This week saw the Los Angeles Lakers tumble to 11th place in the Western Conference, putting themselves at real risk of missing the playoffs. Amid those struggles on the court, however, the team has fared better in court.
On March 17, Los Angeles federal judge Terry Hatter Jr. refused to dismiss a lawsuit brought by the team against Federal Insurance Company. The lawsuit centers on alleged property damage and losses caused by SARS-CoV-2, the virus responsible for the COVID-19 disease.
In 2019, the Lakers purchased an “all-risk” commercial property insurance policy from Federal. The policy covered Crypto.com Arena (then called the Staples Center) and the UCLA Health Training Center, where the Lakers practice. The policy authorized the Lakers to seek reimbursement for “direct physical loss of or damage to” their properties. Although some recent sports insurance litigations have involved virus exclusion policies, this policy lacked one.
The Lakers assert the “persistent presence” of the virus on surfaces and in the air inflicted massive damage “throughout” the arena. The virus, as described by the complaint, attached to surfaces and “physically altered” their condition as well as the “physical condition of the air” surrounding them. “Once safe surfaces,” the Lakers charge, became “fomites,” meaning objects that carried the virus. Fabric seats, concession areas, food service facilities, toilets, plumbing fixtures, locker rooms, elevator buttons and air ducts were all, the Lakers say, extensively impacted.
To remedy this damage and mitigate the risk of additional virus-related harms, the Lakers upgraded their facilities. Touchless toilets, sinks and light switches, new air filters, and nanoseptic (self-cleaning) sleeves over elevator buttons and door handles were added. The team maintains their policy covers repairs to property damaged by the virus.
Federal, however, insists that the virus didn’t directly cause any physical loss or damage.
To that end, Federal argues the Lakers haven’t explained how “the virus itself was ever present on the properties.” The Lakers note that several players tested positive for COVID-19, but Federal points out that by the date of those tests, the NBA had already shut down the league, and California politicians and public health officials had issued civil authority orders limiting use of facilities.
Federal also asserts that none of the arena upgrades “were made to actually ‘repair’ any property”—the policy covers property—”as opposed to ensure the future safety of people.” Federal contends the Lakers “reopened its facilities with the same seating, vendor stations, restrooms, and other physical property that it had before the pandemic.” Further, Federal cites case law standing for the proposition that the virus “bonding with” surfaces is “insufficient to plead adequately that the virus physically damaged the insured properties.”
Federal also attempts to suffocate the Lakers’ claim about the virus rendering the air unsafe. Federal insists that “air” is outside the scope of insurance coverage. “Air and space,” Federal maintains, “are not even a part of the insured premises.” Federal says the policy defines “property” as inclusive of buildings, personal property, electronic data, valuable papers, fine arts and research and development assets—but not “air.”
As the plaintiff, the Lakers have the burden of establishing they suffered “direct physical loss of or damage to property.” Therefore, a crucial question is how the policy defines “direct physical loss or damage.”
The answer: It doesn’t. The policy omits a definition for this important phrase.
Without a contractual explanation, Judge Hatter looked to precedent. He cited a recent California appellate court decision, The Inns by The Sea v. California Mutual Insurance Company, which concerned virus damage at lodging facilities. The relevant policy covered “direct physical loss of or damage.” As in the Lakers case, the policy for Inns by the Sea neglected to include a definition. The appellate court turned to Merriam-Webster’s Online Dictionary for making sense of key words. “Direct physical damage,” the court concluded, centers on a “physical alteration” to the premises.
The Lakers, Hatter stressed, allege “that the virus physically altered surfaces . . . by changing their chemical and physical properties and creating viral vectors that required cleaning or replacement.” While it remains to be seen if the Lakers can prove liability, Hatter found the claim at least logical and not worthy of dismissal.
Hatter was less welcoming of the Lakers’ other insurance claims, which he dismissed. The Lakers maintain they can recover under a business interruption provision, but to do so, they must show their business operations were impaired by damage to the property. The problem with that argument, the judge underscored, is that the Lakers couldn’t reopen per government health orders. “Repairs” and “virus-proofing the Staples Center,” Hatter wrote, “were not, alone, sufficient to restore the Lakers’ business operations.”
Likewise problematic was the Lakers’ civil authority insurance claim, which hinges on proving that their business operations were interrupted because nearby Metro stations experienced direct physical damage or loss. Hatter emphasized that the Metro stations were closed not due to damage but rather to “limit viral spread in the community.”
While Hatter’s order effectively shrinks the Lakers’ lawsuit, the case has advanced past a motion to dismiss. The parties can now pursue pretrial discovery measures, including the sharing of evidence and the taking of sworn testimony. The two sides could settle at any point.
