Marina Pacific: A Rare Glimpse into a Pandemic-Related Property Coverage Trial

Three years into the avalanche of COVID-related coverage actions we have all lived through, we (like many) followed the two-week trial in Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Insurance Company that recently wrapped up in Los Angeles Superior Court in Santa Monica. 

The plaintiffs, Marina Pacific, which manages the Hotel Erwin in Venice Beach, and Erwin Sokol, the hotel’s owner, sought more than $10 million in damages for business interruption losses the hotel suffered between March 2020, when the pandemic began, and January 2022, when the hotel’s revenue and occupancy rates returned to pre-pandemic levels.  The defendant, Fireman’s fund, denied the hotel’s claim for coverage.  Plaintiffs sued for breach of contract and bad faith. 

A couple of weeks before the start of trial, Judge Jay Ford, who presided over the proceedings, decided on his own initiative to bifurcate the trial into two phases, with phase 1 addressing only the breach of contract claim, and phase 2 addressing the bad faith claims (assuming the jury found a breach of contract in phase 1). 

The trial was closely watched by stakeholders in the insurance industry.  Would the jury find that the presence of the SARS-COV-2 virus at the Hotel Erwin caused “direct physical loss or damage” to property at the hotel?  And if so, would it find that the hotel’s business interruption losses arose from such physical loss or damage?   It was not surprising that the trial came down to a battle of experts.  What was surprising was how swiftly the jury came back with its verdict. 

As to the first question, in line with the Court of Appeal’s guidance, Judge Ford instructed the jury that to prove “direct physical loss or damage” to property at the Hotel Erwin, the plaintiffs must prove by a preponderance of the evidence (i.e., that it was more likely than not) that the SARS-COV-2 virus caused a “distinct, demonstrable, physical alteration of property.” 

Plaintiffs relied on Dr. Alexander Klibanov, a professor emeritus of applied chemistry and bioengineering at M.I.T., and former holder of an endowed chair, who testified that images generated by the use of an atomic force microscope show that surfaces sprayed with SARS-COV-2 are different from “clean” surfaces.  He opined that the images show that the virus causes a “distinct, demonstrable, physical alteration” of those surfaces.  He also testified that the physical alteration of surfaces does not depend on whether the virus is infectious or not.  Even if the virus has become inactive, it still causes the same physical alteration to surfaces, as seen in the images generated by atomic force microscopy.

For its part, the defense called Dr. Alexis Sauer-Budge, a biomedical scientist specializing in infectious disease diagnostics, microbiology, and contamination issues, to testify.  Dr. Sauer-Budge has two degrees in chemistry from Stanford University, and a Ph.D. in biophysics from Harvard University.  She testified that the SARS-COV-2 virus shares its structure with other coronaviruses, of which more than 50 are known, and that all coronaviruses are made of the same basic components.  She also testified that coronaviruses (some of which cause the common cold) have been studied extensively for decades, and that the SARS-COV-2 virus has been so extensively studied over the past three years that every atom of the virus is known.   

Dr. Sauer-Budge explained that when a coronavirus like SARS-COV-2 is expelled from a person in the form of respiratory droplets or aerosols and lands on a surface in the real world (as opposed to a laboratory setting), it may interact with the other biological material on that surface (e.g., bacteria or other viruses), but it has no mechanism to change or alter the surface itself.  She testified that what the atomic force microscopy images show is that the virus is present on a surface.  The images don’t show that the surface has been altered, she said.  On cross-examination, Dr. Sauer-Budge testified that it was her opinion that no virus can physically alter inanimate surfaces.

As to the second question before the jury—whether the hotel’s business interruption losses arose from the presence of the SARS-COV-2 virus on its property—plaintiffs relied on the expert testimony of Gregory Scott Thaler, a forensic accountant experienced in quantifying economic damages in business interruption disputes.  Mr. Thaler testified that he assumed—but did not independently determine—that the pandemic and the presence of the COVID-19 virus at the hotel caused the hotel’s business interruption losses.   He acknowledged that the pandemic had not stopped by January 2022, and speculated that the COVID-19 virus was likely still at the hotel at that time. 

The defense responded with the testimony of its damages expert, Susan Thompson, a certified public accountant who is also certified in financial forensics.  Ms. Thompson testified that the hotel’s financial records did not reveal any evidence of loss or damage to property. There were no write-offs or write-downs of property assets, she explained.  She also testified that the hotel’s business interruption losses closely tracked those of other hotels in the same competitive bracket, and that these losses were caused by the pandemic at large—the government orders restricting social gatherings and travel, and the attendant changes in consumer behavior—and not by anything specific to the Hotel Erwin.

Both sides were very ably represented at trial.  David Schack of Barnes & Thornburg represented the plaintiffs.  Brett Ingerman and John Philips of DLA Piper represented the defendant. 

During closing arguments, Mr. Schack told the jury they must disregard all of Dr. Sauer-Budge’s testimony—and especially her opinion that viruses cannot physically alter inanimate surfaces—because it went against an explicit instruction from Judge Ford that the language of the insurance policy “precludes the interpretation that direct physical loss or damage categorically cannot be caused by a virus.” 

When it was his turn, Mr. Phillips told the jury that Judge Ford would instruct them that they are permitted to use their common sense and experience in evaluating the truth and accuracy of testimony, including expert testimony.  He reminded the jury that one of the plaintiffs’ fact witnesses—Mark Sokol, an employee of the Hotel Erwin, and son of its owner, plaintiff Erwin Sokol—testified that the hotel did not close for a single day during the pandemic, and that 17,412 guests checked into the hotel between March 2020 and the end of April 2021, during the height of the pandemic.  Those 17,412 guests used every piece of property the plaintiffs say was physically damaged by the presence of the virus, Mr. Phillips argued.    

The jury took a little over two hours to reach its verdict.  In response to the first question on the special verdict form, “Did SARS-CoV-2 cause any direct physical loss or damage to property at Hotel Erwin on or before June 1, 2020 [the end of the policy period]?,” 11 of the 12 jurors answered “No.”  In light of this answer, the jury did not reach any of the other questions on the special verdict form, including the question of whether any of the Hotel Erwin’s business interruption losses arose from any direct physical loss or damage to hotel property. 

Judge Ford conducted the two-week trial with the assumption—expressed outside the presence of the jury—that, whatever the outcome of the trial, the judgment would very likely be appealed.  Judge Ford was scrupulous in ensuring that the trial record was clear, and that his instructions to the jury tracked California law and the Court of Appeal’s guidance with respect to whether the presence of the SARS-COV-2 virus can constitute “direct physical loss or damage,” and how “direct physical loss or damage” in the context of a coverage dispute should be understood.

We, like many, will continue to follow the proceedings in Marina Pacific with interest, especially given the current landscape of California COVID-related coverage law.  We expect more news of interest in the days ahead now that the California Supreme Court will be answering a threshold question certified to it by the Ninth Circuit in Another Planet Entertainment v. Vigilant Insurance Company, Case No. S277893: “Can the actual or potential presence of the COVID-19 virus on an insured’s premises constitute ‘direct physical loss or damage to property’ for purposes of coverage under a commercial property insurance policy?”  Briefing in Another Planet is still in its early stages, and oral argument is not likely to be scheduled for some months.  Stay tuned for further developments.