Food maker may amend COVID business interruption lawsuit

A California appeals court has ruled that an organic and vegetarian food manufacturer may amend its COVID-19 business interruption lawsuit to claim coverage under its communicable disease policy by overturning a lower court ruling, with which the case was dismissed.

Amy’s Kitchen Inc., based in Petaluma, Calif. with offices in California, Oregon and Idaho, has acquired comprehensive property insurance from the Fireman’s Fund of the Allianz SE entity for a period of one year through July 2020, pursuant to the California Court’s ruling pending appeals in San Francisco in Amy’s Kitchen Inc. v Fireman’s Fund Insurance Co.

The policy included extensions of coverage for communicable diseases and loss prevention and mitigation, the ruling said. The Communicable Disease Coverage Extension states that Fireman’s will pay for direct physical loss or damage caused by or resulting from a “Communicable Disease Covered Event,” including the cost of cleaning up.

It defines a “communicable disease event” as an event where a public health authority has ordered that a location be “evacuated, decontaminated or disinfected” due to an outbreak of a communicable disease.

Amy’s filed a lawsuit against Fireman’s Fund in state court in Santa Rosa, California, after the insurer denied coverage under its policy, stating there was no “direct physical damage to the insured property.”

The court ruled in favor of Allianz without giving Amy permission to amend her lawsuit, finding that the company had failed to assert direct physical loss or damage to property, such as the communicable disease extension requires, and that it asserts its right to avoidance or mitigation of damage Extension also failed.

A three-judge appeals court said the trial court “correctly upheld” the insurer’s denial of coverage “but for the wrong reason, and it wrongly denied Amy permission to rectify.”

“The trial court ruled that the expression ‘direct physical loss or damage’ as used in the communicable diseases extension must be construed as meaning in other contexts a ‘clear, demonstrable physical change of property’ or a ‘ physical change in the condition of the property,'” the decision reads.

“By focusing on that one sentence and how it was interpreted in various policy provisions, the court erred,” the ruling reads.

“Although the Policy’s Definitions section defines over 80 terms, it does not define ‘direct physical loss or damage’ nor any of its components. The operative paragraph also does not define this phrase,” it said.

None of the cases cited by the insurer “focus on the reasonable interpretation of a communicable disease extension where coverage is triggered by a communicable disease event that incurs a cost” to mitigate the impact of the disease, it said.

The lower court “never considered whether Amy’s could change to correctly claim a ‘communicable disease event,'” it said, overturning the lower court’s ruling and remanding the case for further trial.

Insurance attorney John P. Phillips, a partner at DLA Piper LLP in San Francisco, said, “We are pleased that the Circuit Court of Appeals allowed Fireman’s Fund’s defense to the lawsuit. However, we respectfully reject the Court of Appeals’ decision to consider the issue of permission to change de novo.”

Rani Gupta, a partner at Covington & Burling LLP in Palo Alto, Calif., whose law firm filed an amicus brief in support of Amys on behalf of United policyholders, said in a statement, “We are pleased that the court has accepted that the COVID -19 virus may cause physical loss or damage that triggers this insurance policy and rejected the insurer’s narrow interpretation of the policy it has sold to its insured. This is one of several recent cases showing signs that finally more courts will be handling these COVID-19 cases and interpret guidelines according to their text and according to California law.”

Amy’s Kitchen said in a statement that it does not comment on active litigation.

Leave a Comment