In its latest Covid-era coverage case, John’s Grill, Inc. v. Hartford Financial Services, Group, Inc., the California Supreme Court held that an insured cannot use the “illusory coverage doctrine to transform the policy’s limited virus-related coverage into unlimited virus-related coverage.” In so holding, the Court reiterated the long-standing rule that “explicit and unambiguous policy limitations” will be enforced as written. 

This case is significant, not only because it relates to the Covid-19 pandemic, but because it dispels the notion of a broad “illusory coverage doctrine” and clarifies the very narrow circumstances under which coverage will be found to be illusory. 

In John’s Grill, Sentinel Insurance Company issued a policy to John’s Grill that included an endorsement which excluded coverage for virus-related losses, but provided coverage if the virus-related loss resulted from certain specified causes. 

In 2020, John’s Grill made a claim for Covid-19 losses. Relying in part on the endorsement, Sentinel denied it. John’s Grill sued Sentinel asserting that the “endorsement rendered any promise of coverage illusory” because the specified causes “are not the kinds of things that cause a virus.” 

Sentinel filed a demurrer, which the trial court sustained. The Court of Appeal reversed “[b]ecause Sentinel has not proffered enough to demonstrate a realistic prospect of John’s Grill ever benefitting from the [endorsement] based on events the parties might reasonably have anticipated.” The Supreme Court granted Sentinel’s petition for review and reversed the Court of Appeal.

The Court stated that it had never recognized the illusory coverage doctrine articulated by the Court of Appeal. According to the Court, the “optional promise” of coverage the Court of Appeal described as illusory was different “from a claim that a binding promise of coverage” was illusory. The Court further stated that insurers are free to exclude coverage for damage under some circumstances, while providing coverage under others; to be enforceable, provisions that limit coverage reasonably expected by the insured must only be “conspicuous, plain and clear” and not violate public policy.

To clarify the concept of illusory coverage, the Court explained that it is predicated on an ambiguity in policy language that renders the policy’s binding promise of coverage unenforceable. 

The Court also pointed out that John’s Grill failed to carry its burden to show that it had a reasonable expectation of coverage. The Court stated that a reasonable insured would not have believed that the endorsement’s limited coverage provided coverage for all virus-related damage regardless of cause. And John’s Grill failed to allege facts showing that there were no circumstances under which coverage would be provided. Instead, it offered only “purely conclusory assertion[s]” regarding why a virus could not result from the specified causes of loss in the endorsement. However, the Court did not agree that it was implausible for a virus to result from those causes of loss specified in the endorsement and provided examples of how the endorsement could apply.