One of the threshold issues in COVID-19 insurance coverage cases that have been brought across the country is whether the policyholder’s allegations meet the applicable pleading standard in alleging that the virus caused physical loss or damage. In many cases, the courts have gotten it wrong, effectively holding policyholders to a higher standard than required. But recently, a California federal judge righted those wrongs by acknowledging the correct pleading standard in that case, which is whether the allegations state a plausible claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). The Court, here, correctly recognized that the policyholder, the Los Angeles Lakers, met that pleading standard when it alleged that the COVID-19 virus can cause physical loss or damage by physically altering property.
In its complaint, the Los Angeles Lakers alleged that the virus physically altered its property by changing its chemical and physical property conditions, creating viral vectors that required remedial measures before the property was safe again. Los Angeles Lakers, Inc. v. Fed. Ins. Co., 591 F. Supp. 3d 672 (C.D. Cal. 2022), adhered to on reconsideration, 2022 WL 16571193 (C.D. Cal. Oct. 26, 2022). The Court agreed that these allegations by the Lakers adequately pled physical alteration to support a claim for property damage. The insurer requested reconsideration of the decision, and the Court emphatically affirmed its prior decision, explaining its rationale as follows:
The Court lacks the scientific expertise necessary to conclude, based solely on the allegations in the FAC . . . that it is not plausible for the Lakers’ property to have been physically altered by the Virus, which the Lakers adequately alleged. Consequently, the Court, in the March 17 Order, concluded that the Lakers’ theory was plausible. Whether the Lakers can actually prove its theory will be determined at summary judgment or trial.
In supporting its rationale, the Court looked to the development of California state appellate law, ultimately focusing on a more recent decision where the California Court of Appeal for the Second District reached the same conclusion as here in Marina Pac. Hotel and Suites, LLC v. Fireman’s Fund Ins. Co., 81 Cal. App. 5th 96 (2022). Similar to the Los Angeles Lakers, the policyholder in Marina Pacific alleged that COVID-19 “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 court held that the policyholder “unquestionably pleaded direct physical loss or damage to covered property within the definition articulated [by California courts]–a distinct, demonstrable, physical alteration of the property.” Id. at 109. In coming to its conclusion, the Los Angeles Lakers Court recognized Marina Pacific’s criticism of a prior California appellate decision, United Talent Agency v. Vigilant Ins. Co., 77 Cal. App. 5th 821 (2022). The court was critical of United Talent Agency’s determination “without evidence” that COVID-19 does not damage property even though the policyholder alleged that it did.
These decisions show why the development of state law continues to matter even though the state pleading standard is lower than the federal pleading standard. California, unlike federal courts, does not have a plausibility pleading standard but instead requires a court to consider the alleged facts in a pleading as true, “however improbable.” Marina Pac., 81 Cal. App. 5th at 110. This is important, particularly in the context of COVID-19 insurance cases, because the lower threshold can provide policyholders the opportunity to defeat a motion to dismiss and go on to prove their allegations. In hindsight, this has proven to be prudent as scientific evidence, when able to be presented, has shown that it can support policyholders’ allegations. See Baylor Coll. of Med. v. XL Ins. Am., Inc., No. 2020-53316-A (Tex. Dist. Ct. Harris Cty. Aug. 31, 2022) (jury deciding that COVID-19 caused physical loss or damage after presentation of expert evidence).
These recent decisions should be encouraging for policyholders with COVID-19 insurance claims. This California decision follows other more recent cases that have recognized the need for scientific evidence to evaluate these claims, and that a motion to dismiss based solely on the pleadings is improper where there are allegations that the virus physically altered the property. See, e.g., Huntington Ingalls Indus., Inc. v. Ace Am. Ins. Co., 2022 VT 45, ¶¶ 45-46 (Vt. Sept. 23, 2022) (holding scientific evidence is necessary to assess whether the virus can physically alter property).
Although earlier cases held policyholders to a higher pleading standard than what was required in COVID-19 insurance cases, more recent decisions reflect a change in course, providing reason for optimism. Now the ball is truly in the courts’ “court” to apply it correctly and permit discovery of medical and scientific evidence before rendering a decision on COVID-19’s ability to cause loss or damage.
The full opinion in Los Angeles Lakers, Inc. v. Fed. Ins. Co., 2022 WL 16571193 (C.D. Cal. Oct. 26, 2022) can be found here.