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

• Decision Date: 27 December 2022
• Docket Number: A162709
• Citation: 86 Cal.App.5th 1195,303 Cal.Rptr.3d 201
• Parties: JOHN'S GRILL, INC., et al., Plaintiffs and Appellants, v. The HARTFORD FINANCIAL SERVICES GROUP, INC., et al., Defendants and Respondents.
• Court: California Court of Appeals Court of Appeals

86 Cal.App.5th 1195

303 Cal.Rptr.3d 201

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

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

A162709

Court of Appeal, First District, Division 4, California.

Filed December 27, 2022

As Modified January 23, 2023

Certified for Partial Publication.^*

Cotchett, Pitre & McCarthy, Nanci E. Nishimura, Brian Danitz, Burlingame, Andrew F. Kirtley, Julia Q. Peng, for Plaintiffs and Appellants.

Steptoe & Johnson, Anthony J. Anscombe ; Wiggin and Dana, Tadhg Dooley, David R. Roth, for Defendants and Respondents

STREETER, J.

John's Grill, Inc. and its owner John Konstin (collectively, John's Grill) appeal from the trial court's orders (1) sustaining Sentinel Insurance Company, Ltd. (Sentinel)’s demurrer without leave to amend, and (2) granting The Hartford Financial Services Group, Inc. (HFSG)’s motion to quash service of summons.

John's Grill alleges that Sentinel and HFSG wrongfully denied its claim for business interruption coverage for losses sustained in connection with the COVID-19 pandemic. The trial court sustained Sentinel's demurrer on the ground that its business insurance policy affords no coverage for the claim, and granted the motion to quash on the ground that John's Grill failed to show personal jurisdiction over HFSG. In the unpublished portion of this opinion, we conclude that the trial court correctly granted the motion to quash, and in the published portion of the opinion, we conclude that the court erred in sustaining the demurrer without leave to amend.

On the merits, we write in a rapidly evolving area of law. Over the last 18 months, a nearly uniform line of cases in California and across the country holds that temporary loss of use of property due to the COVID-19 pandemic does not constitute "direct physical loss of or damage to" property for purposes of first party insurance coverage. (See Apple Annie, LLC v. Oregon Mutual Ins. Co. (2022) 82 Cal.App.5th 919, 930–935, 298 Cal.Rptr.3d 886 [summarizing cases].) But nearly all of these cases turn on standard form language that was not customized in any material way by modifying endorsement.

The twist in this case is that Sentinel's policy has customized trigger-of-coverage language that is virus-specific. Unlike the undefined term "direct physical loss of or damage to" property in almost all of the COVID-19 business interruption cases decided to date, Sentinel's policy, by endorsement, (1) contains an affirmative grant of coverage specifically for "loss or damage" caused by a virus, and (2) a special definition of "loss or damage" that includes "[d]irect physical loss or direct physical damage to" property, but is broad enough to encompass pervasive infiltration of virus particulates onto the surfaces of covered property, which is what is alleged here.

Although Sentinel's grant of coverage for property "loss or damage" caused by virus is expressly limited—principally by a condition that makes it applicable only if the virus is the "result of" one of a number of listed causes, none of which John's Grill has alleged—the specified causes clause in Sentinel's limited virus coverage endorsement, applied broadly, as Sentinel proposes to apply it here, effectively transforms the limited grant of coverage for virus-caused "loss or damage" into an empty promise. On this record, we conclude that it is unenforceable under the illusory coverage doctrine.

I. BACKGROUND

A. The Parties and the Policy

John's Grill owns and operates a restaurant in downtown San Francisco. On March 16, 2020, in response to the COVID-19 pandemic, the City and County of San Francisco issued a shelter-in-place order that required nonessential businesses to close and restaurants to suspend in-person dining. Subsequent orders were issued that permitted limited indoor and outdoor dining beginning in September 2020. As a result of these orders and the presence of COVID-19 on its premises, John's Grill either had to remain closed or operate at a limited capacity.

Sentinel issued a "Spectrum Business Owner's Policy" to John's Grill for the policy period of November 1, 2019 to November 1, 2020 (the Policy). In a mammoth, 217-page document, the Policy provides a variety of different types of commercial insurance to John's Grill, including first party property coverage in a Special Property Coverage Form, third party liability coverage in a Business Liability Coverage Form, and umbrella liability coverage in an Umbrella Liability Supplemental Contract. All of these coverages are preceded by a Declarations summary stating per claim and per occurrence limitations, and by various Common Conditions of coverage. Within each form of coverage is an insuring agreement, various standard definitions, exclusions, additional coverages, and coverage extensions. There are also modifying endorsements that customize the respective coverages in different ways, including a number of modifications tailored specially to a restaurant business.¹

The Special Property Coverage Form is structured to provide all "Perils" coverage, meaning all risks of physical loss or damage are covered unless subject to a specific exception or exclusion.² At issue here is the first party property insurance provided under two endorsements that modify the Special Property Coverage Form: (1) an "Actual Loss Sustained Business Income & Expense—Specified Limit Coverage" endorsement providing coverage for losses due to suspended operations (the Lost Business Income and Extra Expense Endorsement), and (2) a "Limited Fungi, Bacteria or Virus Coverage" endorsement (the Limited Fungi or Virus Coverage Endorsement).

The most pertinent of these two endorsements is the Limited Fungi or Virus Coverage Endorsement, which includes provisions (1) that add limited coverage in certain circumstances for "loss or damage" "caused by" "virus" (the Limited Virus Coverage), subject to certain conditions requiring that the virus was the "result of" one or more of a list of enumerated causes (the Specified Causes Clause), and (2) that 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" (the Virus Exclusion), subject to an exception where the loss or damage falls within the Limited Virus Coverage. Although we are presented with an issue of personal jurisdiction as a threshold matter, how to reconcile the Limited Virus Coverage with the Virus Exclusion is at the heart of the appeal on the merits.

B. The Proceedings in the Trial Court

Within days of what is now commonly known as the Great Shutdown due to the COVID-19 virus in late March 2020, John's Grill submitted a claim to Sentinel for lost business income under the Lost Business Income and Extra Expense Endorsement. The response came rapidly. On April 6, 2020, Sentinel issued a letter denying the claim.

Sentinel's declination letter explained that "since the coronavirus did not cause property damage at your place of business or in the immediate area, this business income loss is not covered." The letter further stated that even if there was property damage, such damage was excluded from the Policy and that the limited coverage for damage caused by virus did not apply.

On April 15, 2020, John's Grill brought suit against Sentinel and HFSG,³ alleging causes of action for breach of contract, bad faith denial of insurance coverage, unfair business practices, fraud, and declaratory relief. John's Grill claimed coverage under the Civil Authority, Limited Virus Coverage, Lost Business Income and Extra Expense provisions of the Policy. Its primary theory of loss was that government orders compelled a shutdown of business operations, but it alleged in the alternative that it suffered sufficient coverage-triggering damage or loss because "physical droplets containing COVID-19" that land on surfaces rendered its business premises "unusable" due to the "substantial risk of people getting sick, transmitting infection to others, and possibly dying as a result of touching those surfaces."

Both Sentinel and HFSG filed demurrers. HFSG also filed a motion to quash service of summons for lack of personal jurisdiction. In its demurrer, Sentinel argued that the Virus Exclusion bars coverage for John's Grill's alleged losses and that John's Grill has not alleged any of the listed causes of virus in the Specified Causes Clause. Sentinel further argued that there is no coverage under the Lost Business Income and Extra Expense Endorsement because John's Grill fails to allege physical loss of or physical damage to property.

In its motion to quash service of summons, HFSG argued that it is a holding company and parent corporation that does not underwrite any risks itself and is not authorized to do business in California. It further argued that "The Hartford" (as referenced throughout the Policy) is a trade name belonging to Hartford Fire Insurance Company, not HFSG, and is used by various entities, including Sentinel.

Following a hearing, the trial court sustained Sentinel's demurrer without leave to amend. The trial court held that (i) the Virus Exclusion's plain and unambiguous language excludes coverage for losses caused by COVID-19; (ii) the Limited Virus Coverage does not apply because John's Grill failed to allege the COVID-19 virus "resulted from" a cause listed in the Specified Causes Clause; and (iii) the Specified Causes Clause, while perhaps difficult to meet, does not render the Limited Virus Coverage illusory.

The court also granted HFSG's motion to quash service, holding that John's Grill failed to present sufficient evidence to support specific jurisdiction over HFSG.⁴ Finally, the trial court ruled that HFSG's demurrer was moot in light of its order granting the motion to quash.

Following the trial court's dismissal of the action with prejudice as to both Sentinel and HFSG, John's Grill timely appealed. In its appeal, John's Grill...