Filed 7/5/23 Spaghettini v. Fireman’s Fund Ins. Co. CA1/5
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FIVE
SPAGHETTINI, LP,
Plaintiff and Appellant, A163858
v.
FIREMAN’S FUND INSURANCE (Sonoma County
COMPANY, Super. Ct. No. SCV-266378)
Defendant and Respondent.
Spaghettini, LP sued its insurer, Fireman’s Fund
Insurance Company, for breach of contract, among other causes
of action, after Fireman’s denied Spaghettini’s claim for losses it
sustained because of the COVID-19 pandemic. The trial court
sustained Fireman’s demurrer without leave to amend.
Spaghettini appeals from the judgment entered in Fireman’s
favor. Spaghettini argues that the trial court erred by concluding
Spaghettini’s COVID-19 pandemic losses were not covered under
its commercial property insurance policy. Finding no error, we
affirm.
BACKGROUND
A.
Spaghettini owns and operates a restaurant in Orange
County. It purchased a commercial property insurance policy
1
from Fireman’s, which was effective between February 2, 2020
and February 2, 2021.
In the policy’s provision for business income and extra
expense coverage, Fireman’s promised to pay for “the actual loss
of business income and necessary extra expense you sustain due
to the necessary suspension of your operations during the period of
restoration arising from direct physical loss or damage to
property at a location, or within 1,000 feet of such location,
caused by or resulting from a covered cause of loss.” (Italics
added and bold omitted.) A “slowdown or cessation of [business]
operations” at the insured property is a “[s]uspension” under the
policy. (Bold omitted.) Coverage under this provision is limited
to the “[p]eriod of restoration,” during which property is
“repaired, rebuilt, or replaced.” (Bold omitted.)
The policy also contains an extension of coverage for
communicable disease, which provides: “We will pay for direct
physical loss or damage to Property Insured caused by or
resulting from a covered communicable disease event at a location
including the following necessary costs incurred to: [¶] (a) Tear
out and replace any part of Property Insured in order to gain
access to the communicable disease; [¶] (b) Repair or rebuild
Property Insured which has been damaged or destroyed by the
communicable disease; and [¶] (c) Mitigate, contain, remediate,
treat, clean, detoxify, disinfect, neutralize, cleanup, remove,
dispose of, test for, monitor, and assess the effects [of] the
communicable disease.” (Italics added and bold omitted.)
B.
In March 2020, in response to the COVID-19 pandemic, the
Governor of California and Orange County issued shelter-in-place
orders mandating all restaurants suspend in-person dining. The
orders allowed restaurants to operate only for take-out, drive-
through, or food delivery. Because of these and later orders (of
which the trial court took judicial notice), Spaghettini was forced
2
to shut down its indoor dining, which significantly reduced its
business.
That same month, Spaghettini submitted notice to
Fireman’s of its “property and business-interruption loss” and the
presence of infected persons on or near its property. Fireman’s
rejected Spaghettini’s claim, explaining that there was no
coverage because it suffered no physical loss or damage to
property.
Spaghettini sued Fireman’s for breach of contract, breach of
the implied covenant of good faith and fair dealing, false promise,
and negligent misrepresentation. In its operative complaint,
Spaghettini alleges that, in March 2020, state and local
governments issued business closure and stay-at-home orders to
control the spread of COVID-19 within the community. Later,
government orders imposed strict capacity limits and distancing
requirements. Spaghettini also alleges that the virus was
present at its restaurant, as evidenced by the fact that
individuals who tested positive for the coronavirus were present
at the covered property in 2020 and 2021.
Spaghettini asserts it was “forced to suspend and reduce its
business” both by the government orders that compelled a
shutdown of business operations and by physical damage or loss
caused by “physical droplets” containing COVID-19 landing on
surfaces and then “attach[ing] to and adher[ing] on surfaces and
materials, . . . becom[ing] a part of those surfaces and materials
[and] converting the surfaces and materials to fomites.”
Spaghettini further alleges that this “represents a physical
change in the affected surface or material”—changing them from
safe to dangerous—“which constitutes physical loss and damage.”
The complaint also includes allegations that COVID-19 “caused
such physical loss and damage to [Spaghettini’s] property.”
In addition to lost business revenue due to the suspension
of operations, Spaghettini alleges that, by physically altering,
3
“infest[ing],” and rendering its property unusable, COVID-19
necessitated it incur additional expenses to clean, sanitize,
repair, alter, modify, or otherwise make its restaurant safe.
C.
Fireman’s filed a demurrer, asserting that, as a matter of
law, there was no coverage because Spaghettini had not
adequately alleged direct physical loss or damage to the property
and, in the alternative, it had not alleged facts showing that its
COVID-19 losses were caused by direct physical loss or damage.
In addition, Fireman’s argued that Spaghettini could not
establish the prerequisites necessary for communicable disease
coverage.
The trial court sustained Fireman’s demurrer without leave
to amend. The court noted that “the presence of Covid-19
particles does not amount to ‘distinct, demonstrable, physical
alteration of the property,’ ” and that, accordingly, Spaghettini
failed to allege direct physical loss or damage to its property. The
trial court also observed that Spaghettini failed to allege the
occurrence of a “communicable disease event” because it did not
allege that a public health authority ordered that Spaghettini’s
premises in particular must be evacuated, decontaminated, or
disinfected due to an outbreak there. The court entered
judgment in Fireman’s favor.
DISCUSSION
A.
Spaghettini argues that the trial court erred by sustaining
Fireman’s demurrer because Spaghettini adequately alleged the
“ ‘direct physical loss or damage’ ” required for coverage under
the policy’s business income and extra expense provision. We
have independently reviewed Spaghettini’s operative complaint
to determine whether it alleges facts sufficient to state a cause of
action under any legal theory. (Mathews v. Becerra (2019) 8
4
Cal.5th 756, 768 (Mathews).) Although our opinion is based on
different reasoning, we conclude the trial court did not err by
sustaining Fireman’s demurrer without leave to amend.
1.
In reviewing the sufficiency of a complaint, we treat the
demurrer as admitting all properly pleaded facts. But we do not
accept the truth of factual or legal conclusions. (Mathews, supra,
8 Cal.5th at p. 768.) We also consider the complaint’s exhibits
and matters that may be judicially noticed. (Blank v. Kirwan
(1985) 39 Cal.3d 311, 318; Hoffman v. Smithwoods RV Park, LLC
(2009) 179 Cal.App.4th 390, 400 (Hoffman).) We affirm a
judgment of dismissal if it is proper on any grounds stated in the
demurrer, regardless of whether the court stated that ground as
its rationale. (Carman v. Alvord (1982) 31 Cal.3d 318, 324.)
Interpretation of an insurance policy is a question of law.
(Palmer v. Truck Ins. Exchange (1999) 21 Cal.4th 1109, 1115.)
We aim to give effect to the parties’ mutual intentions. (Ibid.;
Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264;
see Civ. Code, § 1636.) An insurance policy “must be examined as
a whole, and in context, to determine whether an ambiguity
exists.” (Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th
315, 322 (Minkler).) “If contractual language is clear and explicit,
it governs.” (Bank of the West, at p. 1264; see Civ. Code, § 1638.)
Terms are to be interpreted in their lay or ordinary sense.
(E.M.M.I. Inc. v. Zurich American Ins. Co. (2004) 32 Cal.4th 465,
471; see Civ. Code, § 1644.)
If the terms are ambiguous—that is susceptible of more
than one reasonable interpretation—we interpret them to protect
the insured’s objectively reasonable expectations. (Bank of the
West v. Superior Court, supra, 2 Cal.4th at pp. 1264-1265.) “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, supra, 49 Cal.4th at p. 321.)
5
The insured bears the burden of establishing that its claim
falls within a policy’s coverage. (Minkler, supra, 49 Cal.4th at p.
322.)
2.
Spaghettini’s argument on appeal is two-pronged. First, it
contends that the trial court misinterpreted the policy because
“direct physical loss or damage” does not require a “distinct,
demonstrable, physical alteration” of the property and that
allegations of loss of use suffice. In the alternative, if physical
tangible alteration is required, Spaghettini insists that it has
satisfied this requirement by alleging both the presence of
COVID-19 at its property and that COVID-19 particles transform
once safe surfaces into property that is potentially dangerous.
The meaning of “direct physical loss or damage” is well
established under California law. To satisfy the policy terms,
property must undergo a “ ‘distinct, demonstrable, physical
alteration.’ ” (MRI Healthcare Center of Glendale, Inc. v. State
Farm General Ins. Co. (2010) 187 Cal.App.4th 766, 779 (MRI
Healthcare); Starlight Cinemas, Inc. v. Massachusetts Bay Ins.
Co. (2023) 91 Cal.App.5th 24, 38.) “ ‘[D]etrimental economic
impact’ ” does not suffice on its own. (MRI, supra, at p. 779;
accord, Musso & Frank Grill Co., Inc. v. Mitsui Sumitomo Ins.
USA Inc. (2022) 77 Cal.App.5th 753, 759-760 (Musso & Frank).)
Spaghettini maintains that, in requiring physical
alteration, MRI Healthcare misstated California law.
Specifically, it insists that the treatise on which MRI Healthcare
relied for this proposition—10A Couch on Insurance (3d ed. 2005)
§ 148:46—was wrong. (MRI Healthcare, supra, 187 Cal.App.4th
at pp. 778-779.)
This may have been a stronger line of attack when
Spaghettini opposed Fireman’s demurrer in the trial court. Since
then, however, numerous California courts of appeal have
6
considered the same argument.1 And all but one of those courts
have held (or assumed) that “direct physical loss or damage,” as
used in a business interruption policy, requires a physical
alteration of the covered property. (See Apple Annie, LLC v.
Oregon Mutual Ins. Co. (2022) 82 Cal.App.5th 919, 935; Marina
Pacific Hotel & Suites, LLC v. Fireman’s Fund Ins. Co. (2022) 81
Cal.App.5th 96, 107-108 (Marina Pacific); United Talent Agency
v. Vigilant Ins. Company (2022) 77 Cal.App.5th 821, 830-833
(United Talent); Musso & Frank, supra, 77 Cal.App.5th at pp.
758-760; Inns-by-the-Sea v. California Mutual Ins. Co. (2021) 71
Cal.App.5th 688, 705-708 (Inns).)2 Accordingly, Spaghettini now
faces a solid “wall of precedent” that holds that direct physical
loss or damage requires physical alteration of the covered
property. (Apple Annie, supra, at p. 935 [“[w]hen originally
published, the Couch formulation may not have reflected
widespread acceptance by the courts, but such acceptance has
now been achieved”].) We agree with this conclusion and see no
need to repeat the analysis.
Coast Restaurant Group, Inc. v. Amguard Ins. Co. (2023) 90
Cal.App.5th 332 is the sole outlier. In Coast Restaurant, Division
Three of the Fourth District recently held that a restaurant’s
losses (caused by COVID-19 closure orders) were potentially
covered even without physical damage or alteration. (Id. at pp.
339-340.) The court concluded that deprivation of important
1 We received supplemental briefing from the parties
addressing the opinions decided after their initial briefing.
2 Applying California law, the Ninth Circuit Court of
Appeals has also reached the same conclusion. (See Mudpie, Inc.
v. Travelers Casualty Insurance Co. of America (9th Cir. 2021) 15
F.4th 885, 892 [concluding business interruption policy providing
coverage for “physical loss and damage” requires some form of
demonstrable, physical alteration of property and that mere loss
of use due to COVID-19 closure orders is insufficient to trigger
coverage].)
7
property rights was sufficient standing alone to constitute direct
physical loss because the government orders “[directly] affected
how the physical space of the property and the physical objects
(chairs, tables, etc.) in that space could or could not be used.” (Id.
at p. 340.) We do not consider Coast Restaurant’s reasoning
persuasive. In any event, in its supplemental briefing,
Spaghettini does not suggest we follow it.
Spaghettini has not demonstrated any error in the trial
court’s interpretation of the policy terms.
3.
Alternatively, Spaghettini argues that it adequately alleged
“direct physical loss or damage” under the MRI Healthcare
formulation because the presence of the virus physically altered
property at the restaurant. There is a split of authority on this
question. (Compare United Talent, supra, 77 Cal.App.5th at pp.
826, 834-835, 838 [allegations that virus altered property by
adhering to its surface are insufficient] with Marina Pacific,
supra, 81 Cal.App.5th at pp. 108-109 [court must accept
allegations that virus altered property, however improbable].) In
Another Planet Entertainment, LLC v. Vigilant Insurance Co.
(9th Cir. 2022) 56 F.4th 730, 731, 733-734, the United States
Court of Appeals for the Ninth Circuit certified that question to
the California Supreme Court. (Another Planet Entertainment,
LLC v. Vigilant Insurance Co., S277893, Supreme Ct. Mins., Mar.
1, 2023.)
We are inclined to disagree with Fireman’s argument (with
which the trial court agreed) that the COVID-19 virus
categorically cannot cause direct physical loss or damage to
property. Spaghettini points out that this position appears
inconsistent with the policy’s communicable disease coverage.
(Marina Pacific, supra, 81 Cal.App.5th at p. 112 [observing that
communicable disease coverage (identical to that contained in the
policy before us) “explicitly contemplates that a communicable
8
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”].) However, we need not decide
the issue here because, even if we assume Spaghettini is correct
and that it adequately alleges physical alteration of its property,
there is still no coverage under the facts it pleads.
The problem is causation—specifically, whether the
physical presence of the virus at the restaurant caused
Spaghettini to suspend its operations and thus incur the lost
income and expenses. (See Inns, supra, 71 Cal.App.5th at pp.
703-705; cf. Best Rest Motel, Inc. v. Sequoia Ins. Co. (2023) 88
Cal.App.5th 696, 706.) Remember that the policy only provides
coverage for loss of business income and necessary extra expense
sustained “due to the necessary suspension of your operations
during the period of restoration arising from direct physical loss
of or damage to property at a location.” (Italics added.) The
question thus becomes: What caused Spaghettini to suspend its
operations?
Spaghettini’s complaint has two alternative causation
theories. First, Spaghettini alleges that the Governor’s and
Orange County’s closure orders caused Spaghettini’s reduction in
operations, loss of income, and extra expenses. Specifically,
Spaghettini alleges that “[s]eparately, and independently, [it]
closed due to the California statewide and local Orange County
related Closure and Shelter Orders which prevented and
precluded public access to the restaurant for the foreseeable
future.” (Italics added.)
This causation theory is well supported with factual
allegations but does not meet the terms of the policy. The
complaint extensively discusses the March 2020 county and state
orders and quotes their mandates—prohibiting public and
private gatherings and allowing restaurants across the entirety
of each respective jurisdiction to remain open only for takeout
9
and delivery. It also alleges that it was not until several months
later that the state and county permitted it to reopen “with strict
reduced capacity and distancing guidelines in place.” However,
under the terms of the policy, Spaghettini cannot recover its
losses attributable to the government’s closure orders, which
were issued to lessen the virus’s circulation throughout society
generally, not Spaghettini’s restaurant specifically. (See, e.g.,
Starlight Cinemas, Inc. v. Massachusetts Bay Ins. Co., supra, 91
Cal.App.5th at p. 38; but see Coast Restaurant Group, Inc. v.
Amguard Ins. Co., supra, 90 Cal.App.5th at pp. 339-340.)
Second, Spaghettini alleges generally that COVID-19’s
presence on the property caused the losses. But it does not
adequately plead facts that support this theory. Nowhere does
the complaint allege, for example, that Spaghettini suspended
take-out service for a month because the virus was present in its
kitchen and had caused several cooks to become ill. (See, e.g.,
Marina Pacific, supra, 81 Cal.App.5th at pp. 101-102, 108-109
[complaint adequately alleged causal link between business
slowdown and COVID-19’s physical presence in hotel when
positive tests of multiple employees prompted health authorities
to order hotel to evacuate and decontaminate]; Shusha, Inc. v.
Century-National Ins. Co. (2022) 87 Cal.App.5th 250, 266
[complaint adequately alleged causal link when restaurant
voluntarily shut down completely (including takeout and delivery
business), on realizing presence of virus created dangerous
condition], review granted, Apr. 19, 2023, S278614.) We cannot
assume the truth of the complaint’s unsupported conclusions.
(See Mathews, supra, 8 Cal.5th at p. 768; Perez v. Golden Empire
Transit Dist. (2012) 209 Cal.App.4th 1228, 1236 [“specific
allegations in a complaint control over an inconsistent general
allegation”]; Hoffman, supra, 179 Cal.App.4th at p. 400 [courts
may disregard allegations inconsistent with complaint’s exhibits
or contrary to judicially noticed facts].)
10
Inns, supra, 71 Cal.App.5th 688 involved causation
allegations like Spaghettini’s. The insured hotel alleged that
COVID-19 was present on its premises and that its presence
caused the hotel to suspend operations. (Id. at pp. 698-699, 703.)
It also alleged “that it ceased operations ‘as a direct and
proximate result of the Closure Orders.’ ” (Id. at p. 703.) The
Inns court explained that the only factually supported theory was
the latter allegation and that it was fatal to the former: “[The
insured hotel] cannot reasonably allege that the presence of the
COVID-19 virus on its premises is what caused the premises to
be uninhabitable or unsuitable for their intended purpose. . . . [A]
review of the actual text of the Orders reveal that they were
issued because the COVID-19 virus was present throughout San
Mateo and Monterey Counties, not because of any particular
presence of the virus on [the hotel’s] premises. . . . [¶] . . . [¶]
[T]he lack of causal connection between the alleged physical
presence of the virus on [the insured’s] premises and the
suspension of [its] operations can be best understood by
considering what would have taken place if [the insured] had
thoroughly sterilized its premises to remove any trace of the virus
after the Orders were issued. In that case, [the insured] would
still have continued to incur a suspension of operations because
the Orders would still have been in effect and the normal
functioning of society still would have been curtailed.” (Id. at p.
704.)
The same logic applies here. Spaghettini admits that it
suspended or reduced its operations because the government
orders forced it to. The judicially noticed orders effectively
deprived the restaurant of customers by initially barring public
and private gatherings and then, later, imposing strict capacity
limits and distancing requirements. We must accept the truth of
these allegations. (Mathews, supra, 8 Cal.5th at p. 768; Castillo
v. Barrera (2007) 146 Cal.App.4th 1317, 1324 [allegations in a
complaint are judicial admissions].) Spaghettini’s specific and
11
factually supported allegations control over its inconsistent
conclusory allegation—that the presence of the virus at the
restaurant caused the losses. (See Perez v. Golden Empire
Transit Dist., supra, 209 Cal.App.4th at p. 1236; Hoffman, supra,
179 Cal.App.4th at p. 400.)
The trial court did not err in concluding there was no
business interruption coverage under the policy.
B.
We also reject Spaghettini’s argument that it is entitled to
coverage under the policy’s communicable disease provision.
1.
The policy’s communicable disease coverage states: “We
will pay for direct physical loss or damage to Property Insured
caused by or resulting from a covered communicable disease event
at a location including the following necessary costs incurred to:
[¶] (a) Tear out and replace any part of Property Insured in order
to gain access to the communicable disease; [¶] (b) Repair or
rebuild Property Insured which has been damaged or destroyed
by the communicable disease; and [¶] (c) Mitigate, contain,
remediate, treat, clean, detoxify, disinfect, neutralize, cleanup,
remove, dispose of, test for, monitor, and assess the effects [of]
the communicable disease.” (Italics added and bold omitted.)
“Communicable disease event means 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.” (Italics added and bold
omitted.) “Communicable disease means any disease, bacteria, or
virus that may be transmitted directly or indirectly from human
or animal to a human.” (Bold omitted). “Location means the
legal boundaries of a parcel of property at the address described
in the Declarations. If the word ‘location’ is not shown in bold
face, then such reference includes all of the following: [¶] a.
12
Location(s); and [¶] b. The legal boundaries of a parcel of property
insured by Newly Acquired Location Coverage, or Unnamed
Location Coverage, or both.” (Bold omitted.)
2.
In Amy’s Kitchen, Inc. v. Fireman’s Fund Ins. Co. (2022) 83
Cal.App.5th 1062 (Amy’s Kitchen), Division Four of this court
considered a communicable disease coverage extension identical
to the one before us. (Id. at p. 1065.) The court held that
communicable disease coverage “applies only if a public health
authority has ordered decontamination ‘due to the outbreak of a
communicable disease at [the insured property].’ ” (Id. at p.
1072.) Because the insured alleged only that government
authorities issued orders that applied jurisdiction-wide due to
general conditions in the area—and did not allege that any public
health authority ordered its premises decontaminated,
evacuated, or disinfected based on an outbreak at its particular
premises—the court concluded that the demurrer was properly
sustained because the insured failed to allege facts showing the
occurrence of a “communicable disease event.” (Id. at pp. 1067,
1069-1072.)
In other words, the policy covers a disease outbreak at the
insured property itself—such as salmonella or listeria in the
restaurant’s kitchen—that leads to a government order requiring
the restaurant to fix the problem. We cannot read the word
“location” so broadly that it covers a worldwide pandemic—a
disease that was literally everywhere and that led to government
orders prohibiting gatherings jurisdiction-wide. (Amy’s Kitchen,
supra, 83 Cal.App.5th at pp. 1067, 1069-1072.)
Spaghettini fails to allege that any government authority
ordered its premises evacuated, decontaminated, or disinfected
due to an outbreak of COVID-19 at its insured premises. The
closure orders do not fill that role. Contrary to Spaghettini’s
assertion in its briefs, the state and county orders were not
13
promulgated in response to conditions at Spaghettini’s
restaurant—instead, as Spaghettini’s complaint accurately
states, they applied to the entire state or county (respectively)
and were measures taken to slow the spread of COVID-19 among
the public, not at Spaghettini’s premises specifically. (See
Paradigm Care & Enrichment Center, LLC v. West Bend Mutual
Insurance Co. (7th Cir. 2022) 33 F.4th 417, 423 [“ ‘due to’ clearly
requires some degree of causation between a shutdown order and
a communicable disease outbreak ‘at the insured premises’ ”],
italics omitted.)
Because Spaghettini fails to meet its burden to
demonstrate coverage under either the policy’s business income
and extra expense provision or the communicable disease
provision, we need not consider whether any policy exclusions
apply.
C.
Nor did the trial court abuse its discretion in denying leave
to amend.
When a demurrer is sustained without leave to amend, we
“decide whether there is a reasonable possibility that the defect
can be cured by amendment: if it can be, the trial court has
abused its discretion and we reverse.” (City of Dinuba v. County
of Tulare (2007) 41 Cal.4th 859, 865.)
Spaghettini fails to identify any facts that it could allege
that would demonstrate either the occurrence of a communicable
disease event or that any suspension of operations was caused by
physical damage or loss rather than the government orders alone.
(See Saint Francis Memorial Hospital v. State Dept. of Public
Health (2021) 59 Cal.App.5th 965, 974 [“ ‘[i]t is the plaintiff’s
burden on appeal to show in what manner it would be possible to
amend a complaint to change the legal effect of the pleading’ ”];
Amy’s Kitchen, supra, 83 Cal.App.5th at pp. 1072-1073 [leave to
14
amend granted because insured’s counsel represented he “ ‘had
specific calls with the county’ ” and that its location had been
specifically directed to clean]; Inns, supra, 71 Cal.App.5th at pp.
704-705, 713-714.)
The trial court did not abuse its discretion in denying leave
to amend.
DISPOSITION
The judgment is affirmed. The parties shall bear their own
costs on appeal. (Cal. Rules of Court, rule 8.278(a)(5).)
15
______________________
BURNS, J.
We concur:
____________________________
JACKSON, P.J.
____________________________
LANGHORNE, J.*
A163858
* Judge of the Napa County Superior Court, assigned by the
Chief Justice pursuant to article VI, section 6 of the California
Constitution.
16