Court rules insurance does not cover restaurant’s business losses due to COVID

An insurance policy that covers damage from viruses transmitted by water or storms does not apply to the COVID-related closure of a San Francisco restaurant, the state Supreme Court ruled Thursday.

The court had ruled unanimously in May that businesses forced to close their doors or cancel events because of the coronavirus could not recover their losses under standard policies that cover property damage because they could not prove actual damage to their property. Thursday’s ruling, also unanimous, went further, saying that even a policy that covered some virus-related losses did not cover the COVID lockdowns.

Downtown San Francisco restaurant John’s Grill apparently will not suffer any financial loss from the ruling, as it settled its case with Sentinel Insurance Co. in 2022 for an undisclosed amount that the restaurant’s attorney called “substantial.” The owner, John Konstin, said 54 workers lost their jobs and the business lost $20 million from the 220-day closure that began in March 2020.

However, the court’s decision will make it more difficult for other companies to enforce their claims against insurers regarding disputed policies.

Sentinel’s policy for John’s Grill covered losses from viruses spread by certain causes, such as storms, water damage, vandalism and explosions. The restaurant’s owner acknowledged that none of those causes caused the closure, but argued that those restrictions made the promise of coverage “illusory.”

A state appeals court agreed, pointing to previous rulings by other California courts that had classified some vaguely worded insurance policies as “illusory coverage” and required insurers to meet their policyholders’ expectations. But the state’s highest court on Thursday questioned those rulings, saying they were not applicable to the case at hand.

The restaurant’s insurance policy “clearly provides virus-related coverage, but only if the virus resulted from certain, specified causes of loss,” wrote Chief Judge Patricia Guerrero in the 7-0 ruling. “The plain spirit of the policy prevails.”

And she said the court has “never recognized an illusory coverage doctrine.” But “even if we were to consider that line of thinking, John’s Grill would have to show that it had a reasonable expectation of coverage for its pandemic-related losses,” which it did not do, Guerrero said.

“Because of the language in the policy, John’s Grill could not have had an objectively reasonable expectation when it purchased the policy that it would cover all virus-related losses or damages,” said the presiding judge, who also wrote the 7-0 ruling in May denying coverage for property damage during business closures.

“John’s Grill cannot rely on the doctrine of illusory coverage to convert the policy’s limited virus-related coverage into unlimited virus-related coverage.”

The case is John’s Grill v. Hartford Financial Services, S278481.