Brook. Rest., Inc. v. Sentinel Ins. Co.

319 Cal.Rptr.3d 572

BROOKLYN RESTAURANTS, INC., Plaintiff and Appellant,

v.SENTINEL INSURANCE COMPANY, LTD., Defendant and Respondent.

D081132

Court of Appeal, Fourth District, Division 1.

Filed March 20, 2024

APPEAL from a judgment of the Superior Court of San Diego County, Eddie C. Sturgeon, Judge. Reversed; remanded with directions. (Super. Ct. No. 37-2020-00024865-CU-IC-CTL)

LiMandri & Jonna, Charles S. LiMandri, Paul M. Jonna, Rancho Santa Fe, and Milan L. Brandon II for Plaintiff and Appellant.

Steptoe & Johnson, Robyn C. Crowther, Melanie Atswei Ayerh, Los Angeles; Wiggin and Dana, and Tadhg Dooley for Defendant and Respondent.

HUFFMAN, Acting P. J.

After its diner was partially shut down during the COVID-19 pandemic, Brooklyn Restaurants, Inc. (Brooklyn) brought suit against its insurer, Sentinel Insurance Company, Limited (Sentinel), when Sentinel declined a tender under a commercial property insurance policy. The superior court granted Sentinel’s motion for judgment on the pleadings, finding there was no coverage under the subject policy for Brooklyn’s claimed business loss.

Brooklyn appeals the ensuing judgment of dismissal, arguing this case is different from the multitude of COVID-19 pandemic related insurance cases filed in this state. To this end, Brooklyn points out that it has alleged a direct physical loss, which triggers coverage under the policy. Moreover, it emphasizes that the subject insurance policy contains a unique provision, specifically covering losses attributable to a virus. As such, Brooklyn insists, under that distinctive provision, physical loss includes simply cleaning an area infected by the coronavirus. We agree that the subject policy is reasonably susceptible to that interpretation. And Brooklyn has pled that the coronavirus was present at its premises, and it engaged in sanitization efforts to remove the virus and remain, at least, partially open. Consequently, this is one of those rare cases where we conclude an insured has adequately alleged a direct physical loss or damage under the subject policy, at least raising the specter of coverage under that policy.

Yet, the subject policy includes certain exclusions and conditions that are applicable to coverage for a loss or damage stemming from a virus. Brooklyn, however, argues that these exclusions and conditions render the subject policy illusory. Because the instant matter is only at the pleading stage, we agree that Brooklyn has done enough to raise the issue that its policy is illusory, which in turn raises factual questions that require discovery and the marshalling of evidence. Accordingly, we reverse the judgment and remand this matter back to the superior court with instructions to enter an order denying Sentinel’s motion for judgment on the pleadings.

FACTUAL AND PROCEDURAL BACKGROUND

Brooklyn "operates an iconic local diner and longstanding community gathering place known as ‘Harry’s Coffee Shop’. " Harry’s Coffee Shop is located in La Jolla, California, in "a heavily trafficked pedestrian thoroughfare that invites visitors to linger, dine, shop, and socialize." In addition, Harry’s Coffee Shop benefits from regional theme parks and other facilities that attract visitors to the area.

In August 2019, Brooklyn renewed its commercial property policy with Sentinel. The policy was a Spectrum Business Owner’s Policy No. 72 SBA BB7110 SC (the Policy), which provided coverage for Harry’s Coffee Shop from August 1, 2019 to August 1, 2020.

The Policy, consisting of 196 pages, includes provisions Brooklyn argues are relevant here. For example, the Special Property Coverage Form states that Sentinel "will pay for direct physical loss of or physical damages to Covered Property at the premises … caused by or resulting from a Covered Cause of Loss." The Policy further defines a "Covered Causes of Loss" as "risks of direct physical loss," except where otherwise excluded or limited.

The Policy also includes an endorsement for "Limited Fungi, Bacteria, or Virus Coverage" (the Virus Endorsement). That endorsement contains provisions that (1) add limited coverage in certain circumstances for "loss or damage" "caused by" "virus," subject to certain conditions requiring that the virus was the "result of’ one or more of a list of enumerated causes, and (2) exclude any "loss or damage caused directly or indirectly by" the "[p]resence, growth, proliferation, spread or any activity of ‘fungi’, wet rot, dry rot, bacteria or virus," subject to an exception where the loss or damage falls within the limited coverage provided under the Virus Endorsement.

Additionally, the Policy provides Business Income coverage for losses caused by direct physical loss or damage at dependent properties "caused by or resulting from a Covered Cause of Loss." Further, the Policy defines a dependent property as "property owned, leased or operated by others whom [Brooklyn] depend[ed] on to: [¶] (a) Deliver materials or services to [Brooklyn] or to others for [Brooklyn’s] account. But services do not include: [¶] (i) Water, communication, power services or any other utility services; or [¶] (ii) Any type of web site, or Internet service, [¶] (b) Accept [Brooklyn’s] products or services; [¶] (c) Manufacture [Brooklyn’s] products for delivery to [Brooklyn’s] customers under contract for sale; or [¶] (d) Attract customers to [Brooklyn’s] business premises."

In March 2020, Brooklyn submitted a claim under the Policy "for loss of business income due to the community spread and infection of coronavirus at [Harry’s Coffee Shop], and the civil response thereto."¹ Sentinel denied the claim. Brooklyn then filed suit.

In the first amended complaint, Brooklyn alleged that, beginning in March 2020, a series of government stay-at-home orders² issued in response to the coronavirus as well as "community infection of COVID-19 adjacent to [Harry’s Coffee Shop], have caused a precipitous decline in [Brooklyn’s] business income." Although acknowledging that restaurants and food services were deemed "Essential Critical Infrastructure," exempting them from governmental orders, Brooklyn alleged that, in response to an executive order issued by California’s governor, it was "forced to prohibit on-site dining, severely limiting the number of customers that [it] could service and effectuating a disastrous evaporation of [its] business income."

Brooklyn also averred that "[b]eginning in March 2020, local and state governments across the country urged their citizens to act as if they were infected and as if everyone around them was infected with a novel and highly infectious coronavirus." As such, Brooklyn claimed Harry’s Coffee Shop was, "and continue[d] to be, repeatedly infected by individuals coming and going from the premises until the virus is eliminated in the region."

Brooklyn further alleged that the United States federal government issued travel bans, prohibiting "foreign nationals" from several countries from entering the United States. It also noted that, "[b]ecause of the presence of COVID-19, which was continually and repeatedly brought to … [Harry’s Coffee Shop] by employees and guests, [Brooklyn] was forced to reduce operations and move outside, physically losing the use of its interior dining spaces."

In addition, Brooklyn represented that "[i]n or about the early weeks of March 2020, the government, scientific community, and those personally affected by the virus recognized the coronavirus as a cause of real physical loss and damage." Moreover, Brooklyn claimed the coronavirus pandemic was "exacerbated by the fact that the deadly coronavirus physically infects and stays on the surfaces of objects or materials for many days. The virus was also carried into this state by individuals traveling between countries and states who in turn infected others and the facilities they visited, infecting property in and around … [Harry’s Coffee Shop]." (Footnote omitted.)

The operative complaint included allegations regarding the impact of the coronavirus pandemic on Harry’s Coffee Shop. To this end, Brooklyn averred that "[t]he presence of COVID-19 also required [Brooklyn] to operate at reduced capacity and deprived [Brooklyn] of the ability to use the dining rooms and other facilities at … [Harry’s Coffee Shop]. Moreover, the repeated movement of equipment, tables, and other furniture in and out of the building in order to respond to the presence of the virus resulted in physical damage to that equipment, including broken chairs and at least one broken table." And Brooklyn alleged that it was required to incur "significant Extra Expense through enhanced and continual sanitation of … [Harry’s Coffee Shop] in order to help mitigate the impacts of business interruption and continue operations in some decreased capacity."

The operative complaint contained causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, declaratory relief, and professional negligence. These causes of action were based on Sentinel’s denial of Brooklyn’s claim under the Policy.

Sentinel filed a motion for judgment on the pleadings. Brooklyn opposed that motion, to which, Sentinel filed a reply. The superior court granted the motion, finding that there was no coverage under the Policy for Brooklyn’s claims. The court subsequently entered judgment in favor of Sentinel, dismissing the operative complaint with prejudice. Brooklyn timely appealed.

DISCUSSION

A. Standard of Review and Relevant Law

[1–3] " ‘The standard of review for a motion for judgment on the pleadings is the same as that for a general demurrer: We treat the pleadings as admitting all of the material facts properly pleaded, but not any contentions, deductions or conclusions of fact or law contained therein…. We review the complaint de novo to determine whether it alleges facts sufficient to state a cause of action under any theory.’ " (Burd v. Barkley Court Reporters, Inc. (2017) 17 Cal.App.5th 1037, 1042, ...