Insurance Law
“Specified Perils” Policy
Failure to Demonstrate “Direct Physical Loss”
“Physical Loss” As Distinguished From “Property Damage”
No Detrimental Economic Impact Unaccompanied by a Distinct, Demonstrable, Physical Alteration of the Property
Meaning of “Explosion”
California Law
Appellants Sherlene and Lawrence Wong (the Wongs) had stored some embryos at a facility that kept them in a cryogenic tank that failed to maintain the temperature necessary to store the embryos, following which the Wongs’s fertility doctor told them they should consider the embryos “compromised” and “no longer viable, and lost.” The Wongs had a homeowners insurance policy with respondent Stillwater Insurance (Stillwater), a specified perils policyproviding that “We insure for direct physical loss to the property described in Coverage C caused by any of the following perils,” going on to list 16 specified perils. The Wongs made a claim for property damage, which Stillwater denied. The Wongs sued, and Stillwater moved for summary judgment, on two bases: the Wongs could not submit evidence of (1) “direct physical loss” or (2) that “one of the sixteen specified perils occurred.” The trial court granted summary judgment. We affirm.
The Wongs had a homeowners insurance policy with Stillwater that under “Coverage C” provided coverage for personal property the Wongs “owned or used” while “anywhere in the world,” with policy limits for personal property of $502,720. The policy was a “specified perils” policy, the significance of which is that in order to demonstrate a covered loss the insured has “the threshold burden of proving the loss was caused by a specifically-enumerated peril.” (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2022) ¶ 6:253.2 (Croskey).) Specifically, the policy provided that “We insure for direct physical loss to the property described in Coverage C caused by any of the following perils,” going on to list 16.
The 16 perils were identified as follows: “ ¶1. Fire Or Lightening; ¶2. Windstorm Or Hail . . .; ¶3. Explosion; ¶4. Riot Or Civil Commotion; ¶5. Aircraft . . .; ¶6. Vehicles; ¶7. Smoke . . .; ¶8. Vandalism Or Malicious Mischief; ¶9. Theft . . .; ¶10. Falling Objects. . .; ¶11. Weight Of Ice, Snow Or Sleet . . .; ¶12. Accidental Discharge Or Overflow Of Water Or Steam...; ¶13. Sudden And Accidental Tearing Apart, Cracking, Burning Or Bulging [meaning] sudden and accidental tearing apart, cracking, burning or bulging of a steam or hot water heating system, and air conditioning or automatic fire protective sprinkler system or an appliance for heating water; ¶. Freezing...; ¶15. Sudden And Accidental Damage From Artificially Generated Electrical Current . . .; ¶16. Volcanic Eruption.”
On March 5, 2019, represented by Mr. Rosenberg-Wohl, the Wongs filed a complaint naming as defendants Stillwater and Government Employees Insurance Company (GEICO). The complaint alleged five causes of action labeled (1) breach of contract, (2) negligence, (3) declaratory judgment, (4) injunctive relief/specific performance, and (5) unjust enrichment. However, within the breach of contract claim was reference to breach “of the covenant of good faith and fair dealing,” and within the negligence claim was that defendants “failed to comply with is duties as a fiduciary of Plaintiffs.” So, however inartfully, the complaint alleged, or at least referred to, seven causes of action.
The burden is on the insured “to prove facts establishing the claimed loss falls within the coverage provided by the policy’s insuring clause.” (MRI, supra,187 Cal.App.4th at p. 777.) As our Supreme Court has described, the insured’s burden is “to establish that the occurrence forming the basis of its claim is within the basic scope of insurance coverage.” (Aydin Corp. v. First State Ins. Co. (1998) 18 Cal.4th 1183, 1188.) Here, as quoted, the insuring clause in the Stillwater policy provided that “we insure for sudden and accidental direct physical loss to property described in Coverage C caused by any of the following perils. . . unless the loss is excluded in Section I. ”So here, as in MRI, the “accidental direct physical loss requirement is part of the policy’s insuring clause and accordingly falls within the insured’s burden of proof.” (MRI, supra, 187 Cal.App.4th at p.778.)
MRI, supra, 187 Cal.App.4th 766 is persuasive. The issue there involved an insured’s claim under a business interruption policy for loss of income as a result of claimed damage to its magnetic resonance imaging machine after the machine failed to satisfactorily ramp up after it was ramped down. The trial court granted summary judgment for State Farm, on the basis that the insured could not demonstrate a “physical loss.” The Court of Appeal affirmed, holding as follows: “In modern policies, ‘“physical loss or damage’” is typically the trigger for coverage. [Citation.] Clearly, this threshold is met when an item of tangible property has been ‘physically altered’ by perils such as fire or water. [Citation.] However, serious questions crop up in instances when the structure of the property itself is unchanged to the naked eye and the insured claims its usefulness for its normal purposes has been destroyed or reduced. [Citation.] That the loss needs to be ‘physical,’ given the ordinary meaning of the term, is ‘widely held to exclude alleged losses that are intangible or incorporeal, and, thereby, to preclude any claim against the property insurer when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property.’” (Id., at pp. 778−779.) And, the court added: “A direct physical loss ‘contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so.’ [Citation.] . . . For loss to be covered, there must be a ‘distinct, demonstrable, physical alteration’ of the property.” (MRI, at p. 779, italics added.) Dr. Eyvazzadeh’s concession there is “no way to know” whether the Wongs’s embryos had actual physical damage was devastating to the Wongs’s claim. And her conclusion that she deemed the embryos to be “worthless” was not a substitute for evidence that any of the embryos actually had undergone a physical change. Again MRI is apt: “Neither diminution in value nor the cost of repair of replacement are active physical forces—they are not the cause of the damage . . . they are the measure of the loss or damage.” (MRI, supra, 187 Cal.App.4th at p. 780.) Put slightly differently, “‘Diminution in market value’ is not a ‘peril’ at all; it is a method of measuring damages.” (State Farm Fire & Casualty Co. v. Superior Court (1989) 215 Cal.App.3d 1435, 1444.)
The mere possibility that the embryos had suffered physical damage was insufficient to create a triable issue of fact to trigger coverage. The Wongs had the burden of submitting evidence of actual physical alteration of the embryos. They did not, instead submitting evidence that there is “no way to know” whether such damage had occurred. “No way to know” was fatal to their claim, as it was in analogous cases. (See, e.g., Whittaker Corp. v. Allianz Underwriters, Inc. (1992) 11 Cal.App.4th 1236, 1241−1244 [insured conceded that it was “impossible to determine” when damage happened, and thus could not meet burden of proving damage occurred “during the policy period”]; Collin v. American Empire Ins. Co. (1994) 21 Cal.App.4th 787, 807 [insureds conceded they “do not know what happened to their property,” and thus could not meet burden of proving loss was caused by “accident” as required by policy].
The Stillwater policy was, as noted, a “specified perils” policy. According to the leading California insurance commentary, the significance of this is the insured has “the threshold burden of proving the loss was caused by a specifically-enumerated peril.” (Croskey, supra, Cal. Practice Guide: Insurance Litigation ¶ 6:253.2.) As our colleagues in Division One have described it, “in litigation,‘“... the burden is on the insured to prove that an event is a claim within the scope of the basic coverage.”’ [Citation.] Only after ‘the insured shows that an event falls within the scope of basic coverage under the policy’ [citation] does the burden shift to the insurer to prove the claim is specifically excluded. [Citation.]” (Central Nat. Ins. Co. v. Superior Court (1992) 2 Cal.App.4th 926, 932−933; see generally CACI No. 2306, instructions for use: [“For ‘named perils’ policies . . . the insured bears the burden of proving the loss was caused by the specified peril”].
(…) Turning to insurance cases, “explosion” is “what ordinary men, not scientists,” understand it to be. (Roma Wine Co. v. Hardware Mut. Fire Ins. Co. (1939) 31 Cal.App.2d 455, 458.) As the United States Supreme Court long ago put it, “When the word ‘explosion’ is used in the policy, the parties are presumed to have understood the word ‘explosion’ in its ordinary and popular sense. Not what some scientific man would define to be an explosion, but what the ordinary man would understand to be meant by that word.” (Mitchell v. Potomac Insurance Co. (1901) 183 U.S. 42, 52.) As a leading insurance commentary puts it, an “explosion” is “commonly defined as a sudden and rapid combustion, causing a violent expansion of the air and accompanied by a report or sound, and is caused by a sudden release of energy from an escape of gas or vapors under pressure.” (10A Couch on Insurance (3d ed. 2022) § 150.6.)
Secondary Sources: Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2022); Weil & Brown, Cal. Prac. Guide Civ. Pro. Before Trial § 10:205 (TRG 2020); Couch on Insurance (3d ed. 2022); Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2023)
(California Court of Appeal, June 30, 2023, Wong v. Stillwater Insurance Comp., Docket No. A162893, Certified for Publication)
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