Page 1
S.C. Reverses Case Finding Possible COVID-19 Coverage
Guerrero Says Insurance Provision Limiting Recovery for Virus Losses to Certain Causal Scenarios, Such as Weather Events, Is Not Illusory
By Kimber Cooley, Associate Editor
A commercial property insurance policy provision providing coverage for losses due to the presence of viruses only if the contagion results from specified causes—such as explosions, windstorms, and hail, among others—is not illusory because the language is not ambiguous by its terms or nonsensical in its application, the California Supreme Court held yesterday.
The dispute arose after a downtown San Francisco restaurant, John’s Grill, Inc., and its owner John Konstin sued Sentinel Insurance Company, Ltd. after the insurer declined to cover the restaurant’s financial losses between March and September 2020 due to the COVID-19 pandemic and related public health orders.
Plaintiffs asserted causes of action breach of contract, bad faith denial of an insurance claim, and unfair business practices, among others.
The insurance policy provides coverage to pay for losses or damages resulting from viruses under certain “specified cause[s] of loss,” defined elsewhere in the contract as “explosion[s], windstorm[s] or hail; smoke; aircraft or vehicles; riot[s] or civil commotion[s]; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; [and] water damage.”
San Francisco Superior Court Judge Ethan P. Schulman sustained Sentinel’s demurrer to the complaint without leave to amend. Div. Four of the First District Court of Appeal reversed, in an opinion by Justice Jon B. Streeter, finding that the policy’s “specified causes of loss” limit rendered empty the promise to cover virus-related losses and is unenforceable as illusory.
Chief Justice Patricia Guerrero authored the opinion for a unanimous court reversing the judgment of the First District. She wrote:
“John’s Grill cannot invoke the illusory coverage doctrine to transform the policy’s limited virus-related coverage into unlimited virus-related coverage. The policy’s limitations on coverage were explicit and unambiguous. Absent some extraordinary circumstance, courts must enforce such explicit and unambiguous policy limitations. John’s Grill has not shown any such extraordinary circumstances exist here.”
Causes of Viruses
The plaintiffs do not dispute that they cannot establish that the presence of coronavirus on the premises was caused by a “specified cause of loss” under the policy but contend that the promise of virus coverage is illusory because the insured has no realistic prospect of benefitting from the coverage as the listed events “are not the kinds of things that cause a virus.”
Streeter agreed and reasoned that the limitation was illusory because there was no realistic prospect of this insured ever benefitting from the coverage based on events that the parties might reasonably expect.
Guerrero disagreed, citing a fundamental flaw in the reasoning of the appellate court and the plaintiffs. She wrote:
“Both conclusions rely on the premise that viruses cannot replicate outside of a host organism, and thus they cannot ‘result[] from’ an inanimate force or phenomenon. But replication is not the only way that a force or phenomenon may bring about a virus. A force or phenomenon may also transmit a virus.”
She continued:
“[I]n ordinary usage, a person might say that a viral infection resulted from contaminated drinking water or contact with a contaminated object. The contaminated water or object did not cause the virus to replicate, but it nonetheless brought the virus to a new environment where it could do so. From that perspective, the virus “result[ed] from” the contaminated water or object because the contaminated water or object transmitted it to the new environment. Given this ordinary usage, it is reasonable to construe the policy language as including transmission. Under this construction, the policy language is not indecipherable or otherwise unclear when applied to viruses.”
She concluded that “[b]ecause John’s Grill admits that it cannot satisfy the specified cause of loss limitation, it has no claim for coverage under the policy.”
Illusory Coverage Doctrine
Guerrero said:
“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.”
She continued:
“Based on the policy language, John’s Grill could not have an objectively reasonable expectation when it obtained the policy that it would provide coverage for all virus-related loss or damage, regardless of cause….[T]he clear and unambiguous policy language defined the factual scenarios in which John’s Grill would have coverage. To the extent John’s Grill contends it reasonably expected additional coverage based on other circumstances, such an expectation is contradicted by the policy language, and it is wholly unsupported and undefined.”
She acknowledged the “well-established” principle that words which make performance entirely subject to the whim of the promisor do not constitute a promise, but said that “the performance sought by John’s Grill is not optional; it is expressly excluded by the terms of the policy.”
She pointed out that an insurance company may limit the coverage of a policy if the restriction conforms to the law and is not contrary to public policy and remarked that the plaintiffs do not contend that the limitation at issue runs afoul of this principle.
The case is John’s Grill, Inc. v. The Hartford Financial Services Group, Inc., 2024 S.O.S. 2728.
Copyright 2024, Metropolitan News Company