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Hotel group’s COVID-related suit allowed to proceed

COVID business interruption

A federal district court in California has refused for the second time to dismiss COVID-19 related litigation filed by a hotel group against a Sompo International Holdings Ltd. claiming coverage under an environmental policy. 

Irvine, California-based Sunstone Hotel Investors Inc., an investment trust with 20 hotel properties, including the Marriott Boston Long Wharf, had a “site environmental impairment liability” policy from Sompo unit Endurance America Specialty Insurance Co., according to Wednesday’s ruling by the U.S. District Court in Santa Ana in Sunstone Hotel Investors Inc. v. Endurance American Specialty Insurance Co. 

Sunstone sought business interruption coverage for the hotel’s closing under its environmental policy, but Endurance denied the claim. The trust sued Endurance and the district court ruled in Sunstone’s favor. 

In its first ruling in the case, issued Feb. 26, 2021, the court focused on a cleanup provision in the policy, and held that nowhere “does it say that an insured must incur $100,000 in cleanup costs to trigger” business interruption coverage. 

In Wednesday’s ruling, in denying Endurance’s motion for partial summary judgment, the court distinguished Sunstone’s policy from the bulk of other COVID-19 cases.   

“The policy was not for your run-of-the mill ‘physical loss of or damage to property’ coverage, but for expansive site environmental impairment liability coverage,” the ruling said. 

“With almost prescient insight, Sunstone paid a significant premium for an aggregate maximum of $40,000,000 worth of insurance to protect itself against all kinds of events including $25,000,000 of coverage for business interruption losses resulting from a virus.” 

“Unlike the policies presented to other courts which have found that no coverage exists for pandemic-related losses, this Court finds that Sunstone’s policy must be interpreted to encapsulate the very thing for which Sunstone seeks coverage,” it states. 

The ruling said much of the dispute focuses on the issue of how “interruption period” is defined in the policy, with the coverage stating that Endurance will pay during this time. 

Endurance argued this period ended when the state issued an order on March 23, 2020, closing nonessential businesses, while Sunstone argued it lasted until March 2021, but ended no earlier than July 7, 2020.   

“Endurance’s argument is not persuasive,” the court said. “Due to the ambiguity in the Policy and Sunstone’s objectively reasonable expectations, the Court concludes that as long as the virus was a source of Marriott Boston Long Wharf’s Business Interruption Losses, the Interruption Period continued, ending no later than March 2021,” the court said. 

The decision concludes that “Discovery in this case has not yet closed,” and the case “requires a more developed factual record governed by the guidance provided in this order.” 

Attorneys in the case did not respond to requests for comment. 

Policyholder attorney Scott D. Greenspan, senior counsel with Pillsbury Winthrop Shaw Pittman LLP in New York, who is not involved in the case, said the ruling is significant. 

It is “directly applicable” to the contested issue of whether government orders are the “efficient proximate cause” of all business interruption losses and reflects the view that operations would still have been impaired even without the government shutdown order. 

It says the facts of each case must be examined as to the cause of the loss, and that this is an issue for the jury to decide, he said.