John’s Grill is “a historic, family-owned, landmark restaurant located in the heart of downtown San Francisco.” Its business, like many others, was heavily impacted by the COVID-19 pandemic and related state and local public health orders.

For example, between March 2020 and September 2020, indoor dining – “the lifeblood of John’s Grill’s business” – was prohibited. After September 2020, indoor dining was limited to 25 percent of restaurant capacity. As a result of these restrictions, “John’s Grill suffered substantial financial losses and had to let 54 workers go.”

Moreover, even absent these restrictions, John’s Grill alleges it “would have had to close and suspend its operations due to the worsening pandemic-level presence of the Coronavirus in, on, and around the Insured Premises.”

John’s Grill sought compensation for its losses from its property insurer, Sentinel Insurance Company, Ltd. 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 acknowledged it cannot meet this limitation, but it contends the limitation is unenforceable because it renders the policy’s promise of virus-related coverage illusory. John’s Grill alleged in is lawsuit that when “physical droplets containing COVID-19 land on or otherwise attach to surfaces, [the virus] renders those surfaces and the immediate surrounding area unusable because there is substantial risk of people getting sick, transmitting infection to others, and possibly dying as a result of touching those surfaces.”

In the trial court, Sentinel successfully demurred to John’s Grill’s operative complaint for damages and other relief.

The Court of Appeal agreed with John’s Grill. It held that the promise of coverage was illusory because John’s Grill had no realistic prospect of benefiting 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.) 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.)

The California Supreme Court reversed in it’s John’s Grill, Inc. v. The Hartford Financial Services Group , Inc., Opinion -S278481 (August 2024).

It concluded 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.”

Carrier Prevails in Cal. Supreme Ct. on Pandemic Related Property Coverage