(Article from Insurance Law Alert, July/August 2023)
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Holding
A California appellate court ruled that policyholders were not entitled to coverage under a homeowners policy for the loss of compromised embryos based on a mechanical failure of a cryogenic storage tank. Wong v. Stillwater Ins. Co., 2023 Cal. App. LEXIS 496 (Cal. App. 1st Dist. July 5, 2023).
Background
After completing in vitro fertilization in 2014, the Wongs stored embryos at a fertility center that utilized cryogenic storage tanks. In 2018, one of the tanks failed to maintain the appropriate temperature, and according to the parties’ joint stipulation of facts, some or possibly all of the embryos partially or totally thawed. The Wongs filed a claim under their homeowners policy, which the insurer denied. In ensuing litigation, a California trial court granted the insurer’s motion for summary judgment, ruling that there was no “direct physical loss” and that none of the listed perils occurred. The appellate court affirmed.
Decision
The appellate court explained that direct physical loss contemplates “a distinct, demonstrable physical alteration” of property. The court ruled that a statement by the Wongs’ fertility physician that “there is no way to know” whether the embryos were damaged was fatal to homeowner’s assertion that they incurred direct physical loss. In so ruling, the court emphasized that deeming the embryos “worthless” was “not a substitute for evidence that any of the embryos had actually undergone a physical change.” Additionally, the “mere possibility” of physical damage was insufficient to create a triable issue of fact.
The court further held that there was no factual evidence of any of the specifically enumerated perils in the policy, a prerequisite to coverage. The Wongs argued that the loss was caused by an “explosion” (one of the covered perils) because their expert witness utilized the terms implosion and explosion in his testimony regarding the tank failure. The court ruled that this evidence was not only inadmissible on various procedural grounds, but also substantively deficient in creating an issue of fact as to an “explosion” for insurance coverage purposes. In particular, the court explained that the term explosion indicates “a violent expansion or bursting that is accompanied by noise and is caused by a sudden release of energy,” which was not alleged here. Additionally, the court noted that the witness’s use of the term “explosion” was equivocal (“you have that type of explosion, as we are calling it”) and in actuality related to an implosion of vacuum space. The court stated: “Such ‘opinion’ was not ‘explosion’ as the insurance cases would have it, as understood by the ordinary man, not the scientist.”
Comments
Courts are frequently called upon to decide whether the inability to use property for its intended purpose in various contexts satisfies the “direct physical loss” requirement of first-party insurance policies. Most notably, the wave of COVID-19-related coverage litigation resulted in an overwhelming consensus among courts that a property owner’s inability to use property due to actual or potential viral contamination did not constitute direct physical loss. The Wong decision reaffirms the well-established principle that an “actual change in insured property” is necessary in order to implicate coverage.