John's Grill, Inc. v. Hartford Fin. Serv. Grp., Inc.

323 Cal.Rptr.3d 875

552 P.3d 1045

JOHN’S GRILL, INC., et al., Plaintiffs and Appellants,

v.The HARTFORD FINANCIAL SERVICES GROUP, INC., et al., Defendants and Respondents.

S278481

Supreme Court of California.

August 8, 2024

First Appellate District, Division Four, A162709, San Francisco City and County Superior Court, CGC-20-584184, Ethan P. Schulman, Judge Cotchett, Pitre & McCarthy, Nanci E. Nishimura, Brian Danitz, Burlingame, Andrew F. Kirtley and Julia Q. Peng for Plaintiffs and Appellants.

Reed Smith, John N. Ellison, Richard P. Lewis, Jr., Katherine J. Ellena and Kathryn M. Bayes, Los Angeles, for French Laundry Partners, LP, KRM, Inc., and Yountville Food Emporium, LLC, as Amici Curiae on behalf of Plaintiffs and Appellants.

Covington & Burling, Richard Z. Lee, Barbara Tsao, Rani Gupta, Palo Alto, and David B. Goodwin, San Francisco, for United Policyholders as Amicus Curiae on behalf of Plaintiffs and Appellants.

Complex Appellate Litigation Group, Anna-Rose Mathieson, Melanie Gold; Steptoe & Johnson, Anthony J. Anscombe, Sarah D. Gordon; Wiggin and Dana, Jonathan Freiman, Tadhg Dooley, David R. Roth and Evan Bianchi for Defendants and Respondents.

Crowell & Moring and Mark D. Plevin, San Francisco, for American Property Casualty Insurance Association as Amicus Curiae on behalf of Defendants and Respondents.

Opinion of the Court by Guerrero, C. J.

Plaintiffs John’s Grill, Inc., and John Konstin (together, John’s Grill) operate a restaurant in San Francisco. 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, 303 Cal. Rptr.3d 201 (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, 303 Cal.Rptr.3d 201.)

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.

[1] 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 farther proceedings.

I. FACTUAL AND PROCEDURAL BACKGROUND

[2, 3] In the trial court, Sentinel successfully demurred to John’s Grill’s operative complaint for damages and other relief. "Accordingly, we assume that the complaint’s properly pleaded material allegations are true and give the complaint a reasonable interpretation by reading it as a whole and all its parts in their context.". (Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125, 271 Cal. Rptr. 146, 793 P.2d 479.) "We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.’ " (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal. Rptr. 718, 703 P.2d 58 (Blank).)

According to its operative complaint, John’s Grill is "a historic, family-owned, landmark restaurant located in the heart of downtown San Francisco." Its business 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." The COVID-19 virus is a deadly infectious disease that can be transmitted from person to person through small respiratory droplets, which spread when an infected person coughs or exhales. The droplets can also "land on objects and surfaces around the person" and may infect others who come into contact with the object or surface. John’s Grill further alleges, "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." Given the presence of the COVID-19 virus in the community, "John’s Grill could not have reopened during this ongoing closure period due to the high statistical likelihood, if not certainty, that the Insured Premises would have been regularly re-damaged by the recurrent reintroduction of infectious Coronavirus into the Insured Premises from COVID-19 infected individuals and personal property."

John’s Grill had purchased a first-party commercial property insurance policy from Sentinel. Under the policy, Sentinel generally agreed to pay for "direct physical loss of or physical damage to" covered property. The covered property included both the physical premises of John’s Grill and personal property associated with its restaurant business. In the event the direct physical loss or damage to property caused a suspension of business operations, Sentinel agreed to pay for "the actual loss of Business Income" suffered by John’s Grill "during the ‘period of restoration,’ " as well as any "reasonable and necessary Extra Expense" incurred "during the ‘period of restoration’ that [John’s Grill] would not have incurred if there had been no direct physical loss or physical damage to property." "Extra Expense" includes expenses incurred to "avoid or minimize the suspension of business and to continue ‘operations’ " and to "repair or replace any property." The "period of restoration" begins on the date of direct physical loss or damage and ends when the property "should be repaired, rebuilt or replaced with reasonable speed and similar quality" or when the "business is resumed at a new, permanent location."

As noted, the policy included a Limited Fungi, Bacteria or Virus Coverage endorsement. The endorsement added a broad exclusion for loss or damage caused by viruses and other microorganisms: "We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss: [¶] (1) Presence, growth, proliferation, spread or any activity of ‘fungi,’ wet rot, dry rot, bacteria or virus."¹ However, the exclusion did not apply if the " ‘fungi,’ wet or dry rot, bacteria or virus results from fire or lightning" or to the extent the endorsement provided specific additional coverage.

The specific additional coverage provided by the endorsement applied only "when the ‘fungi,’ wet or dry rot, bacteria or virus is the result of one or more of the following causes that occurs during the policy period … [¶] (1) A ‘specified cause of loss’ other than fire or lightning; [¶] (2) Equipment Breakdown Accident occurs to Equipment Breakdown Property, if Equipment Breakdown applies to the affected premises." Elsewhere in the policy, "specified cause of...