California Court of Appeals Reverses Denial of COVID-19 Claim Based on Virus-Specific Endorsement
The California Court of Appeal reversed the trial court’s grant of the insurer’s demurrer on a COVID-19 claim and remanded the case for further proceedings. John’s Grill v. Hartford Fin. Servs. Group, 2022 Cal. App. LEXIS 1056 (Cal. Ct. App. Dec. 27, 2022).
John’s Grill had two insurers, Hartford and Sentinel. Hartford’s motion to quash service of summons was granted by the trial court and affirmed by the appellate court. Sentinel’s policy had customised trigger-of-coverage language that was virus-specific. The Sentinel endorsement (1) contained an affirmative grant of coverage specifically for “loss or damage” caused by a virus; and (2) a special definition of ‘loss or damage” that included “direct physical loss or direct physical damage to” property, but was broad enough to encompass pervasive infiltration of virus particulates onto the surfaces of covered property, which is what John’s Grill alleged here.
The policy’s Limited Fungi or Virus Coverage Endorsement included provisions: (1) that added 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) that excluded any “loss or damage caused directly or indirectly by” the “presence, growth, proliferation, spread or any activity of . . . virus,” subject to an exception where the loss or damage fell within the Limited Virus Coverage.
The appellate court started with the policy’s insuring agreement. The key triggering phrase in the Limited Virus Coverage grant was simply “loss or damage,” which contemplated the possibility that a virus could cause physical damage to covered property and include the costs of “removal” of “virus.”
Under California law, the court was concerned with giving an affirmative grant of coverage its fullest reach, in accord with its text and structure, while resolving ambiguities in accordance with the reasonable expectations of the insured. The applicability of the Virus Exclusion could be determined only after the threshold question was answered, keeping in mind the exclusion was given narrow scope.
The court further decided that the federal case law relied upon by Sentinel was from federal district court judges sitting in diversity and not binding. Few applied California insurance coverage law and focused on policy language different from that at issue here.
Therefore, (1) the insuring agreement in the Limited Virus Coverage was broad enough to encompass forms of property “loss” that did not involve physical alteration of property; (2) John’s Grill alleged enough to warrant giving it another opportunity to plead that its claim fell within the scope of the Limited Virus Coverage grant; (3) the Specfied Causes Clause, construed broadly, as Sentinel urged, would leave John’s Grill with no virus coverage and would be illusory; and (4) turning to the exclusionary language, it was premature to say whether the Virus Exclusion applied, since that exclusion was subject to an exception wherever there was coverage under the Limited Virus Coverage provisions. The applicability of the exception could not be dete3rmined until the issue of coverage was decided.
