California Supreme Court Watch

#23-58 John’s Grill, Inc. v. The Hartford Financial Services Group, Inc., S278481. (A162709; 86 Cal.App.5th 1195; San Francisco County Superior Court; CGC20584184.) Petition for review after the Court of Appeal affirmed in part and reversed in part the judgment in a civil action. This case presents the following issues: (1) Is a grant of coverage for property loss or damage to covered property caused by a virus rendered illusory where it is limited by a condition that makes coverage applicable only if the virus is the result of one or more of a number of listed causes? (2) Is a conditional grant of coverage for property loss or damage to covered property caused by a virus, including the cost of removal of the virus, triggered by cleaning surfaces in the covered property that are contaminated by the virus in the absence of physical alteration of the property?

Petition for review granted: 3/29/2023

Case fully briefed: 11/21/2023

Cause argued and submitted: 5/21/2024

Opinion filed: Judgment reversed: 8/08/2024

See the Court of Appeal Opinion.

See the Petition for Review.

See the Oral Argument.

See the California Supreme Court Opinion.  (John’s Grill, Inc., et al. v. The Hartford Financial Services Group, Inc. (2024) 16 Cal.5th 1003.)

“Like many businesses, John’s Grill suffered substantial financial losses during the COVID-19 pandemic. John’s Grill sought compensation for its losses from its property insurer, Sentinel Insurance Company, Ltd. (Sentinel). Sentinel denied coverage on various grounds, including that the loss or damage claimed by John’s Grill did not fall within the insurance policy’s ‘Limited Fungi, Bacteria or Virus Coverage’ endorsement. The Limited Fungi, Bacteria or Virus Coverage endorsement generally excludes coverage for any virus-related loss or damage that the policy would otherwise provide, but it extends coverage for virus-related loss or damage if the virus was the result of certain specified causes of loss, including windstorms, water damage, vandalism, and explosion.

The validity of this specified cause of loss limitation is the focus of the parties’ dispute. John’s Grill acknowledges it cannot meet this limitation, but it contends the limitation is unenforceable because it renders the policy’s promise of virus-related coverage illusory. The Court of Appeal below agreed with John’s Grill. It held that the promise of coverage was illusory because John’s Grill had no realistic prospect of benefitting from the virus-related coverage as written. (John’s Grill, Inc. v. The Hartford Financial Services Group, Inc. (2022) 86 Cal.App.5th 1195, 1224 (John’s Grill).) It therefore invalidated the specified cause of loss limitation and allowed John’s Grill’s claims for virus-related losses or damage to proceed. (Id. at p. 1212.)

We conclude the Court of Appeal erred by declining to enforce the specified cause of loss limitation under the circumstances here. The terms of the Limited Fungi, Bacteria or Virus Coverage endorsement are clear and unambiguous. It provides virus-related coverage, but only if the virus results from certain specified causes of loss. In accordance with long-settled principles of contract interpretation, the plain meaning of the policy governs. Because John’s Grill admits that it cannot satisfy the specified cause of loss limitation, it has no claim for coverage under the policy.

John’s Grill cannot escape this conclusion by citing the so-called illusory coverage doctrine. This court has never recognized an illusory coverage doctrine as such. The doctrine as articulated by John’s Grill does not appear in our precedents. But even assuming some version of the doctrine may exist under California law, we conclude that an insured must make a foundational showing that it had a reasonable expectation that the policy would cover the insured’s claimed loss or damage. Such a reasonable expectation of coverage is necessary under any assumed version of the doctrine. Here, however, John’s Grill has not shown it had a reasonable expectation of coverage under the policy for its pandemic-related losses. It has therefore failed to establish that the policy created the illusion of coverage that rendered any contrary policy language unenforceable. Moreover, even setting aside this hurdle, and accepting John’s Grill’s articulation of the doctrine, it still cannot demonstrate that the policy’s promised coverage was illusory. Even with the specified cause of loss limitation, the policy offered John’s Grill a realistic prospect for virus-related coverage. Because the Court of Appeal held otherwise, we reverse and remand for further proceedings.”

Chief Justice Guerrero authored the opinion of the Court, in which Justices Corrigan, Liu, Kruger, Groban, Jenkins, and Evans concurred.

In the news: Egelko, Court rules insurance doesn’t cover restaurant’s COVID-related business losses, S.F. Chronicle (Aug, 8, 2024).