California Supreme Court Finds Virus Endorsement Does Not Cover COVID-19 Claim

    Reversing the Court of Appeal, the California Supreme Court determined a virus endorsement did not salvage coverage for business loss due to COVID-19. John's Grill v. Hartford Fin. Serv. Group, Inc., 2024 Cal. LEXIS 4241 (Cal. Aug. 8, 2024). 

    John's Grill was heavily impacted by the COVID-19 pandemic and related state and local public health orders. As a result of the restrictions imposed, John's Grill suffered substantial financial losses and had to terminate 54 workers. 

    John's Grill had a first-party commercial property insurance policy with Sentinel. Sentinel agreed to pay for "direct physical loss of or physical damage to" covered property. The loss of business income was also covered if direct physical loss or damage to property caused a suspension of business operations. 

    The policy included a Limited Fungi, Bacteria or Virus Coverage endorsement (Virus Endorsement) which added a broad exclusion for loss or damage caused by viruses and other microorganisms. However, the exclusion did not apply if the virus resulted from fire or lightning or to the extent the endorsement provided specific additional coverage. The specific additional coverage applied only "when the . . . virus is the result of one or more of the following causes that occurred during the policy period . . . (1) A 'specified cause of loss' other than fire or lightning . . . " Elsewhere in the policy, 'specified cause of loss" was defined as "fire; lightning; erosion; windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; and water damage." Under this specific additional coverage, Sentinel agreed to pay "for loss or damage caused by . . . virus."

    John's Grill sought coverage. Sentinel denied the claim (Hartford was also sued, but successfully moved to quash service based on lack of personal jurisdiction). Sentinel wrote that John's Grill did not identify any direct physical loss to any property at the premises. Regarding the Virus Endorsement, Sentinel wrote, "As we understand your loss, the virus did not result from a specified cause of loss; therefore, there is no coverage for your claim based on the limited coverage for virus."

    John's Grill sued. It contended that the Virus Endorsement rendered any promise of coverage illusory, requiring Sentinel to cover pandemic-related losses regardless of the cause. Sentinel maintained that coverage was not illusory because "there are circumstances where virus . . .coverage could be provided." The trial court sustained Sentinel's demurrer to the complaint. On appeal, the Court of Appeal agreed with John's Grill that the Virus Endorsement was illusory. For the endorsement to apply, the virus had to be the "result of one of a number of enumerated causes. But none of the listed causes had anything to do with the biological processes that actually cause a virus . . ."

    The Supreme Court reversed the Court of Appeal. John's Grill's argument relied on the premise that viruses could not replicate outside of a host organism, and thus could not result from an inanimate force or phenomenon. But replication was not the only way that a force or phenomenon could bring about a virus. A force or phenomenon could also transmit a virus. If a viral infection resulted from contaminated drinking water or contact with a contaminated object, the contaminated water or object did not cause the virus to replicate, but it nonetheless brought the virus to a new environment where it could do so.Therefore, the virus resulted from the contaminated water or object because the contaminated water or object transmitted it to the new environment. Given this ordinary usage, it was reasonable to construe the policy language as including transmission. Under this construction, the policy language was not indecipherable or otherwise unclear when applied to viruses.

    Next, the Court addressed John's Grill's argument that the Virus Endorsement was illusory. Based on the policy language, John's Grill could not have an objectively reasonable expectation when it obtained the policy that it would provide coverge for all virus-related loss or damage, regardless of cause. The clear and unambiguous policy language defined the factual scenarios in which John's Grill would have coverage. John's Grill did not show it had a reasonable expectation in virus-related coverage beyond the policy's terms. John's Grill did not address, for example, why a virus at its premises could not result from phenomena such as a windstorm or water damage that carried it there, or even an erosion, vandalism, or riot or civil commotion that released it. 

    Therefore, the judgment of the Court of Appeal was reversed and the matter was remanded.