covid19 – Duane Morris Insurance Law

By Max Stern, Terrance Evans, Todd Norris and Jessica La Londe

On August 8, 2024, in a case entitled John’s Grill v. The Harford Financial Services Group, No. S278481, the Supreme Court of California questioned the existence of the “so-called” illusory coverage doctrine under California law, as it concluded that a policyholder had, in any event, failed to satisfy its foundational elements.

John’s Grill suffered substantial losses during the COVID-19 pandemic. Its insurer 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. That 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.

John’s Grill acknowledged that it could not meet the latter specified cause of loss limitation. Instead, it contended the limitation was unenforceable because it rendered the policy’s promise of virus-related coverage illusory. The Court of Appeal below agreed, and allowed John’s Grill’s claims for virus-related losses or damage to proceed.

Relying on “long-settled principles of contract interpretation,” the Supreme Court of California reversed, concluding that the “plain meaning of the policy govern[ed].” The Court stated that it “has never recognized an illusory coverage doctrine as such,” and rejected “the so-called illusory coverage doctrine [as articulated by John’s Grill],” stating that it “does not appear in our precedents.”

The Court went on to explain that even assuming some version of the doctrine did exist under California law, there were two hurdles John’s Grill would still need to clear before it could establish coverage, and it had not cleared either one in this case. First, in such a case, an insured would have to “make a foundational showing that it had a reasonable expectation that the policy would cover the insured’s claimed loss or damage.” The Court declared that “[s]uch a reasonable expectation of coverage is necessary under any assumed version of the doctrine.” Here, the Court concluded that based on the policy language limiting coverage to certain causes, John’s Grill could not have an objectively reasonable expectation the policy would provide coverage for all virus-related loss or damage, regardless of the cause. Second, the Court explained that even accepting John’s Grill’s articulation of the doctrine, it still could not demonstrate that coverage was illusory. The Court noted that restaurants handle both raw and cooked food, which could be contaminated by a virus and that “John’s Grill has not shown that the prospect of such contamination by water damage or other specified cause of loss is so unrealistic as to render the promised coverage illusory.” According to the Court, it is for the insured to consider the likelihood of benefiting from the policy’s limited virus coverage when obtaining coverage.

By Sheila Raftery Wiggins

The District of New Jersey granted a motion to dismiss a restaurant owner’s purported class action lawsuit seeking business interruption coverage by analyzing: (1) the New Jersey Governor’s Executive Order and (2) the policy language, in a commercial all-risk property damage policy, that excluded coverage for losses covered by viruses.

In N&S Restaurant LLC v. Cumberland Mutual Fire Insurance Company, No. 20-05289 (RBK/KMW), plaintiff filed a claim for loss of business income caused by the New Jersey Governor’s Executive Order which suspended the operation of non-essential retail businesses in response to the ongoing COVID-19 pandemic. The insurance policy provides coverage for “direct physical loss of or damage to Covered Property at the described premises . . . caused by or result[ing] from any Covered Cause of Loss.” Plaintiff requested coverage under three separate policy provisions: (1) the “Business Income” provision; (2) the “Extra Expense” provision; and (3) the “Civil Authority” provision.

The “Business Income” provision provides as follows:

We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “operations” during the “period of restoration”. The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss. With respect to loss of or damage to personal property in the open or personal property in a vehicle, the described premises include the area within 100 feet of such premises.

The “Extra Expense” provision provides as follows:

We will pay necessary Extra Expense you incur during the “period of restoration” that you would not have incurred if there had been no direct physical loss or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss.

The “Civil Authority” provision provides as follows:

When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises

The policy also denies coverage under several enumerated exclusions. Under the Virus Exclusion, Defendant “will not pay for loss or damage caused directly or indirectly by” any “Virus or Bacteria,” which is any “virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” The Virus Exclusion includes an anti-concurrent causation preamble, which states that “[s]uch loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss[.]”

Defendant denied Plaintiff’s request for coverage, citing two primary reasons: (1) the claim was barred by the Virus Exclusion, and (2) the claim did not arise out of physical loss or damage as required by each of the applicable provisions. Defendant asserted that because COVID-19 caused the Executive Order mandating closure of all non-essential businesses, the Virus Exclusion applies.

Plaintiff asserted that the Virus Exclusion does not apply because the “cause of Plaintiff’s loss was the Closure Orders, not the coronavirus.” Plaintiff supports this point by asserting that its claimed loss is not for decontaminating its premises as a result of a coronavirus infestation.

When analyzing Defendant’s motion to dismiss, the District Court focused on the anti-concurrent causation clause of the Virus Exclusion which specifically states that loss caused directly or indirectly by a virus is excluded. The District Court concluded that there is no doubt that COVID-19, a virus, caused New Jersey’s Governor to issue the Executive Order mandating closure of Plaintiff’s restaurant. Therefore, COVID-19 is still a cause of the closure because the Virus Exclusion specifically provides for such indirect causation. The District Court further stated that there is no requirement, as Plaintiff suggests, for the virus to have physically caused the loss, such as via contamination of the property. The District Court analyzed that although costs for decontamination would certainly be a direct loss caused by the virus, this is not the only possible loss that would trigger the Virus Exclusion. The District Court ruled that by its plain language, the Virus Exclusion applies, barring coverage

This District Court case is one of a growing number of rulings which dismiss similar cases. We expect that this body of law will continue to develop.