 by “taking, appropriating, obtaining and/or
retaining personal property in the form of benefits owing to Sokol
under the Policy for a wrongful use and/or with intent to
defraud.”
      The fourth cause of action alleged Fireman’s Fund’s
conduct constituted unlawful business practices in violation of
California’s unfair competition law (Bus. & Prof. Code,
§ 17200 et seq.).

                                 8
was inapplicable.4 Finally, it argued coverage (and, thus, the
insureds’ claims for damages) was expressly precluded by the
policy’s mortality and disease exclusion.
       In their opposition filed September 2, 2021 the insureds,
pointing to specific allegations, argued their first amended
complaint had alleged direct physical loss or damage to covered
property; disputed Fireman’s Fund’s interpretation of the policy’s
civil authority coverage provision and the mortality and disease
exclusion; and argued cases from California (e.g., Armstrong
World Industries, Inc. v. Aetna Casualty & Surety Co. (1996)
45 Cal.App.4th 1 [involving asbestos fibers]) and across the
country have refused to dismiss similar lawsuits at the pleading
stage.
      4. The Court’s Order Sustaining the Demurrer Without
         Leave To Amend
       After taking the matter under submission following a
hearing on September 13, 2021, the trial court issued its final
ruling on October 5, 2021, sustaining without leave to amend
Fireman’s Fund’s demurrer to each of the four causes of action in
the first amended complaint.5 The court, relying on MRI

4     The policy’s “civil authority coverage,” which is not at issue
on appeal, provided that under certain circumstances the insurer
would pay for “actual loss of business income and necessary
extra expense” sustained due to the “necessary suspension” of
operations caused by actions of a civil authority.
5     The court denied as irrelevant Fireman’s Fund’s request to
take judicial notice of four orders from governmental entities
relating to the COVID-19 pandemic and 10 orders and filings
from various state and federal trial court cases. The court
similarly denied as irrelevant the insureds’ request to take
judicial notice of three orders issued in cases pending in the

                                 9
Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co.
(2010) 187 Cal.App.4th 766 (MRI Healthcare), held “direct
physical loss or damage,” necessary for there to be a “loss”
triggering coverage within the meaning of policies of the type at
issue here, requires some external force acting upon the insured
property that causes a physical change in the condition of the
property—that is, “it must have been ‘damaged’ within the
common understanding of that term.” The insureds’ allegations
do not satisfy that definition, the court ruled: “[W]here the
property has simply been rendered unusable based on a virus,
rather than an external force, the loss of use of the property in a
typical manner is not a ‘direct physical loss’ contemplated by the
insurance policy. To the contrary, the fact that the virus ‘can
survive on surfaces up to 28 days, serving as a vehicle for
transmission during that time span’ [citing to paragraph 16 of
the first amended complaint], shows that any harm is temporary
such that there is no need for any repairs or remediation.
Instead, risk mitigation policies responsive to the existence of
COVID-19, such as those in place at the Los Angeles Superior
Court, i.e., regular cleaning and mandatory masks, serve to
remove the virus from surfaces and minimize transmission.”
That the virus actually bonds or adheres to surfaces and objects,

Los Angeles and Orange County Superior Courts. However, on
its own motion the court took judicial notice of the three studies
cited by the insureds in their pleading and observed, “[N]one of
the three cited studies stands for the proposition that the
presence of COVID-19 causes physical property damage, i.e., that
it is ‘damaged’ within the common understanding of that term.”
Neither side challenges these rulings on appeal.

                                10
as alleged, “does not mean it causes physical damage to
property.”
       The court additionally found, quoting the mortality and
disease exclusion, that the Fireman’s Fund policy “contains an
express virus exclusion provision.” “This provision expressly
excludes coverage of any direct physical loss or damage resulting
from a virus; it is beyond dispute that COVID-19 is a virus.”
       Because the insureds could not successfully allege direct
physical loss or damage to property, the court concluded, it
followed that they had failed to set forth a cause of action for
breach of contract. In the absence of such a breach, there could
be no tortious breach of contract, financial elder abuse or unfair
competition. And the insureds failed to demonstrate they could
cure those deficiencies if given leave to amend.
       Judgment was entered October 26, 2021. The insureds
filed a timely notice of appeal.
                         DISCUSSION
      1. Standard of Review
      A demurrer tests the legal sufficiency of the factual
allegations in a complaint. We independently review the superior
court’s ruling on a demurrer and determine de novo whether the
complaint alleges facts sufficient to state a cause of action or
discloses a complete defense. (Mathews v. Becerra (2019)
8 Cal.5th 756, 768; T.H. v. Novartis Pharmaceuticals Corp. (2017)
4 Cal.5th 145, 162.) We assume the truth of the properly pleaded
factual allegations, facts that reasonably can be inferred from
those expressly pleaded and matters of which judicial notice has
been taken. (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 20;
accord, Centinela Freeman Emergency Medical Associates v.
Health Net of California, Inc. (2016) 1 Cal.5th 994, 1010;

                                11
Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.)
Indeed, “we accept as true even improbable alleged facts, and we
do not concern ourselves with the plaintiff’s ability to prove [the]
factual allegations.” (Friends of Glendora v. City of Glendora
(2010) 182 Cal.App.4th 573, 576; accord, Hacker v. Homeward
Residential, Inc. (2018) 26 Cal.App.5th 270, 280 [“[i]n considering
the merits of a demurrer, however, ‘the facts alleged in the
pleading are deemed to be true, however improbable they may
be’”]; Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949,
958 [same]; see Smith v. State Farm Mutual Automobile Ins. Co.
(2001) 93 Cal.App.4th 700, 711 [“[w]e do not concern ourselves
with whether the plaintiff will be able to prove the facts that he
or she may allege in the complaint”].) However, we are not
required to accept the truth of the factual or legal conclusions
pleaded in the complaint. (Mathews, at p. 768; Centinela
Freeman, at p. 1010; Zelig v. County of Los Angeles (2002)
27 Cal.4th 1112, 1126.)
       We affirm the judgment if it is correct on any ground stated
in the demurrer, regardless of the trial court’s stated reasons
(Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967;
Las Lomas Land Co., LLC v. City of Los Angeles (2009)
177 Cal.App.4th 837, 848), but liberally construe the pleading
with a view to substantial justice between the parties. (Code Civ.
Proc., § 452; Ivanoff v. Bank of America, N.A. (2017)
9 Cal.App.5th 719, 726; see Schifando v. City of Los Angeles,
supra, 31 Cal.4th at p. 1081.) “Further, we give the complaint a
reasonable interpretation, reading it as a whole and its parts in
their context.” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318;
accord, Centinela Freeman Emergency Medical Associates v.
Health Net of California, Inc., supra, 1 Cal.5th at p. 1010.)

                                 12
      2. Governing Law: Interpretation of Insurance Policies
       “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.) The principles governing such an
interpretation are well-established: “Our goal in construing
insurance contracts, as with contracts generally, is to give effect
to the parties’ mutual intentions. If contractual language is clear
and explicit, it governs. 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. If these rules do not resolve an ambiguity, we
may then resort to the rule that ambiguities are to be resolved
against the insurer.” (Montrose Chemical Corp. of California v.
Superior Court (2020) 9 Cal.5th 215, 230 [cleaned up].)
       “The ‘tie-breaker’ rule of construction against the insurer
stems from the recognition that the insurer generally drafted the
policy and received premiums to provide the agreed protection.”
(Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th 315, 321.)
As a corollary rule of interpretation, intended “[t]o 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.” (Id. at
p. 322.)
       The insureds’ appeal requires analysis of the allegations in
their first amended complaint primarily in terms of one insuring
provision —coverage for business interruption due to “direct

                                 13
physical loss or damage to” covered property6—and one
exclusion—for “mortality and disease.” We consider each
provision in turn.
      3. The Insuring Provision: Direct Physical Loss or Damage
       Although “direct physical loss or damage” is a crucial term
in a first party commercial property insurance policy, it is left
undefined in commercial property policies, which define a
plethora of other words and phrases. Left to other interpretive
tools, Division Eight of this court in MRI Healthcare, supra,
187 Cal.App.4th 766 construed a similar, but not identical,
coverage term, “accidental direct physical loss” to insured
property as requiring “‘an actual change in insured property then
in a satisfactory state, occasioned by accident or other fortuitous
event directly upon the property causing it to become

6     In addition to alleging Fireman’s Fund breached the
policy’s business income and extra expense coverage, the first
amended complaint alleged Fireman’s Fund breached the policy’s
communicable disease coverage by failing to pay for direct
physical loss or damage to insured properties caused by public
health authority orders that insured properties be evacuated,
decontaminated or disinfected due to the COVID-19 outbreak and
the policy’s civil authority coverage by failing to pay for losses
caused by orders prohibiting access to the insured properties as a
result of direct physical loss or damage to property other than at
the insured’s location.
      The parties do not separately address these alleged
breaches in their briefs in this court, focusing instead on whether
we can hold, as a matter of law, the COVID-19 virus does not
cause damage to property, a ruling that would preclude all forms
of coverage under the policy. Similarly, the trial court in its order
sustaining Fireman’s Fund’s demurrer did not discuss these
alternative grounds for finding a policy breach.

                                 14
unsatisfactory for future use or requiring that repairs be made to
make it so.’” (Id. at p. 779.) The MRI Healthcare court
continued, “The word ‘direct’ used in conjunction with the word
‘physical’ indicates the change in the insured property must occur
by the action of the fortuitous event triggering coverage. In this
sense, ‘direct’ means ‘“[w]ithout intervening persons, conditions,
or agencies; immediate.” [Citation.]’ [Citation.] For loss to be
covered, there must be a ‘distinct, demonstrable, physical
alteration’ of the property.” (Ibid.)7
      The insureds argue MRI Healthcare’s definition of “direct
physical loss” misstated California law and was based, they
contend, solely on the erroneous assertion in a treatise of a

7      The insured in MRI Healthcare operated an imaging center
in a building leased from a third party. As a result of storms the
landlord was required to repair the roof over the room housing
the MRI machine. These repairs could not be undertaken unless
the machine was “ramped down” (demagnetized). Once the
machine was ramped down, it failed to ramp back up. The
insured alleged this failure constituted damage to the MRI
machine within the meaning of its commercial property
insurance. Because the damage was proximately caused by the
storms, which were a covered event, the insured claimed it was
entitled to recover both the amount it expended to repair the MRI
machine and the income loss sustained while the machine was
inoperable. (MRI Healthcare, supra, 187 Cal.App.4th at p. 770.)
Affirming the judgment entered after the trial court granted
State Farm’s motion for summary judgment—not an order
sustaining a demurrer—the court of appeal held, “The failure of
the MRI machine to satisfactorily ‘ramp up’ emanated from the
inherent nature of the machine itself rather than actual physical
‘damage.’” (Id. at p. 780.)

                                15
“widely held” rule that was, in fact, not at all widely held.8 In
support of this position the insureds cite Hughes v. Potomac Ins.
Co. (1962) 199 Cal.App.2d 239, disapproved on another ground in
Sabella v. Wisler (1963) 59 Cal.2d 21, 34, in which the court of
appeal held a home had suffered physical loss or damage when
the land underlying the home slid away, leaving the home
standing on the edge of a newly formed cliff (Hughes, at p. 243),9
as well as a third-party commercial general liability (CGL) case
in which the court held the existence of asbestos fibers on
surfaces in a building constituted property damage. (Armstrong
World Industries, Inc. v. Aetna Casualty & Surety Co., supra,
45 Cal.App.4th at p. 90.)
      Notwithstanding those authorities, the requirement an
insured allege an external force acted on the insured property
causing a physical change in the condition of the property to come
within the coverage provision for “direct physical loss or damage”
has been adopted by a number of other courts of appeal, including

8     In holding physical alteration was a necessary element of
“accidental direct physical loss,” the court in MRI Healthcare
quoted extensively from the third edition of Couch on Insurance
(1995). (See, e.g., MRI Healthcare, supra, 187 Cal.App.4th at
pp. 778-779.)
9     In rejecting the insurer’s argument coverage did not exist,
the Hughes court explained, “Despite the fact that a ‘dwelling
building’ might be rendered completely useless to its owners, [the
insurer] would deny that any loss or damage had occurred unless
some tangible injury to the physical structure itself could be
detected. Common sense requires that a policy should not be so
interpreted in the absence of a provision specifically limiting
coverage in this manner.” (Hughes v. Potomac Ins. Co., supra,
199 Cal.App.2d at pp. 248-249.)

                                16
our colleagues in Division Four of this court and Division One of
the Fourth Appellate District when deciding cases involving
COVID-19. (See United Talent Agency v. Vigilant Ins. Co. (2022)
77 Cal.App.5th 821, 830 (United Talent); Inns-by-the-Sea v.
California Mutual Ins. Co. (2021) 71 Cal.App.5th 688, 706
(Inns-by-the-Sea); see also Doyle v. Fireman’s Fund Ins. Co.
(2018) 21 Cal.App.5th 33, 38 [“‘“[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
where the insured merely suffers a detrimental economic impact
unaccompanied by a distinct, demonstrable, physical alteration of
the property”’”].) Because we conclude the insureds’ first
amended complaint adequately alleged direct physical loss or
damage to their covered property within the MRI Healthcare
definition, we need not address their additional argument that
MRI Healthcare should not be followed and direct physical loss or
damage may be shown without evidence of a physical alteration
in the insured property.
      4. The Insureds Adequately Alleged Direct Physical Loss or
         Damage Caused by the COVID-19 Virus and a Cause of
         Action for Breach of Contract by Fireman’s Fund
       “[T]he elements of a cause of action for breach of contract
are (1) the existence of the contract, (2) plaintiff’s performance or
excuse for nonperformance, (3) defendant’s breach, and (4) the
resulting damages to the plaintiff.” (Oasis West Realty, LLC v.
Goldman (2011) 51 Cal.4th 811, 821.) Fireman’s Fund’s
demurrer did not challenge elements (1), (2) or (4), contending
only it did not breach its obligation to pay benefits under the
policy because the insureds, having failed to allege any direct

                                 17
physical loss or damage to property, failed to allege a covered
loss.10
        To reiterate, with respect to covered loss, the insureds
alleged in their first amended complaint COVID-19 (that is, the
SARS-CoV-2 virus that causes the disease) not only lives on
surfaces but also bonds to surfaces through physicochemical
reactions involving cells and surface proteins, which transform
the physical condition of the property. The virus was present on
surfaces throughout the insured properties, including the hotel
lobby, kitchens at both the hotel and restaurant, employee
breakroom, service elevator and parking garage, as well as on the
properties’ food, bedding, fixtures, tables, chairs and countertops.
Because of the nature of the pandemic, the virus was continually
reintroduced to surfaces at those locations. As a direct result, the
insureds were required to close or suspend operations in whole or
in part at various times and incurred extra expense as they
adopted measures to restore and remediate the air and surfaces
at the insured properties. The insureds specifically alleged they
were required to “dispose of property damaged by COVID-19 and
limit operations at the Insured Properties.”
        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 (MRI
Healthcare, supra, 187 Cal.App.4th at p. 779). They also

10    The parties agree, as did the trial court, for purposes of
Fireman’s Fund’s demurrer the insureds’ other three causes of
action stand or fall with their ability to allege a covered loss.

                                 18
adequately alleged that physical loss or damage caused a
slowdown in, or cessation of, the operation of the insureds’
business while the covered property was restored or remediated,
thereby triggering their business interruption (“business income
and extra expense”) coverage.
       We recognize this conclusion is at odds with almost all (but
not all) decisions considering whether business losses from the
pandemic are covered by the business owners’ first person
commercial property insurance. Of course, federal cases, whether
considering insurance coverage under California law or that of
other states; state court decisions from other jurisdictions; and
decisions from other California courts of appeal are not binding
on us. (See, e.g., T.H. v. Novartis Pharmaceuticals Corp., supra,
4 Cal.5th at p. 175 [“[a]lthough the decisions of our sister states
and the lower federal courts may be instructive to the extent we
find their analysis persuasive, they are neither binding nor
controlling on matters of state law”]; Rubin v. Ross (2021)
65 Cal.App.5th 153, 163 [“decisions of lower federal courts are not
binding on us, even on questions of federal law”]; Sarti v. Salt
Creek Ltd. (2008) 167 Cal.App.4th 1187, 1193 [“there is no
horizontal stare decisis in the California Court[s] of Appeal”].)
Moreover, virtually all those decisions dismissing lawsuits
claiming coverage for business losses attributable to COVID-19
are readily distinguishable from the issue presented by the case
at bar.
       First, the pleading rules in federal court are significantly
different from those we apply when evaluating a trial court order
sustaining a demurrer. In Ashcroft v. Iqbal (2009) 556 U.S. 662
the Supreme Court held, to survive a motion to dismiss under the
Federal Rules of Civil Procedure, “a complaint must contain

                                19
sufficient factual matter, accepted as true, to ‘state a claim to
relief that is plausible on its face.’” (Id. at p. 678; see id. at p. 679
[“[O]nly a complaint that states a plausible claim for relief
survives a motion to dismiss. [Citation.] Determining whether a
complaint states a plausible claim for relief will, as the Court of
Appeals observed, be a context-specific task that requires the
reviewing court to draw on its judicial experience and common
sense”].) Unlike in federal court, the plausibility of the insureds’
allegations has no role in deciding a demurrer under governing
state law standards, which, as discussed, require us to deem as
true, “however improbable,” facts alleged in a pleading—
specifically here, that the COVID-19 virus alters ordinary
physical surfaces transforming them into fomites through
physicochemical processes, making them dangerous and
unusable for their intended purposes unless decontaminated. 11
       Second, a number of the cases rejecting COVID-19 claims,
including Inns-by-the-Sea, supra, 71 Cal.App.5th 688, the first
published California court of appeal decision involving a
COVID-19 insurance claim, and Musso & Frank Grill Co., Inc. v.
Mitsui Sumitomo Ins. USA Inc. (2022) 77 Cal.App.5th 753 (Musso
& Frank), the first such decision in the Second District, involved

11    Being the careful lawyers they are, two weeks after filing
their demurrer counsel for Fireman’s Fund moved for summary
judgment, arguing, based on discovery conducted to date, the
undisputed facts established the absence of any covered losses.
(We augment the record on our own motion pursuant to
California Rules of Court, rule 8.155(a)(1)(A) to include Fireman’s
Fund’s September 3, 2021 motion for summary judgment and
separate statement in support of the motion.) As part of its
ruling sustaining the demurrer, the trial court vacated the
hearing date scheduled for that motion.

                                   20
allegations of loss of use of 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 the
virus on the insured premises caused physical damage to covered
property, which in turn led to business losses. (See, e.g., Inns-by-
the-Sea, at pp. 703 [“Inns alleges that it ceased operations ‘as a
direct and proximate result of the Closure Orders.’ It does not
make the proximate cause allegation based on the particular
presence of the virus on its premises”];12 Musso & Frank, at
pp. 758-759 [citing Inns-by-the Sea and holding a policy requiring
physical loss or damage to property did not cover losses incurred
as a result of the Los Angeles Mayor’s pandemic-related order
mandating that restaurants close by midnight]; see also Mudpie,
Inc. v. Travelers Cas. Ins. Co. (9th Cir. 2021) 15 F.4th 885, 892
(Mudpie) [“Mudpie’s complaint does not identify a ‘distinct,
demonstrable, physical alteration of the property’. . . . Mudpie
alleges the Stay at Home Orders temporarily prevented Mudpie
from operating its store as it intended, and urges us to interpret

12     The court of appeal in Inns-by-the-Sea acknowledged, “in a
hypothetical scenario,” “an invisible airborne agent [c]ould cause
a policyholder to suspend operations because of direct physical
damage to property. . . . ‘For example, a restaurant might need
to close for a week if someone in its kitchen tested positive for
COVID-19, requiring the entire facility to be thoroughly sanitized
and remain empty for a period.’” (Inns-by-the-Sea, supra,
71 Cal.App.5th at pp. 704-705.) The court emphasized, however,
that was not the scenario it was considering: “[T]he complaint
here simply does not describe such a circumstance because it
bases its allegations on the situation created by the Orders,
which were not directed at a particular business establishment
due to the presence of COVID-19 on that specific business’s
premises.” (Id. at p. 704.)

                                 21
‘direct physical loss of or damage to’ to be synonymous with ‘loss
of use’”].)
       Not distinguishable on this ground, however, is United
Talent, supra, 77 Cal.App.5th 821, Division Four’s recent decision
affirming a dismissal following an order sustaining a demurrer
without leave to amend, which, like the trial court in the case at
bench, found, as a matter of law, the insured’s allegations that
the physical presence of the virus on insured property constituted
direct physical loss or damage were insufficient to trigger
coverage. (Id. at p. 838.)13 Rejecting the analogy to the
infiltration of asbestos considered in Armstrong World Industries,
Inc. v. Aetna Casualty & Surety Co., supra, 45 Cal.App.4th 1 and
the presence of environmental contaminants found sufficient for
coverage in AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807,
like Armstrong a case involving a CGL policy, the court reasoned,
“[T]he virus exists worldwide wherever infected people are
present, it can be cleaned from surfaces through general
disinfection measures, and transmission may be reduced or
rendered less harmful through practices unrelated to the
property, such as social distancing, vaccination, and the use of
masks. Thus, the presence of the virus does not render a
property useless or uninhabitable, even though it may affect how

13     United Talent, agreeing with the analysis in Inns-by-the-
Sea, also held temporary loss of use of a property due to
pandemic-related closure orders, without more, did not constitute
direct physical loss or damage and was insufficient for a claim of
coverage under commercial property insurance policies. (United
Talent, supra, 77 Cal.App.5th at pp. 830-832.) The insureds in
this case made no such claim.

                                22
people interact with and within a particular space.” (United
Talent, at p. 838.)14
       Thus, the United Talent court, based on its de novo review,
affirmed a trial court ruling that, like the decision we review,
found—without evidence—the COVID-19 virus does not damage
property. But the insureds here expressly alleged that it can and
that it did, including the specific allegation they were required to
dispose of property damaged by COVID-19. We are not
authorized to disregard those allegations when evaluating a
demurrer, as the court did in United Talent, based on a general
belief that surface cleaning may be the only remediation
necessary to restore contaminated property to its original, safe-
for-use condition. That was not always the understanding of the
appropriate precautions to take with items potentially exposed to
the virus (many people, in the early months of the pandemic, left
groceries and other items outside their homes for several days
after first sanitizing them); the insureds expressly alleged
disinfecting affected objects does not repair or remediate the
actual physical alteration to property caused by the virus; and
the trial court did not take judicial notice of the effectiveness of
cleaning as a proposition “not reasonably subject to dispute”
pursuant to Evidence Code section 452, subdivisions (g) or (h).
       Even if there had been evidence subject to proper judicial
notice to establish that disinfecting repaired any alleged property
damage, it would not resolve whether contaminated property had
been damaged in the interim, nor would it alleviate any loss of
business income or extra expenses. As the insureds argue on

14    The court added, “UTA has not alleged that its properties
required unique abatement efforts to eradicate the virus.”
(United Talent, supra, 77 Cal.App.5th at p. 839.)

                                 23
appeal, the duration of exposure may be relevant to the measure
of policy benefits; it does not negate coverage.
       Finally, Fireman’s Fund’s argument and the trial court’s
conclusion that the COVID-19 virus cannot cause direct physical
loss or damage to property are directly undermined by the
policy’s plain language establishing communicable disease
coverage. Fireman’s Fund asserts the insureds must allege an
obvious physical alteration, for example, “broken chairs, dented
walls, or smashed windows,” to adequately allege direct physical
loss or damage. Because it is undisputed the COVID-19 virus (or
presumably any communicable disease) does not cause such
damage, Fireman’s Fund argues, it cannot cause property
damage as defined in the policy. However, as discussed, the
communicable disease coverage states Fireman’s Fund will pay
for “direct physical loss or damage” to insured property “caused
by or resulting from a covered communicable disease event,”
including necessary costs to “[r]epair or rebuild [insured
property] which has been damaged or destroyed by the
communicable disease.” This language explicitly contemplates
that a communicable disease, such as a virus, can cause damage
or destruction to property and that such damage constitutes
direct physical loss or damage as defined in the policy.
Construing the policy provisions together, as we must, this
language precludes the interpretation that direct physical loss or
damage categorically cannot be caused by a virus. (See Civ.
Code, § 1641 [“[t]he whole of a contract is to be taken together, so
as to give effect to every part, if reasonably practicable, each
clause helping to interpret the other”].)

                                 24
      5. The Mortality and Disease Exclusion
       If, as the trial court ruled and Fireman’s Fund argues on
appeal, the policy’s mortality and disease exclusion bars all loss
or damage caused by a virus, then it would be immaterial
whether the first amended complaint alleged facts showing direct
physical loss or damage to property from the COVID-19 virus.
The most reasonable interpretation of that policy language,
however, does not exclude the insureds’ claim of loss.
       Significantly, in the wake of the SARS outbreak (caused by
the SARS-CoV virus) in the early 2000’s, the Insurance Services
Office (ISO) in 2006 introduced a new industry-standard
endorsement for commercial property policies, “CP-01-40-07-06—
Exclusion Of Loss Due To Virus Or Bacteria,” which stated there
is no coverage for losses 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. (ISO
Circular, New Endorsements Filed To Address Exclusion of Loss
Due to Virus or Bacteria (July 6, 2006)
 [as of July 13, 2022], archived at
https://perma.cc/NXM6-36HM.) That exclusion was included, for
example, in the policy at issue in Musso & Frank, supra,
77 Cal.App.5th 753. Accordingly, Division One of this district
held, in rejecting the insured’s claim for losses incurred as a
result of its pandemic-related business closure, “even assuming
Musso & Frank could bring itself within the insuring clause, the
virus exclusion would bar coverage.” (Id. at p. 761; accord,
Mudpie, supra, 15 F.4th at p. 893 [the policy’s virus exclusion,
which provided, “[Travelers] will not pay for loss or damage

                                25
caused by or resulting from any virus, bacterium or other
microorganism that induces or is capable of inducing physical
distress, illness or disease,” bars coverage for Mudpie’s claimed
COVID-19-related losses].)
       The policy issued to the insureds did not contain this virus
or bacteria exclusion. Instead, as discussed, the exclusion
provided only that the insurer would not pay for loss, damage or
expense caused by, or resulting from, “[m]ortality, death by
natural causes, disease, sickness, any condition of health,
bacteria, or virus.” Particularly when compared to the all-
encompassing language of the ISO virus exclusion, the most
reasonable interpretation of this language is that it precludes
coverage for losses related to death from any of the listed
causes—that is, it excludes losses resulting from a death caused
by a virus or other disease, and not more broadly any otherwise
covered losses resulting from a virus or a disease. At the very
least, the language is ambiguous. Absent extrinsic evidence of
the parties’ expectations—hardly surprising given the
preliminary stage of the proceedings—the exclusion must be
interpreted narrowly, at least for now. (See Montrose Chemical
Corp. of California v. Superior Court, supra, 9 Cal.5th at p. 230;
see also MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th
635, 648 [“‘[a]n insurer cannot escape its basic duty to insure by
means of an exclusionary clause that is unclear’”].)
       This understanding of the exclusion’s more limited reach is
reinforced by the policy’s communicable disease coverage, which
applies if there is a direct physical loss or damage to insured
property caused by a public health authority order that a location
be evacuated, decontaminated or disinfected due to the outbreak
of a transmissible virus. If all losses caused by a virus were

                                26
excluded, even those indirectly resulting from the virus, as
Fireman’s Fund contends, the communicable disease coverage
would be meaningless. It is our obligation to interpret the policy
in a manner that does not leave one of its provisions without
effect. (See Civ. Code, § 1641 [“[t]he whole of a contract is to be
taken together, so as to give effect to every part, if reasonably
practicable, each clause helping to interpret the other”]; AIU Ins.
Co. v. Superior Court, supra, 51 Cal.3d at pp. 827-828 [insurance
policy should not be read in such a way as to render some of its
terms meaningless]; Collin v. American Empire Ins. Co. (1994)
21 Cal.App.4th 787, 818 [same].) We do so by holding the
mortality and disease exclusion does not bar the insured’s claims
in this lawsuit.
      6. Conclusion
      Quoting from one of the many out-of-state federal court
decisions cited in its respondent’s brief, Fireman’s Fund argues,
“‘Common sense’ confirms that ‘the pandemic impacts human
health and human behavior, not physical structures,’” and
asserts “common experience from all of us being in homes,
courtrooms, or other structures during the pandemic shows that
COVID-19 does not physically alter the structure of property.”
We acknowledge it might be more efficient if trial courts could
dismiss lawsuits at the pleading stage based on the judges’
common sense and understanding of common experience rather
than waiting to actually receive evidence to determine whether
the plaintiff’s factual allegations can be proved. But that is not
how the civil justice system works in this state.
      Because the insureds adequately alleged losses covered by
Fireman’s Fund’s policy, they are entitled to an opportunity to
present their case, at trial or in opposition to a motion for

                                27
summary judgment. The judgment of dismissal based on the
trial court’s disbelief of those allegations, whether ultimately
reasonable or not, must be reversed.
                          DISPOSITION
      The judgment is reversed, and the cause remanded with
directions to the trial court to vacate its order sustaining the
demurrer without leave to amend and to enter a new order
overruling the demurrer. The insureds are to recover their costs
on appeal.

                                            PERLUSS, P. J.
      We concur:

            SEGAL, J.

            FEUER, J.

                                 28