Amy’s Kitchen (Amy’s) employs over 2,500 people to manufacture organic and vegetarian meals at facilities in California, Oregon, and Idaho. Its headquarters are located in Petaluma, CA. Amy’s purchased a comprehensive property insurance policy from Fireman’s Fund Insurance Company (Fireman’s) for a one-year period ending in July 2020.
The policy included coverage extensions for communicable diseases and for loss avoidance and mitigation. The communicable disease coverage extension stated that Fireman’s “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: … mitigate, contain, remediate, treat, clean, detoxify, disinfect, neutralize, clean up, remove, dispose of, test for, monitor, and assess the effects [of] the communicable disease.” The policy defines “communicable disease event” as one 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.” The loss avoidance or mitigation coverage extension states that Fireman’s will pay the “necessary expense you incur to protect, avoid, or significantly mitigate potential covered loss or damage that is actually and imminently threatening Property Insured.”
Amy’s submitted a claim to Fireman’s for costs incurred to clean, disinfect, and test its facilities for COVID-19 under both the communicable disease and loss avoidance and mitigation extensions. Fireman’s denied the claim, and Amy’s sued the insurance company for denial of coverage.
In its complaint, Amy’s alleged COVID-19 was present at its facilities because some employees had confirmed cases, prompting Amy’s to take measures to mitigate, clean, disinfect, test, and monitor for COVID-19. Amy’s further alleged that public health orders required Amy’s to implement various disinfection and sanitization measures to continue its operations. The trial court granted Fireman’s demurrer to dismiss the complaint without leave to amend the complaint. Amy’s appealed.
The Court of Appeal agreed that the trial court correctly granted the demurrer, but that it was wrong to deny Amy’s leave to amend its complaint.
The Court of Appeal noted that the insurance policy did not define the phrase “direct physical loss or damage,” but disagreed with the trial court’s determination that this phrase required physical alteration or change to property. The Court of Appeal explained that an insurance policy must be construed in light of how a reasonable layperson – a non-attorney – would read the language, not how insurance coverage lawyers understand terms of art defined by courts. Accordingly, requiring Amy’s to show a physical alteration to property in order to trigger the communicable disease extension would not be a reasonable interpretation of the extension. The extension covers costs incurred to mitigate, clean, disinfect, test, monitor, and assess the effects of the communication disease, and the plain language does not require that the property be torn out, repaired, or replaced.
Ultimately, the Court of Appeal reversed the trial court and directed the trial court to allow Amy’s to amend their complaint.
Amy’s Kitchen, Inc. v. Fireman’s Fund Ins. Co. (2022) 83 Cal. App. 5th 1062.
Note: This case signals a growing trend that courts are now construing insurance policy language for COVID-19 property damage cases the way they would be read by reasonable laypersons.