Page 1
Court of Appeal:
C.A. Decides ‘Rare Case’ in Which Restaurant Adequately Alleged Loss Due to COVID-19
Opinion Says Insurance Policy with Virus Provision Might Afford Coverage for Certain Losses
By Kimber Cooley, Staff Writer
Div. One of the Fourth District Court of Appeal has held that a trial court improperly granted judgment on the pleadings in favor of an insurance company in a suit by a restaurant owner after denial of coverage for losses incurred due to COVID-19 where the insurance contract specifically provided for coverage related to losses associated with viruses and removal of a virus as a covered loss.
“[T]his is one of those rare cases where we conclude an insured has adequately alleged a direct physical loss or damage under the subject policy,” Acting Presiding Justice Richard D. Huffman said in an opinion filed on March 20 and certified for publication on Monday. Justices William Dato and Jose S. Castillo joined in the opinion.
It reinstates an action brought by Brooklyn Restaurants, Inc. which operates the iconic La Jolla diner Harry’s Coffee Shop. In August 2019, the company renewed its with to provide coverage through August 2020.
When the government-imposed restrictions on travel and dining went into effect in the spring of 2020, Brooklyn suffered financial harm. After Sentinel Insurance Company, Ltd. denied Brooklyn’s claim for coverage under its commercial property insurance policy, Brooklyn filed suit alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, declaratory relief and professional negligence.
San Diego Superior Court Judge Eddie Sturgeon on Aug. 22, 2022, granted Sentinel’s motion for judgment on the pleadings and one week later, signed a judgment of dismissal.
Several Cases
Huffman acknowledged that several “appellate courts have determined that, as a matter of law, the mere presence of the coronavirus on the surface of the covered premises is insufficient to allege damage to the property or a direct physical loss.”
However, he continued:
“Yet, we do not end our consideration of the appeal here. As Brooklyn represents, this case is different because the Policy includes the Virus Endorsement. We thus consider Brooklyn’s claim that coverage exists based on the allegations of the complaint measured against that endorsement.”
Looking to the policy, he explained that it contains a provision that declares:
“We will pay for loss or damage by ‘fungi’, wet rot, dry rot, bacteria and virus. As used in this Limited Coverage, the term loss or damages means: (1) Direct physical loss or direct physical damage to Covered Property caused by ‘fungi’, wet rot, dry rot, bacteria or virus, including the cost of removal of the ‘fungi’, wet rot, dry rot, bacteria or virus….”
The policy also provides that the coverage for such losses applies only when the virus is the result of specified causes of loss such as fire, lightning, aircraft or vehicles, riot or civil commotion.
Cost of Removal
Hoffman rejected Sentinel’s assertion that the policy requires a physical loss or damage, pointing out that the contract specifically stated that covered losses include the cost of removal of a virus. He said:
“[A]ccording to Sentinel, if the virus causes some direct physical loss or direct physical damage, independent of the cost of removal, only then is Sentinel required to pay for the cost of removing a virus. But that is not what the Policy says.”
The jurist continued:
“[W]e conclude it is a reasonable interpretation of that provision that the mere incurring of the cost of removal would be a sufficient ‘direct physical loss or direct physical damage.’ If we were to adopt Sentinel’s interpretation of the first subsection of the Limited Virus Coverage, we would have to ignore the word ‘include’ or otherwise rewrite this subdivision. We decline to engage in such contract drafting.”
Turning to the allegations of the operative complaint, Hoffman wrote:
“[W]e read the allegations that Brooklyn engaged in ‘enhanced and continual sanitation’ of Harry’s Coffee Shop as an allegation that it incurred the cost of removal of the coronavirus to keep Harry’s Coffee Shop at least partially open. Accordingly, we conclude that Brooklyn sufficiently alleged that it suffered the requisite ‘loss or damage’ under the Limited Virus Coverage to potentially trigger coverage under the Virus Endorsement.”
Illusory Provision
Sentinel asserted that the policy only covers losses occasioned by specified causes, none of which applied—contrary to Brooklyn’s theory that the coronavirus was transported to the United States, and eventually to Harry’s Coffee Shop, by airplanes—a specified cause of loss under the policy. Hoffman rejected Brooklyn’s interpretation and said:
“[I]t was not airplanes and vehicles themselves that caused the spread of the virus. Without the people traveling on those airplanes and vehicles, there would have been no spread of the coronavirus.”
The Justice said that, despite the inadequacy of the claim that airplanes caused the virus, “our analysis is not finished.”
He pointed out that if there were no enumerated causes that would qualify as a cause of a virus under the agreement, then the contract would be illusory as it would in fact lack any coverage for viruses.
First District Decision
Hoffman pointed to the Dec. 27, 2022 decision by Div. Four of the First District Court of Appeal in John’s Grill, Inc. v. The Hartford Financial Services Group which he said addressed the issue “persuasively.” There, it was held that a similar virus provision in a Sentinel policy to be illusory and rejected Sentinel’s alleged examples of possible enumerated causes for viruses.
Justice Jon B. Streeter said in that opinion that Sentinel’s argument “not only flies in the face of the principle that we must give effect to all the words of the Policy, but is precisely the kind of ‘heads I win, tails you lose’ position the illusory coverage doctrine forbids….”
Hoffman commented:
“Our decision to follow John’s Grill regarding this issue is buttressed by the fact that this case is at the pleading stage and there is not a sufficient record before us to ascertain the parties’ intentions of entering into the Policy….Such development of the facts and evidence appears to be necessary here where the parties seem to be at such severe loggerheads regarding what the Policy was meant to cover.”
The California Supreme Court granted a petition for review in the John Grill case on March 29, 2023.
The case is Brooklyn Restaurants, Inc. v. Sentinel Insurance Company, Ltd., 2024 S.O.S 1114.
Copyright 2024, Metropolitan News Company