Bottega, Ottimo, Chiarello, and Solo filed claims with National Surety, which were paid under the policy’s Civil Authority coverage. The next year, a property inspection revealed smoke damage to each business. Bottega and Ottimo subsequently filed claims for further property damage and additional lost business income. National Surety denied the claims for additional lost business income because business had shut down based on the government orders, not the smoke damage.

The four entities filed suit against National Surety for breach of contract and breach of good faith and fair dealing. Each argued they had continued to lose business income well after the end of time prescribed for the Civil Authority coverage. Both sides filed for summary judgment regarding coverage under the National Surety policy.

The court said a successful claim for business income coverage for each of the plaintiffs had the same requirements: business operations were suspended because of direct physical damage to the business premises that was caused by a covered peril. The court took the claims of each entity in turn.

National Surety’s Admissions

The analysis of the claims by each of the restaurants was similar. National Surety made two admissions that effectively proved two of the four requirements for a business income claim. First, National Surety admitted that, based on Bottega’s and Ottimo’s business records, both restaurants had closed completely on October 9. Bottega was able to begin operating at a reduced capacity on October 10, with only one more complete closure taking place on October 16. Ottimo also tried to resume operations on October 10, but closed again the next day and remained closed until both businesses reopened to full capacity on October 18.

National Surety also admitted that smoke and soot from the fires had “caused direct physical damage” to both restaurants. Regarding whether the cause of loss was a covered peril, the policy language specifically included “[s]moke causing sudden and accidental loss or damage” on its list of covered perils.

The crux of the claims rested on whether there was a sufficient causal connection between the physical damage to Bottega’s and Ottimo’s premises and the suspension of operations.

Bottega

Bottega’s director of operations testified that the property had been “inundated with smoke soot, ash, and char” and was not able to serve customers. Even though Bottega had resumed partial operations on October 10, it was working at a drastically reduced capacity, able to use only 60 of the restaurant’s 180 seats.

National Surety argued that, similar to the slew of failed business interruption claims based on the COVID-19 pandemic, the closure resulted from the orders of a civil authority. They cited how Bottega had been closed on the same day the governor issued the public safety order in support. The court was not convinced stating a mere coincidence “[was] not sufficient to create a genuine dispute of fact.”

National Surety then argued that Bottega’s reopening and continued operations at a reduced capacity was proof that the physical damage caused by soot, smoke, and char was not the reason for the October 9 closure. Bottega claimed National Surety had no evidence to support this contention. National Surety countered that Bottega’s outdoor awning, which had been damaged by the fires, was not replaced for five years and had only been replaced after Bottega’s landlord had demanded a replacement. These opposing arguments, said the court, only created a factual issue that was up to a jury to decide, not the court.

Ottimo

As stated above, National Surety admitted that the smoke, soot, ash, and char from the fire had caused physical damage at the premises of both Bottega and Ottimo. Similar to the analysis of the causal connection between the damages and Bottega’s loss, the record held enough evidence for a reasonable jury to find that Ottimo’s operations had been suspended due to the smoke damage.

However, there was also evidence that Ottimo’s second closure, from October 11 to October 18, had been based on a business decision rather than the physical damage. The owner of the restaurants testified he had had neither the funds nor the manpower to keep both Bottega and Ottimo open while the governor’s orders were in effect.

Based on these facts, the court likewise determined that the cause of Ottimo’s closures was a matter for a jury to decide, not the judges.

Chiarello and Solo

National Surety argued that Chiarello, the company that managed Bottega and Ottimo, and Solo, a Bottega-related holding company, were not entitled to the business income coverage because they had not actually ceased operations during the fires. No evidence in the record showed or even suggested otherwise.

This question, said the court, was much clearer. Solo and Chiarello, though some of their business was tied to operations at Bottega and Ottimo, had not experienced a true suspension of business operations. In the absence of such a suspension, the claims for business income failed.

Conclusion

The court denied summary judgment for any party regarding the claims for Bottega and Ottimo. Summary judgment was awarded to National Surety regarding only the claims of Chiarello and Solo.

Editor’s Note: The judges pointed out that California case law stated that a claim for business income coverage “require[d] a complete cessation of [the insured's] business." Buxbaum v. Aetna Life & Cas. Co., 103 Cal. App. 4th 434 (Cal. Ct. App. 2002). In this case, business records showed that Bottega and Ottimo each experienced a “complete cessation” of operations on October 9, which satisfied the business income coverage requirement.

Chiarello and Solo, on the other hand, only experienced a partial cessation of business. Though each entity did business with Bottega and Ottimo, those restaurants were only part of the entities’ business. When Bottega and Ottimo were completely closed, Chiarello and Solo could still continue normal business operations with other parts of their business. Since there wasn’t a “complete cessation” of business, neither entity was entitled to business income coverage.

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