Failure to Satisfy Policy’s ‘Direct Physical Loss of or Physical Damage to Property’ Requirement Causes Restaurant's COVID-19 Business Interruption Claim to Fail


In Protégé Rest. Partners LLC v. Sentinel Ins. Co., No. 21-16814 (9th Cir. 2022), the Ninth Circuit Court of Appeals, rejected another business interruption claim related to the pandemic. The Court affirmed the dismissal of a restaurant's proposed class action complaint under Federal Rule of Civil Procedure 12(b)(6) finding that under California law, business interruption loss caused by the coronavirus is not considered physical loss or damage.

Protégé Restaurant Partners, LLC (Protégé) owned and operated a restaurant in Palo Alto, California. Protégé purchased an insurance policy from Sentinel Insurance Company (Sentinel) in January 2020, which provided three types of business interruption coverage, including civil authority, business income and extra expense coverage. The policy specified that coverage applies only if there has been “direct physical loss or physical damage … or risks of physical loss” to property.

In March 2020, Protégé filed a claim under the policy, seeking coverage for business interruptions caused by COVID-19. Protégé then sued Sentinel for denial of coverage. Finding that Protégé did not “adequately plead that it suffered a loss under the unambiguous … language of the policy,” the district court dismissed Protégé’s complaint with leave to amend in February of 2021. In September of 2021, Protégé filed an amended complaint, which was again dismissed because none of the new facts the plaintiff alleges in its second amended complaint were sufficient to change the court's mind and confirmed that none of Protege's alleged losses met the "direct physical loss of or physical damage to property" required under those policy provisions.

On appeal, Protégé asserted, in an attempt to distinguish its case from others concerning nearly identical insurance policies, that “the presence and contamination of its properties by COVID-19 … satisfies the policy’s ‘direct physical loss of or physical damage to property’ requirement.”  However, shortly after Protégé filed its opening brief,  the California Court of Appeal issued an opinion in United Talent Agency v. Vigilant Insurance Co., 77 Cal. App. 5th 821 (2022), and Musso & Frank Grill Co. v. Mitsui Sumitomo Insurance USA Inc., 774 Cal. App. 5th 753 (2022), which directly undermined Protégé’s argument. Specifically, that Court held that “mere loss of use of physical property to generate business income, without any other physical impact on the property, does not give rise to coverage for direct physical loss … rather, there must be some physicality to the loss of property – e.g., a physical altercation, physical contamination, or physical destruction.” Further, the Court decided that “the presence or potential presence of the virus does not constitute physical damage or loss … because it is a ubiquitous virus transmissible among people and untethered to any property.” Similarly, here, the Ninth Circuit found that Protégé was unable to recover losses attributable to COVID-19 because the virus did not cause “direct physical damage” or “risk of physical loss.”

Comment: Despite the creative arguments raised by insureds to obtain coverage for business interruptions claims, appellate courts are consistently determining that "direct physical loss of or physical damage to" language is unambiguous. They are finding that it requires a "distinct, demonstrable, physical alteration of the property" to invoke coverage. In fact, most courts that have addressed COVID-19 business interruption claims to date have concluded that "government orders that prevent full use of a commercial property or that make the business less profitable do not themselves cause or constitute ‘direct physical loss of or physical damage to’ the insured property." Claims professionals should remain vigilant and be aware that losses incurred by the COVID-19 pandemic will generally lack the “physicality” aspect required for such a claim to be sufficient.

Media Contact

Valerie Lyons
Chief Marketing and Business Development Officer
T: 267.765.4124

back to top