Policyholders often contend a limitation or exclusion of coverage in an insurance policy is “illusory” and thus should not be enforced. On August 8, the California Supreme Court ruled that there is no “illusory coverage doctrine” per se and that it is only when policy wording is ambiguous or runs afoul of public policy that the potential for coverage to be illusory might matter. The court further held that even if an “illusory coverage doctrine” could apply to unambiguous wording, the insured would bear the burden of alleging and proving facts sufficient to support application of the doctrine.
John’s Grill v. The Hartford Financial Services Group, No. S278481 is one of many cases seeking coverage for COVID-19 related losses suffered by a policyholder, here a restaurant in San Francisco. The policy included a Limited Fungi, Bacteria or Virus Coverage endorsement, which provided coverage only for virus related losses caused by one of several specified causes of loss. The policyholder admitted none of those specified causes of loss were present, but argued the limitation to specified causes of loss was unenforceable because it rendered the virus coverage illusory.
The California Supreme Court disagreed, finding the limited buy-back of virus coverage in a property insurance policy was unambiguous, not illusory, and—under the circumstances—provided no coverage for the policyholder restaurant’s COVID-19 loss.
In ruling in favor of the insurer, the California Supreme Court took the opportunity to explain the uncommon situations in which a policy provision might be considered to be illusory. It began by noting it had never recognized an illusory coverage doctrine as such. It then explained that to invoke the illusory coverage doctrine it would have to make a foundational showing that it had a reasonable expectation that the policy would cover pandemic related losses, which it failed to do.
Policyholders have long argued coverage provisions are illusory. John’s Grill is significant because it establishes a substantial burden that a policyholder must make to establish that a contractual promise is illusory. The Supreme Court only addressed the threshold reasonable expectations doctrine. It did not discuss the other burden a policyholder has in persuading a court that the reasonable expectations doctrine should be applied.
