Court Opinion

ID: 9365415
Source: CourtListenerOpinion
Date Created: 2023-01-24 02:02:16.214329+00
Date Added: 2024-06-11T17:15:45.528093
License: Public Domain

Filed 1/23/23 (unmodified opinion attached)

                  CERTIFIED FOR PARTIAL PUBLICATION *

       IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                             FIRST APPELLATE DISTRICT

                                      DIVISION FOUR

 JOHN’S GRILL, INC., et al.,
       Plaintiffs and Appellants,                 A162709
                      v.                          (San Francisco Super. Ct.
 THE HARTFORD FINANCIAL                           No. CGC-20-584184)
 SERVICES GROUP, INC., et al.,                    ORDER MODIFYING OPINION;
       Defendants and Respondents.                NO CHANGE IN JUDGMENT

       On its own motion, this court orders that the December 27, 2022
          opinion be modified as follows:
       1. On page 10, in the first paragraph under subheading “1. Insurance
          Policy Interpretation”, in the parenthetical after the first sentence
          of text, insert as the first citation in the parenthetical, “Yahoo Inc.
          v. National Union Fire Ins. Co. (2022) 14 Cal.5th 58, 67 (Yahoo);” so
          that the sentence and the following parenthetical read:
                 Because insurance policies are contracts, judicial interpretation
                 of them, like any other contract, is a question of law. (Yahoo
                 Inc. v. National Union Fire Ins. Co. (2022) 14 Cal.5th 58, 67
                 (Yahoo); AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807,
                 818; Bank of the West v. Superior Court (1992) 2 Cal.4th 1254,
                 1264 [“While insurance contracts have special features, they are
                 still contracts to which the ordinary rules of contractual
                 interpretation apply.”].)

       Pursuant to California Rules of Court, rules 8.1105(b) and 8.1110, this
       *

opinion is certified for publication with the exception of part II.A.

                                              1
2. On page 10, also in the first paragraph under the subheading
   “1. Insurance Policy Interpretation”, in the parenthetical after the
   second and third sentences of text, insert as the second citation in
   the parenthetical, “; Yahoo, supra, at p. 67” so that the sentences
   and the following parenthetical read:
       The “mutual intention of the parties at the time the contract is
       formed governs interpretation. [Citation.] Such intent is to be
       inferred, if possible, solely from the written provisions of the
       contract.” (AIU Ins. Co., at pp. 821–822; Yahoo, supra, at p. 67.)
3. On page 10, also in the first paragraph under the subheading
   “1. Insurance Policy Interpretation”, in the parenthetical at the end
   of that paragraph, insert as the concluding citations in the
   parenthetical, “; Yahoo, supra, at p. 67 [if policy terms “ ‘are
   ambiguous [i.e., susceptible of more than one reasonable
   interpretation], we interpret them to protect “ ‘the objectively
   reasonable expectations of the insured.’ ” [Citations.] Only if these
   rules do not resolve a claimed ambiguity do we resort to the rule
   that ambiguities are to be resolved against the insurer.’ ”]; Yahoo,
   at p. 69” so that the concluding sentence and the following
   parenthetical read:
       Any ambiguous terms must be interpreted “in the sense [the
       insurer] believed [the insured] understood them at the time of
       formation,” and ambiguities must be resolved in favor of
       coverage. (AIU Ins. Co., at p. 822, citing Civ. Code, § 1649;
       Yahoo, supra, at p. 67 [if policy terms “ ‘are ambiguous [i.e.,
       susceptible of more than one reasonable interpretation], we
       interpret them to protect “ ‘the objectively reasonable
       expectations of the insured.’ ” [Citations.] Only if these rules
       do not resolve a claimed ambiguity do we resort to the rule that
       ambiguities are to be resolved against the insurer.’ ”]; Yahoo, at
       p. 69.)
4. On page 11, in the first paragraph (which begins, “ “The rules for
   recognizing ambiguity are . . .” ”), in the parenthetical after the
   multi-sentence quotation, insert as the second citation in the
   parenthetical, “; accord, Yahoo, supra, 14 Cal.5th at p. 69 [“the
   meaning of the word or phrase must be considered in light of its
   context”]” so that the parenthetical reads:

                                    2
       (Shell Oil Co. v. Winterthur Swiss Ins. Co. (1993)
       12 Cal.App.4th 715, 737; accord, Yahoo, supra, 14 Cal.5th at
       p. 69 [“the meaning of the word or phrase must be considered in
       light of its context”].)
5. On page 11, in the second paragraph (which begins, “Insurance
   policies typically contain”), in the parenthetical after the second
   sentence of text, insert as the second citation in the parenthetical,
   “; accord, Yahoo, supra, 14 Cal.5th at pp. 67, 69” so that the
   sentence and the following parenthetical read:
       The grant of coverage is generally interpreted broadly in favor
       of the insured to protect the objectively reasonable expectations
       of the insured. (AIU Ins. Co. v. Superior Court, supra, 51 Cal.3d
       at p. 822; accord, Yahoo, supra, 14 Cal.5th at pp. 67, 69.)
6. On page 12, in the first full paragraph (which begins, “The insurer
   bears the burden”), in the parenthetical after the first sentence,
   insert as the first citation in the parenthetical, “Yahoo, supra,
   14 Cal.5th at p. 68;” so that the sentence and the following
   parenthetical read:
       The insurer bears the burden of proving that an exclusionary
       clause applies. (Yahoo, supra, 14 Cal.5th at p. 68; Travelers
       Casualty & Surety Co. v. Superior Court (1998) 63 Cal.App.4th
       1440, 1453.)
7. On page 12, also in the first full paragraph (which begins, “The
   insurer bears the burden”), in the parenthetical at the end of the
   paragraph, insert as the second citation in the parenthetical,
   “; accord, Yahoo, supra, at p. 68 [“When coverage is in dispute, the
   initial burden is on the insured . . . to prove that its claim falls
   within the scope of potential coverage. [Citation.] If the insured
   establishes that the policy provides at least the potential for
   coverage, the burden shifts to the insurer . . . to show the claim falls
   within one of the policy’s exclusions.”].)” so that the parenthetical
   reads:
       (Hallmark Ins. Co. v. Superior Court (1988) 201 Cal.App.3d
       1014, 1017; accord, Yahoo, supra, at p. 68 [“When coverage is in
       dispute, the initial burden is on the insured . . . to prove that its
       claim falls within the scope of potential coverage. [Citation.] If
       the insured establishes that the policy provides at least the
       potential for coverage, the burden shifts to the insurer . . . to
       show the claim falls within one of the policy’s exclusions.”].)

                                     3
     8. On page 28, in the first full paragraph (which begins, “Sentinel
        acknowledges the more expansive breadth”), after the last sentence
        of the paragraph, insert a parenthetical stating, “(See Yahoo, supra,
        14 Cal.5th at pp. 65, 68, 71, 72 [endorsement significantly modified
        standard version of policy, including by removing an otherwise
        applicable exclusion].)” so that the sentence and the parenthetical
        citation read:
            They modify the main body of an otherwise standardized form,
            thereby customizing it for purposes of the endorsement, which
            is an objective the parties to this insurance contract plainly had,
            given the tailored nature of several of the endorsements they
            agreed upon. (See Yahoo, supra, 14 Cal.5th at pp. 65, 68, 71, 72
            [endorsement significantly modified standard version of policy,
            including by removing an otherwise applicable exclusion].)
     9. On page 30, in the paragraph that begins on page 29 with the
        words, “We are prepared to accept”, after the second sentence of
        text, insert a parenthetical stating, “(See Yahoo, supra, 14 Cal.5th
        at pp. 65, 68, 71, 72 [endorsement modified standard policy].)” so
        that the sentence and the parenthetical citation read:
            But at best for Sentinel, the Policy is ambiguous when read in
            light of the modifications made by the Limited Fungi or Virus
            Coverage Endorsement. (See Yahoo, supra, 14 Cal.5th at
            pp. 65, 68, 71, 72 [endorsement modified standard policy].)
     The modifications effect no change in the judgment.

Dated: January 23, 2023                         STREETER, Acting P. J.

                                         4
Trial Court: Superior Court of California, County of San Francisco

Trial Judge: Hon. Ethan P. Schulman

Counsel:     Cotchett, Pitre & McCarthy, Nanci E. Nishimura, Brian Danitz,
               Andrew F. Kirtley, Julia Q. Peng, for Plaintiffs and
               Appellants.

             Steptoe & Johnson, Anthony J. Anscombe; Wiggin and Dana,
                Tadhg Dooley, David R. Roth, for Defendants and
                Respondents.

                                     5
Filed 12/27/22 (unmodified opinion)

                    CERTIFIED FOR PARTIAL PUBLICATION *
        IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                FIRST APPELLATE DISTRICT

                                      DIVISION FOUR

 JOHN’S GRILL, INC., et al.,
        Plaintiffs and Appellants,              A162709
                        v.                      (San Francisco Super. Ct.
 THE HARTFORD FINANCIAL                         No. CGC-20-584184)
 SERVICES GROUP, INC., et al.,
        Defendants and Respondents.

        John’s Grill, Inc. and its owner John Konstin (collectively, John’s Grill)
appeal from the trial court’s orders (1) sustaining Sentinel Insurance
Company, Ltd. (Sentinel)’s demurrer without leave to amend, and
(2) granting The Hartford Financial Services Group, Inc. (HFSG)’s motion to
quash service of summons.
        John’s Grill alleges that Sentinel and HFSG wrongfully denied its
claim for business interruption coverage for losses sustained in connection
with the COVID-19 pandemic. The trial court sustained Sentinel’s demurrer
on the ground that its business insurance policy affords no coverage for the
claim, and granted the motion to quash on the ground that John’s Grill failed
to show personal jurisdiction over HFSG. In the unpublished portion of this
opinion, we conclude that the trial court correctly granted the motion to
quash, and in the published portion of the opinion, we conclude that the court
erred in sustaining the demurrer without leave to amend.

       Pursuant to California Rules of Court, rules 8.1105(b) and 8.1110, this
        *

opinion is certified for publication with the exception of part II.A.

                                            1
        On the merits, we write in a rapidly evolving area of law. Over the last
18 months, a nearly uniform line of cases in California and across the country
holds that temporary loss of use of property due to the COVID-19 pandemic
does not constitute “direct physical loss of or damage to” property for
purposes of first party insurance coverage. (See Apple Annie, LLC v. Oregon
Mutual Ins. Co. (2022) 82 Cal.App.5th 919, 930–935 [summarizing cases].)
But nearly all of these cases turn on standard form language that was not
customized in any material way by modifying endorsement.
        The twist in this case is that Sentinel’s policy has customized trigger-
of-coverage language that is virus-specific. Unlike the undefined term “direct
physical loss of or damage to” property in almost all of the COVID-19
business interruption cases decided to date, Sentinel’s policy, by
endorsement, (1) contains an affirmative grant of coverage specifically for
“loss or damage” caused by a virus, and (2) a special definition of “loss or
damage” that includes “[d]irect physical loss or direct physical damage to”
property, but is broad enough to encompass pervasive infiltration of virus
particulates onto the surfaces of covered property, which is what is alleged
here.
        Although Sentinel’s grant of coverage for property “loss or damage”
caused by virus is expressly limited—principally by a condition that makes it
applicable only if the virus is the “result of ” one of a number of listed causes,
none of which John’s Grill has alleged—the specified causes clause in
Sentinel’s limited virus coverage endorsement, applied broadly, as Sentinel
proposes to apply it here, effectively transforms the limited grant of coverage
for virus-caused “loss or damage” into an empty promise. On this record, we
conclude that it is unenforceable under the illusory coverage doctrine.

                                         2
                            I. BACKGROUND
   A. The Parties and the Policy
      John’s Grill owns and operates a restaurant in downtown San
Francisco. On March 16, 2020, in response to the COVID-19 pandemic, the
City and County of San Francisco issued a shelter-in-place order that
required nonessential businesses to close and restaurants to suspend in-
person dining. Subsequent orders were issued that permitted limited indoor
and outdoor dining beginning in September 2020. As a result of these orders
and the presence of COVID-19 on its premises, John’s Grill either had to
remain closed or operate at a limited capacity.
      Sentinel issued a “Spectrum Business Owner’s Policy” to John’s Grill
for the policy period of November 1, 2019 to November 1, 2020 (the Policy).
In a mammoth, 217-page document, the Policy provides a variety of different
types of commercial insurance to John’s Grill, including first party property
coverage in a Special Property Coverage Form, third party liability coverage
in a Business Liability Coverage Form, and umbrella liability coverage in an
Umbrella Liability Supplemental Contract. All of these coverages are
preceded by a Declarations summary stating per claim and per occurrence
limitations, and by various Common Conditions of coverage. Within each
form of coverage is an insuring agreement, various standard definitions,
exclusions, additional coverages, and coverage extensions. There are also
modifying endorsements that customize the respective coverages in different
ways, including a number of modifications tailored specially to a restaurant
business. 1

      1These modifications, set forth in an endorsement entitled “Super
Stretch for Restaurants,” apply specifically to the Special Property Coverage
Form.

                                       3
      The Special Property Coverage Form is structured to provide all
“Perils” coverage, meaning all risks of physical loss or damage are covered
unless subject to a specific exception or exclusion. 2 At issue here is the first
party property insurance provided under two endorsements that modify the
Special Property Coverage Form: (1) an “Actual Loss Sustained Business
Income & Expense—Specified Limit Coverage” endorsement providing
coverage for losses due to suspended operations (the Lost Business Income
and Extra Expense Endorsement), and (2) a “Limited Fungi, Bacteria or
Virus Coverage” endorsement (the Limited Fungi or Virus Coverage
Endorsement).
      The most pertinent of these two endorsements is the Limited Fungi or
Virus Coverage Endorsement, which includes provisions (1) that add limited
coverage in certain circumstances for “loss or damage” “caused by” “virus”
(the Limited Virus Coverage), subject to certain conditions requiring that the
virus was the “result of ” one or more of a list of enumerated causes (the
Specified Causes Clause), and (2) that exclude any “loss or damage caused
directly or indirectly by” the “[p]resence, growth, proliferation, spread or any
activity of ‘fungi’, wet rot, dry rot, bacteria or virus” (the Virus Exclusion),
subject to an exception where the loss or damage falls within the Limited
Virus Coverage. Although we are presented with an issue of personal
jurisdiction as a threshold matter, how to reconcile the Limited Virus
Coverage with the Virus Exclusion is at the heart of the appeal on the merits.

      2  An endorsement entitled “Perils Specifically Excepted” provides that,
“As used herein, ‘Peril’ means a cause of physical loss or damage to property.”
Paragraphs A and B of the endorsement go on to list a series of “excepted”
“Perils.” And Paragraph B of the Special Property Coverage Form sets forth
a list of exclusions.

                                         4
   B. The Proceedings in the Trial Court
      Within days of what is now commonly known as the Great Shutdown
due to the COVID-19 virus in late March 2020, John’s Grill submitted a claim
to Sentinel for lost business income under the Lost Business Income and
Extra Expense Endorsement. The response came rapidly. On April 6, 2020,
Sentinel issued a letter denying the claim.
      Sentinel’s declination letter explained that “since the coronavirus did
not cause property damage at your place of business or in the immediate
area, this business income loss is not covered.” The letter further stated that
even if there was property damage, such damage was excluded from the
Policy and that the limited coverage for damage caused by virus did not
apply.
      On April 15, 2020, John’s Grill brought suit against Sentinel and
HFSG, 3 alleging causes of action for breach of contract, bad faith denial of
insurance coverage, unfair business practices, fraud, and declaratory relief.
John’s Grill claimed coverage under the Civil Authority, Limited Virus
Coverage, Lost Business Income and Extra Expense provisions of the Policy.
Its primary theory of loss was that government orders compelled a shutdown
of business operations, but it alleged in the alternative that it suffered
sufficient coverage-triggering damage or loss because “physical droplets
containing COVID-19” that land on surfaces rendered its business premises

      3 Sentinel, not HFSG, is the insurer named on the Policy, but in its
opposition to HFSG’s motion to quash, John’s Grill argued the Policy was
drafted and sold by The Hartford (the trade name that is commonly used for
HFSG). John’s Grill had also named as a defendant Norbay Insurance
Services, Inc., the insurance broker that sold the Policy to it. The trial court
dismissed Norbay from the case in March 2021. John’s Grill does not appeal
this dismissal.

                                        5
“unusable” due to the “substantial risk of people getting sick, transmitting
infection to others, and possibly dying as a result of touching those surfaces.”
      Both Sentinel and HFSG filed demurrers. HFSG also filed a motion to
quash service of summons for lack of personal jurisdiction. In its demurrer,
Sentinel argued that the Virus Exclusion bars coverage for John’s Grill’s
alleged losses and that John’s Grill has not alleged any of the listed causes of
virus in the Specified Causes Clause. Sentinel further argued that there is
no coverage under the Lost Business Income and Extra Expense
Endorsement because John’s Grill fails to allege physical loss of or physical
damage to property.
      In its motion to quash service of summons, HFSG argued that it is a
holding company and parent corporation that does not underwrite any risks
itself and is not authorized to do business in California. It further argued
that “The Hartford” (as referenced throughout the Policy) is a trade name
belonging to Hartford Fire Insurance Company, not HFSG, and is used by
various entities, including Sentinel.
      Following a hearing, the trial court sustained Sentinel’s demurrer
without leave to amend. The trial court held that (i) the Virus Exclusion’s
plain and unambiguous language excludes coverage for losses caused by
COVID-19; (ii) the Limited Virus Coverage does not apply because John’s
Grill failed to allege the COVID-19 virus “resulted from” a cause listed in the
Specified Causes Clause; and (iii) the Specified Causes Clause, while perhaps
difficult to meet, does not render the Limited Virus Coverage illusory.
      The court also granted HFSG’s motion to quash service, holding that
John’s Grill failed to present sufficient evidence to support specific

                                        6
jurisdiction over HFSG. 4 Finally, the trial court ruled that HFSG’s demurrer
was moot in light of its order granting the motion to quash.
      Following the trial court’s dismissal of the action with prejudice as to
both Sentinel and HFSG, John’s Grill timely appealed. In its appeal, John’s
Grill argues that the trial court erred by sustaining Sentinel’s demurrer, and
by granting HFSG’s motion to quash service of summons. After full briefing,
argument and submission of the appeal, the parties notified us that they
reached a settlement (Cal. Rules of Court, rule 8.244(a)) and stipulated to
dismissal (id., rule 8.244(c)).
      “On receipt of a request or stipulation to dismiss, the court may dismiss
the appeal and direct immediate issuance of the remittitur.” (Cal. Rules of
Court, rule 8.244(c)(2), italics added; see City of Morgan Hill v. Brown (1999)
71 Cal.App.4th 1114, 1121, fn. 5 [“After the record on appeal is filed,
dismissal of the action based on abandonment or stipulation of the parties is
discretionary, rather than mandatory.”].)
      Because this appeal raises issues “of continuing public interest which
are likely to recur” (Bay Guardian Co. v. New Times Media LLC (2010)
187 Cal.App.4th 438, 445, fn. 2; see Lucich v. City of Oakland (1993)
19 Cal.App.4th 494, 500–502), we decline to dismiss at this late stage in the
appellate proceedings and proceed to file our opinion. Below, we conclude
that the court properly granted HFSG’s motion to quash, but that it erred in
sustaining Sentinel’s demurrer without leave to amend.

      4 In its motion to quash, HFSG argued that the court lacked both
general jurisdiction and specific jurisdiction. In its opposition and opening
brief on appeal, John’s Grill only argues that specific jurisdiction exists over
HFSG. John’s Grill does not dispute that the court lacks general jurisdiction.

                                       7
                                II. ANALYSIS
   A. The Motion To Quash
      We address first whether the trial court erred in granting HFSG’s
motion to quash service of summons for lack of personal jurisdiction. We hold
that it did not.
      “The concept of minimum contacts embraces two types of jurisdiction—
general and specific.” (Sonora Diamond Corp. v. Superior Court (2000)
83 Cal.App.4th 523, 536.) The sole issue here is whether there is a basis to
exercise specific jurisdiction. Specific jurisdiction exists if: (1) the defendant
has purposefully availed itself of forum benefits related to the matter in
controversy; (2) the controversy relates to or arises out of the defendant’s
contacts with the forum; and (3) the exercise of jurisdiction would comport
with fair play and substantial justice. (Van Buskirk v. Van Buskirk (2020)
53 Cal.App.5th 523, 531.) The relationship between the defendant and the
forum state “must arise out of contacts that the ‘defendant [it]self ’ creates
with the forum [s]tate,” not out of “contacts between the plaintiff (or third
parties) and the forum [s]tate.” (Walden v. Fiore (2014) 571 U.S. 277, 284.)
      When, as here, a defendant has moved “to quash service of process on
jurisdictional grounds, the plaintiff has the initial burden of demonstrating
facts justifying the exercise of jurisdiction” by a preponderance of the
evidence. (Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434,
449; ViaView, Inc. v. Retzlaff (2016) 1 Cal.App.5th 198, 209–210.) To satisfy
its initial burden, a plaintiff “must come forward with affidavits and other
competent evidence . . . and cannot simply rely on allegations in an unverified
complaint.” (ViaView, Inc. v. Retzlaff, supra, at p. 210; see Rivelli v. Hemm
(2021) 67 Cal.App.5th 380, 393 [jurisdictional allegations must be supported
by “ ‘competent evidence of jurisdictional facts. Allegations in an unverified
complaint are insufficient to satisfy this burden of proof ’ ”].)

                                         8
      Here, the superior court held that John’s Grill “fail[ed] to present
sufficient evidence to show specific jurisdiction against HFSG.” We agree.
HFSG is not a party to the Policy. It is a holding company that indirectly
owns Sentinel. Without alleging or attempting to present proof that Sentinel
is the mere alter ego of HFSG, John’s Grill alleges that HFSG’s corporate
affiliation with Sentinel is enough to justify the exercise of personal
jurisdiction over HFSG. According to John’s Grill, the Policy “is replete with
references to and messages from ‘The Hartford’ ” and “The Hartford”
maintains a website that invites California-based businesses to purchase
insurance from it.
      As the superior court found, however, The Hartford is merely a trade
name, used by multiple entities and owned by Hartford Fire Insurance
Company, not HFSG. The court also found that, since HFSG is not even
authorized by the California Department of Insurance to do business in
California, HFSG therefore cannot reasonably be confused with “The
Hartford” that is referenced in Sentinel’s Policy. The court also found that
John’s Grill failed to show that “discovery is likely to lead to the production of
evidence of facts establishing jurisdiction,” and having so found, denied a
request from John’s Grill for jurisdictional discovery. All of these findings are
supported by substantial evidence.
   B. The Demurrer
      We review an order sustaining a demurrer de novo and exercise our
independent judgment as to whether the complaint states a cause of action as
a matter of law. (Moore v. Regents of University of California (1990)
51 Cal.3d 120, 125.) This extends “even as to matters not expressly ruled
upon by the trial court.” (Hayter Trucking, Inc. v. Shell Western E&P, Inc.
(1993) 18 Cal.App.4th 1, 13.) We accept as true all material facts properly
pleaded and matters which may be judicially noticed but disregard

                                        9
contentions, deductions, or conclusions of fact or law. (Blank v. Kirwan
(1985) 39 Cal.3d 311, 318.) We “give the complaint a reasonable
interpretation, reading it as a whole and its parts in their context.” (Ibid.)
      “When a demurrer is sustained without leave to amend, it is the duty of
the reviewing court to decide whether there is a reasonable possibility that
the defect can be cured by amendment. If it can, the trial court has abused
its discretion and we must reverse. If it cannot be reasonably cured, there
has been no abuse of discretion. [Citation.] It is the plaintiff’s burden to
show the reviewing court how the complaint can be amended to state a cause
of action.” (Michaelian v. State Comp. Ins. Fund (1996) 50 Cal.App.4th 1093,
1105.)
      1. Insurance Policy Interpretation
      Because insurance policies are contracts, judicial interpretation of
them, like any other contract, is a question of law. (AIU Ins. Co. v. Superior
Court (1990) 51 Cal.3d 807, 818; Bank of the West v. Superior Court (1992)
2 Cal.4th 1254, 1264 [“While insurance contracts have special features, they
are still contracts to which the ordinary rules of contractual interpretation
apply.”].) The “mutual intention of the parties at the time the contract is
formed governs interpretation. [Citation.] Such intent is to be inferred, if
possible, solely from the written provisions of the contract.” (AIU Ins. Co., at
pp. 821–822.) The words in the contract are to be interpreted in their
“ordinary and popular sense” unless “used by the parties in a technical sense,
or unless a special meaning is given to them by usage.” (Civ. Code, § 1644.)
Any ambiguous terms must be interpreted “in the sense [the insurer] believed
[the insured] understood them at the time of formation,” and ambiguities
must be resolved in favor of coverage. (AIU Ins. Co., at p. 822, citing Civ.
Code, § 1649.)

                                       10
      “The rules for recognizing ambiguity are . . . straightforward.
Ambiguity exists when an insurance policy provision is susceptible to two or
more constructions that are reasonable and not based on strained
interpretations. (Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986)
41 Cal.3d 903, 912.) Contract language interpretation involves considering
the whole instrument and the circumstances of the case; ambiguity is not an
abstract question. (Id. at p. 916, fn. 7.) ‘A word generally has several
meanings, even in the dictionary. You have to consider the sentence in which
it stands to decide which of those meanings it bears in the particular case,
and very likely will see that it there has a shade of significance more refined
than any given in the wordbook.’ (Holmes, The Theory of Legal Interpretation
(1899) 12 Harv. L.Rev. 417.)” (Shell Oil Co. v. Winterthur Swiss Ins. Co.
(1993) 12 Cal.App.4th 715, 737.) Under this basic precept, every insurance
contract must be interpreted by its particular wording and read in its
entirety, with careful attention paid to context, the interrelationship of the
provisions within the policy and how they work together, and the actual
circumstances of the contracting parties.
      Insurance policies typically contain two main components: on the one
hand, provisions that specify the risks being covered and thus that mark out
the affirmative grant of coverage, and on the other hand, exclusionary
provisions that “remove coverage for certain risks which are initially within
the insuring clause.” (Collin v. American Empire Ins. Co. (1994)
21 Cal.App.4th 787, 802–803.) The grant of coverage is generally interpreted
broadly in favor of the insured to protect the objectively reasonable
expectations of the insured. (AIU Ins. Co. v. Superior Court, supra, 51 Cal.3d
at p. 822.) And exclusionary provisions that limit or take away coverage are
“strictly construed against the insurer and liberally interpreted in favor of

                                       11
the insured” (Delgado v. Heritage Life Ins. Co. (1984) 157 Cal.App.3d 262,
271), while exceptions to exclusions are broadly construed in favor of the
insured (E.M.M.I. Inc. v. Zurich American Ins. Co. (2004) 32 Cal.4th 465,
471).
        The insurer bears the burden of proving that an exclusionary clause
applies. (Travelers Casualty & Surety Co. v. Superior Court (1998)
63 Cal.App.4th 1440, 1453.) Before exclusionary provisions are even
considered, however, “a court must examine the coverage provisions to
determine whether a claim falls within the potential ambit of the insurance.
[Citations.] Where the scope of the basic coverage itself clearly creates no
potential liability under the policy, a court may not give it a ‘strained
construction’ to impose on an insurer a liability the insurer has not assumed.
[Citation.] The burden is on the insured to prove that an event is a claim
which falls within the basic coverage of the insurance.” (Hallmark Ins. Co. v.
Superior Court (1988) 201 Cal.App.3d 1014, 1017.)
        The phrase “ ‘trigger of coverage’ ” is a “term of ‘convenience’ ” used to
denote the occurrence of an event that “ ‘must happen in the policy period in
order for the potential of coverage to arise. The issue is largely one of
timing—what must take place within the policy’s effective dates for the
potential of coverage to be “triggered”?’ ” (State of California v. Continental
Ins. Co. (2012) 55 Cal.4th 186, 196, italics omitted; see Montrose Chemical
Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 655, fn. 2.) But the
occurrence of a coverage-triggering event simply means the insured may be
entitled to coverage benefits. The remainder of the analysis requires
consideration of whether limiting conditions to coverage have been satisfied
or an exclusion applies. There is no need to consider these additional issues

                                         12
when an occurrence is not within the scope of the insuring clause in the first
instance. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 16.)
      2. The Main Grant of First Party Coverage in the Special
         Property Coverage Form
      The insuring agreement in the Special Property Coverage Form states
that Sentinel “will pay for direct physical loss of or physical damage to
Covered Property . . . caused by or resulting from a Covered Cause of Loss.”
The Policy provides additional coverages that supplement this basic grant of
first party coverage, including under the Lost Business Income and Extra
Expense Endorsement. 5 When applicable, the Lost Business Income and

      5John’s Grill alleges that the Lost Business Income and Extra Expense
coverages may be found at Subparagraphs A.5.o. and A.5.q. of the Special
Property Coverage Form. But the Policy itself—which is attached to and
incorporated in the operative complaint—shows that these provisions were
replaced by an endorsement titled “Actual Loss Sustained Business Income &
Extra Expense—Specified Limit Coverage.” Absent this modifying change,
the business interruption coverage provided by the Special Property Coverage
Form was “not subject to the Limits of Insurance” stated in the Declarations.
(See Subparagraph A.5.o.; see also Subparagraph A.5.p.(3)(c).ii. [same for
Extra Expenses].) Effectively, the applicable limit was temporal: Lost
Business Income and Extra Expense losses occurring “within 12 consecutive
months after the date of direct physical loss or physical damage” and within
24 months after the inception of the Policy were covered.
       The language of the Lost Business Income and Extra Expense
Endorsement tracks the original form language in Subparagraphs A.5.o. and
A.5.q. of the Special Property Coverage Form, but modifies it by adding a
“Specified Limit” ($50,000 per occurrence and $4,000,000 total) indicated in
the Declarations summary. The fact that the replacement language is
virtually identical to the original form language presumably explains why in
the main briefs none of the parties draws attention to it. In a supplemental
briefing order, we asked the parties to address the Lost Business Income and
Extra Expense Endorsement, among other things. The supplemental briefs
confirm that, while the parties disagree about whether John’s Grill’s claim in
this case is covered under any provisions of the Policy, there is no dispute

                                       13
Extra Expense Endorsement covers net business interruption losses—subject
to specified limits—incurred due to suspended business operations caused by
a covered event of “physical loss of or physical damage to” covered property,
together with expenses incurred to mitigate such losses or damage.
      The lost business income provision affords coverage for “the actual loss
of Business Income you sustain due to the necessary suspension of your
‘operations’ during the ‘period of restoration.’ The suspension must be caused
by direct physical loss of or physical damage to property at the ‘scheduled
premises’ . . . caused by or resulting from a Covered Cause of Loss.” The
Extra Expense provision provides coverage for “reasonable and necessary
Extra Expense you incur during the ‘period of restoration’ that you would not
have incurred if there had been no direct physical loss or physical damage to
property . . . .” Thus, the grant of business interruption coverage in the Lost
Business Income and Extra Expense Endorsement—at least before
customizing endorsement language is considered—parallels the main grant of
first party coverage by requiring “physical” impairment and by contemplating
a “period of restoration” of physically impaired property.
      Faced with similar policy language in cases involving claims for
business interruption losses sustained during the COVID-19 pandemic, many
courts have ruled for the insurer under California insurance coverage law.
These cases all conclude that “ ‘direct physical loss of or damage to’ property”
requires a “ ‘distinct, demonstrable, physical alteration of the property’ ” and
cannot be synonymous with mere “ ‘loss of use.’ ” (Mudpie, Inc. v. Travelers
Casualty Ins. Co. (9th Cir. 2021) 15 F.4th 885, 892; see Apple Annie, LLC v.

that John’s Grill seeks coverage in this case under the Lost Business Income
and Extra Expense Endorsement, not under Subparagraphs A.5.o. and A.5.q.
of the Special Property Coverage Form.

                                       14
Oregon Mutual Ins. Co., supra, 82 Cal.App.5th at pp. 930–935; United Talent
Agency v. Vigilant Ins. Co. (2022) 77 Cal.App.5th 821, 830; Musso & Frank
Grill Co., Inc. v. Mitsui Sumitomo Ins. USA Inc. (2022) 77 Cal.App.5th 753;
Inns-by-the-Sea v. California Mutual Ins. Co. (2021) 71 Cal.App.5th 688
(Inns-by-the-Sea). 6 In recent months some courts have held that the issue of
“physical” loss or damage cannot be decided as a pleading matter where the
insured alleges a scientifically supportable theory of virus-caused alteration
of property (see Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Ins.
Co. (2022) 81 Cal.App.5th 96; cf. also Huntington Ingalls Industries v. Ace
American Ins. Co., 2022 VT 45 [applying Vermont law]), but even this strain
of authority accepts (or at least assumes) the Mudpie premise that coverage
can only be triggered by some form of physical alteration of property.
      As one federal district court in the Mudpie line recently put it, if “a sick
person walked into one of Plaintiffs’ restaurants and left behind COVID-19
particulates on a countertop, it would strain credulity to say that the
countertop was damaged or physically altered as a result.” (Unmasked Mngt.

      6 The Mudpie line of cases applying California law is consistent with a
nearly uniform trend across the country, primarily in federal diversity cases.
(See, e.g., Q Clothier New Orleans v. Twin City Fire Ins. (5th Cir. 2022)
29 F.4th 252, 259; Uncork & Create LLC v. Cincinnati Ins. Co. (4th Cir. 2022)
27 F.4th 926, 933–934; 10012 Holdings, Inc. v. Sentinel Ins. Co. (2d Cir. 2021)
21 F.4th 216, 220–223; Santo’s Italian Café LLC v. Acuity Ins. Co. (6th Cir.
2021) 15 F.4th 398, 401; Sandy Point Dental, P.C. v. Cincinnati Ins. Co.
(7th Cir. 2021) 20 F.4th 327, 335; Oral Surgeons, P.C. v. Cincinnati Ins. Co.
(8th Cir. 2021) 2 F.4th 1141, 1144, 1145, fn. 3; Goodwill Industries v.
Philadelphia Indemnity (10th Cir. 2021) 21 F.4th 704, 710; see also Neuro-
Communication Servs. v. Cincinnati Ins. Co., 2022-Ohio-4379, ¶ 17; Verveine
Corp. v. Strathmore Insurance (Mass. 2022) 184 N.E.3d 1266, 1275–1277;
AC Ocean Walk, LLC v. American Guarantee and Liability Ins. Co. (N.J.
Super.Ct.App.Div., June 23, 2022, No. A-1824-21) 2022 WL 2254864,
*11–*12.)

                                       15
v. Century-National Insurance Co. (S.D.Cal. 2021) 514 F.Supp.3d 1217, 1226.)
We know by now that disinfectants provide no cure for the COVID-19 virus
itself—the “debate” about this issue was famously short-lived in 2020—but
we also know (and always did) that disinfectants and other cleaning methods
can be used to eliminate the presence of virus on physical surfaces, which has
been a commonly used precautionary mitigation measure during the
pandemic. But under the Mudpie line of cases, as the Unmasked
Management court explained, allegations merely “showing the alleged
presence of COVID-19 in or on the covered property are not sufficient to
trigger coverage when direct physical loss of or damage to property is
required” (id. at pp. 1225–1226), and thus whatever cleaning or detoxification
efforts may be undertaken do not qualify as “restoration” under standard
first party insurance policies because of the absence of any “physical”
alteration of property. 7

      7 There is a minority view. Some courts have concluded that “direct
physical loss or damage” in COVID-19 business interruption coverage cases
does not require a distinct, demonstrable physical alteration of property (see,
e.g., Kingray Inc. v. Farmers Group Inc. (C.D.Cal. 2021) 523 F.Supp.3d 1163,
1173–1174), but so far as we can discern all of the appellate precedent on this
point has adopted the contrary view, consistent with Mudpie and its progeny.
We are also aware that, in the fall of 2021, some noted insurance coverage
commentators published an article arguing that courts across the country
have, in effect, engaged in a rush-to-judgment against policyholders in
COVID-19 business interruption coverage cases. (See, e.g., Lewis et al.,
Couch’s “Physical Alteration” Fallacy: Its Origins and Consequences (Fall
2021) 56 Tort Trial & Ins. Prac. L.J. 621 [discussing 10A Couch on Insurance
(3d ed. 2016) § 148:46].) This article contends that the reasoning in cases like
Mudpie is premised on a view expressed in a single treatise, Couch on
Insurance, that is contrary to settled law in various areas of first party
insurance coverage law predating the COVID-19 pandemic. (Lewis, supra, at
p. 628 & fn. 36 [discussing cases recognizing first party coverage of claimed
losses due to asbestos, odors, and other types of environmental

                                      16
      In this case, the trial court did not address the meaning of “direct
physical loss of or physical damage to” property in the Special Property
Coverage Form or in the Lost Business Income and Extra Expense
Endorsement. Nor did it mention the Mudpie line of cases. On appeal,
Sentinel defends the order sustaining its demurrer primarily on the grounds
the trial court relied upon—that the Virus Exclusion bars coverage, and that
John’s Grill has failed to allege the COVID-19 on its premises was the “result
of ” any of the causes in the Specified Causes Clause. Even apart from the
obstacles to coverage presented by the Virus Exclusion and the Specified
Causes Clause, Sentinel adds in a last line of argument, the operative
complaint fails to allege direct physical loss of or physical damage to
property, thus precluding coverage as a matter of law under the Mudpie line
of cases.
      John’s Grill addresses Mudpie in a similarly roundabout way,
discussing the issue only in its reply brief and emphasizing that it did allege
“direct physical loss of property in the form of deprivation, loss of use, and
being unable to use the property for its intended purpose due to . . . the
presence of the coronavirus.” On the strength of that allegation, John’s
Grill insists that it “suffer[ed] physical loss of and damage to its property”
within the meaning of the Special Property Coverage Form. It also contends
that the depth of judicial consensus on the issue addressed in Mudpie is
overstated by Sentinel. But John’s Grill nonetheless urges us to avoid

contamination]; see Windt, Insurance Claims and Disputes (6th ed. 2013)
§§ 11:40–11:41 [disagreeing with the Couch view].) A similar critique of
Couch was addressed and rejected by a Second District, Division Four panel
in United Talent Agency, supra, 77 Cal.App.5th at pages 832–833 (“We . . .
decline [the] invitation to depart from the Couch treatise and the case law
that relies upon it.”).

                                       17
engaging with the Mudpie line of cases because of “the absence of a pertinent
ruling on the issue” and the limited briefing on it. We are told by John’s Grill
that “this case [is] a poor vehicle for addressing this important issue of first
impression” and that it “would be better addressed by this Court in the
context of another pending case in which the physical loss or damage issue
was the basis of the decision below and the virtually exclusive focus of the
parties’ briefing” on appeal.
      Thus, while the parties joust with one another over the Mudpie line of
cases in indirect ways, for different reasons they each focus their attention
primarily on the Virus Exclusion and the Limited Virus Coverage. We
largely accept that framing of the issues. We say “largely” because the
Limited Fungi or Virus Coverage Endorsement must be construed together
with the remainder of the Policy, and we think the Mudpie line of cases
provides an important contextual backdrop and helps inform our analysis of
the Policy as a whole. Ultimately, however, we agree that we need not join
the fray over whether “ ‘distinct, demonstrable, physical alteration of . . .
property’ ” is required to trigger coverage under a first party property
insurance policy which uses the undefined phrase “physical loss of or damage
to” property (Mudpie, Inc. v. Travelers Casualty Ins. Co., supra, 15 F.4th at
p. 892).
      We so conclude not because this appeal is a “poor vehicle” to decide the
issues addressed in Mudpie. Obviously, we are not a court of discretionary
jurisdiction with the ability to pick and choose our cases, and where we wish
to disregard nonbinding federal precedent or we have good reason to part
ways with sister courts in California, we will not shrink from doing so. But
in this case, the Mudpie line of cases may be dealt with in a more
straightforward way: It is distinguishable. Because the Limited Fungi or

                                        18
Virus Coverage Endorsement adds virus-specific language to the Policy that
is not present in COVID-19 business interruption insurance cases involving
form language without material modification, those cases involve “very
different policy provisions” and are not controlling here. (Amy’s Kitchen, Inc.
v. Fireman’s Fund Ins. Co. (2022) 83 Cal.App.5th 1062, 1069 (Amy’s
Kitchen).)
      3. The Limited Fungi or Virus Coverage Endorsement
         a. Summary of Analysis
      The trial court’s interpretation and application of the Limited Fungi or
Virus Coverage Endorsement adopted the analytical framework Sentinel
urged in support of the demurrer and continues to urge here on appeal. We
conclude that that approach to analyzing coverage led to error. According to
Sentinel, the Virus Exclusion applies by its clear and unambiguous terms;
John’s Grill fails to allege that any COVID-19 virus on its premises was the
“result of ” some cause listed in the Specified Causes Clause; and the
argument from John’s Grill that the Specified Causes Clause is unenforceable
under the illusory coverage doctrine lacks merit, just as “every California
court to address this argument has held.” Only in an alternative, secondary
line of reasoning does Sentinel attempt to deal with the scope of the Limited
Virus Coverage grant, and then it circles back to the Mudpie line of cases.
      By starting with the Virus Exclusion, focusing next on the Specified
Causes Clause, and dealing with the Limited Virus Coverage grant as an
afterthought, Sentinel has the proper sequence of insurance coverage
analysis backward. There may be cases in which the plain terms of an
exclusion unequivocally foreclose any potential for coverage, without the need
to consider anything else, but this is not one of them. Here, the first question
to address is whether the insured’s coverage claim falls within the scope of
the pertinent insuring agreement. And on this question, the reasoning in the

                                      19
Mudpie line of cases cannot be transposed onto the Limited Virus Coverage
grant. Unlike the undefined phrase “direct physical loss of or physical
damage to” property in the Special Property Coverage Form, the key
coverage-triggering phrase in the Limited Virus Coverage grant is simply
“loss or damage,” which is specially defined in a manner that not only
contemplates the possibility a virus may “cause[]” physical damage to covered
property, but that includes the costs of “removal” of “virus”—a phrase
capacious enough to include cleaning the surfaces of the property—as well as
testing to detect whether virus is merely “present” on the property.
      Analyzing the coverage issues in proper sequence, we conclude that
(1) the insuring agreement in the Limited Virus Coverage, construed in
accordance with the reasonable expectations of an insured in the position of
John’s Grill, is broad enough to encompass forms of property “loss” that do
not involve physical alteration of property; (2) John’s Grill has alleged enough
here to warrant giving it another opportunity to plead that its claim falls
within the scope of the Limited Virus Coverage grant; (3) the Specified
Causes Clause, construed and applied expansively, as Sentinel urges us to do,
leaves John’s Grill with what amounts to no virus coverage at all and thus is
unenforceable under the illusory coverage doctrine; and (4) finally, turning to
the exclusionary language Sentinel invokes—not first in the sequence of
coverage analysis, but last—it is premature to say whether the Virus
Exclusion applies, since that exclusion is subject to an exception wherever
there is coverage under the Limited Virus Coverage provisions, and the
applicability of this exception cannot be determined until the issue of
coverage is ultimately decided.

                                      20
          b. The Virus Exclusion and the Limited Virus Coverage Provisions:
             Text and Structure
      We begin our analysis with some observations about the text of the
Limited Fungi or Virus Coverage Endorsement. Structurally, it has two
parts. First, to the list of Exclusions set forth in the Special Property
Coverage Form, Paragraph A of the Limited Fungi or Virus Coverage
Endorsement adds a new exclusionary clause, the Virus Exclusion, specifying
that Sentinel “will not pay for loss or damage caused directly or indirectly by
. . . [¶] . . . [the] [p]resence, growth, proliferation, spread or any activity of
‘fungi’, wet rot, dry rot, bacteria or virus.” 8 Second, to the list of Additional
Coverages set forth in the Special Property Coverage Form, Paragraph B of
the Limited Fungi or Virus Coverage Endorsement adds a series of
subparagraphs (Subparagraph B.1.a.—Subparagraph B.1.f.) titled “Limited
Coverage For ‘Fungi’, Wet Rot, Dry Rot, Bacteria and Virus,” which together
set forth the terms of the Limited Virus Coverage.
      The principal limitation placed on the Limited Virus Coverage is in the
Specified Causes Clause, Subparagraph B.1.a. of the Limited Fungi or Virus
Coverage Endorsement. This limitation—which tracks counterpart language
stated as an exception to the Virus Exclusion (“But if ‘fungi’, wet rot, dry rot,
bacteria or virus results in a ‘specified cause of loss’ to Covered Property, we
will pay for the loss or damage caused by that ‘specified cause of loss’ ”)—
narrows the Limited Virus Coverage to circumstances where the virus is the
“result of ” certain enumerated “causes.” For purposes of the virus-caused
risks, this effectively flips the all-perils structure of the Special Property
Coverage Form. The Specified Causes Clause states as follows: The Limited

      8 In a proviso, the Virus Exclusion states, “Such loss or damage is
excluded regardless of any other cause or event that contributes concurrently
or in any sequence to the loss.”

                                          21
Virus Coverage grant “only applies when the ‘fungi’, wet or dry rot, bacteria
or virus is the result of one or more of the following causes that occurs during
the policy period and only if all reasonable means were used to save and
preserve the property from further damage at the time of and after that
occurrence. [¶] (1) A ‘specified cause of loss’ other than fire or lightning; [¶]
(2) Equipment Breakdown Accident occurs to Equipment Breakdown
Property, if Equipment Breakdown applies to the affected premises.” (Italics
added.)
      “Specified Cause of Loss,” a defined term in Subparagraph G.19. of the
Special Property Coverage Form (and the first of two conditions set forth in
the Specified Causes Clause) means: “Fire; lightning; explosion, 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; water damage.” “Equipment
Breakdown Accident,” a defined term in Subparagraph A.5.c. of the Special
Property Coverage Form (and the second of two conditions set forth in the
Specified Causes Clause), means, slightly paraphrased: “Mechanical
breakdown,” including rupture or bursting caused by centrifugal force;
“Artificially generated electric current” such as arcing or other electrical
disturbance affecting electrical devices, appliances or wires; or “Explosion” of
or “Physical loss or physical damage” to steam boilers, steam piping, steam
engines or steam turbines or hot water boilers.
      The precise wording of the Limited Virus Coverage grant in
Subparagraph B.1.b. of the Limited Fungi or Virus Coverage Endorsement is

                                        22
as follows: “We will pay for loss or damage by ‘fungi’,[9] wet rot, dry rot,
bacteria and virus. As used in this Limited Coverage, the term loss or
damage means: [¶] (1) Direct physical loss or direct physical damage to
Covered Property caused by ‘fungi’, wet rot, dry rot, bacteria or virus,
including the cost of removal of the ‘fungi’, wet rot, dry rot, bacteria or virus;
[¶] (2) The cost to tear out and replace any part of the building or other
property as needed to gain access to the ‘fungi’, wet rot, dry rot, bacteria or
virus; and [¶] (3) The cost of testing performed after removal, repair,
replacement or restoration of the damaged property is completed, provided
there is a reason to believe that ‘fungi’, wet rot, dry rot, bacteria or virus are
present.” (Italics added.)
           c. “Loss or Damage” as Specially Defined Within the Affirmative
              Grant of Coverage in the Limited Fungi or Virus Coverage
              Endorsement
      The Limited Virus Coverage does more than simply restore pre-existing
coverage that is taken away by the Virus Exclusion. Not only does it contain
an affirmatively phrased insuring agreement (“We will pay for”), which is in
line with the phrasing of other affirmative grants of coverage in the Policy, 10

      9 “Fungi” is defined to mean “any type or form of fungus, including mold
or mildew, and any mycotoxins, spores, scents or by-products produced or
released by fungi.” There is no definition of “virus” or any of the other perils
listed in the Limited Virus Coverage grant.
      10 Compare the language of the endorsement titled “Exclusion—Fungi,
Bacteria and Viruses,” which modifies the Business Liability Coverage Form.
It provides as follows: “This insurance does not apply to: [¶] 1. Injury or
damage arising out of or related to the presence of, suspected presence of, or
exposure to: [¶] a. Fungi, including but not limited to mold, mildew, and
yeast; [¶] b. Bacteria; [¶] c. Viruses; or [¶] d. Dust, spores, odors, particulates
or byproducts, including but not limited to mycotoxins and endotoxins,
resulting from any of the organisms listed in a., b., or c. above; from any
source whatsoever. [¶] 2. Any loss, cost or expense arising out of the testing

                                        23
but the triggering language in the insuring agreement for the Limited Virus
Coverage (“loss or damage”) includes but is not restricted to “direct” and
“physical” forms of loss or damage.
      The term “loss or damage” is also specially defined in Subparagraph
B.1.b. of the Limited Fungi or Virus Coverage Endorsement. And this special
definition is more expansive than the counterpart, undefined phrase “direct
physical loss of or physical damage to Covered Property” in the Special
Property Coverage Form. First, by stating that “[d]irect physical loss or
direct physical damage to” property can be “caused by” “virus,” 11 the special
definition expressly contemplates what the Mudpie line of cases places
outside the ambit of standard form first party trigger of coverage language:
A virus can directly “cause” physical loss or physical damage to property in
some circumstances.
      Second, the language in a series of inclusively framed subparagraphs
within the special definition of “loss or damage” extends beyond the limited
scope of the trigger language in the Special Property Coverage Form in
several key respects. These subparagraphs sweep within the special

for, monitoring of, cleaning up of, removal of, containment of, treatment of,
detoxification of, neutralization of, remediation of, disposal of, or any other
response to or assessment of, the effects of any of the items in 1.a., b., c. or d.
above, from any source whatsoever.”
       This third party liability virus exclusion is subject to a simply stated
exception (the “exclusion does not apply to ‘bodily injury’ or ‘property damage’
caused by the ingestion of food”), but is otherwise absolute and contains no
affirmative grant of coverage. There is a virtually identical, following form
exclusion for virus risk in the Umbrella Liability Supplemental Contract that
also lacks an affirmative grant of virus coverage.
       Subparagraph B.1.b.(1). (“Direct physical loss or direct physical
      11

damage to Covered Property caused by . . . virus, including the cost of
removal of the ‘fungi’, wet rot, dry rot, bacteria or virus,” italics added).

                                        24
definition the costs of structural mitigation work such as “tear[ing] out” and
“replace[ment]” of property, 12 but go further than that. They also refer to
“removal of the virus” 13—a phrase broad enough to encompass simply wiping
and cleaning surfaces—and after the mitigating “repair,” “replacement” or
“removal” work is done, the costs of “testing” for the “presen[ce]” of the virus
is included as well, presumably to ensure that the mitigation was effective.
      We think an insured in the position of John’s Grill could reasonably
construe this trigger language to encompass what has been alleged here. The
operative complaint avers that (1) the COVID-19 virus “can spread from
person to person through small droplets from the nose or mouth which are
spread when a person with COVID-19 coughs or exhales,” (2) “[t]hese
droplets land on objects and surfaces around the person,” (3) the droplets
“land indiscriminately on the surfaces of property with potentially fatal
consequences,” (4) the insidious nature of the COVID-19 virus is that it can
remain infectious on a variety of surfaces and objects from several hours to
several days, and (5) on the premises at John’s Grill, “every surface and
object [was] implicated, including the doors and their parts, door jambs, floors
and carpeting, window panes, walls, countertops, light fixtures, the hostess
desk, tables, chairs, dishes, drinking utensils, flatware, the entire kitchen
and cookware, bathrooms, elevator, artwork and photos, and other fixtures
and moveable personal property” inside the premises.

      12 Subparagraph B.1.b.(2). (“The cost to tear out and replace any part of
the building or other property as needed to gain access to the . . . virus,”
italics added).
      13 Subparagraph B.1.b.(1). (“Direct physical loss or direct physical
damage to Covered Property caused by ‘fungi’, wet rot, dry rot, bacteria or
virus, including the cost of removal of the . . . virus,” italics added).

                                       25
      It is important to bear in mind the commercial context we are dealing
with. Gathering people in a congregate setting is essential to the operation of
John’s Grill’s business. For an enterprise of that type, the allegations of
pervasive virus “presence” on property surfaces can reasonably be read to
mean some type of “removal” of COVID-19 contamination by cleaning or
detoxification was required, thus triggering Subparagraph B.1.b. of the
Limited Virus Coverage provisions even if the mitigation steps that had to be
taken did not involve physical alteration of property. As one of the leading
cases in the Mudpie line puts the issue, “ ‘When the structure of the property
itself is unchanged to the naked eye . . . and the insured alleges that its
usefulness for its normal purposes has been destroyed or reduced, there are
serious questions whether the alleged loss satisfies the policy trigger.’ ”
(Inns-by-the-Sea, supra, 71 Cal.App.5th at p. 700, quoting 10A Couch on
Insurance, supra, § 148:46.) The particular policy language in this case
requires us to decide these questions in favor of the insured, just as we did in
a case involving different but similarly customized language in Amy’s
Kitchen, supra, 83 Cal.App.5th at p. 1069. 14
      Wholly apart from the issue of whether John’s Grill alleged “[d]irect
physical loss or direct physical damage to” property, Sentinel pointed out at
oral argument that John’s Grill does not allege any mitigation steps were
taken to remove the alleged contamination on its premises. In response,
John’s Grill argued that, to the extent more facts are necessary to show “loss

      14 See Amy’s Kitchen, supra, 83 Cal.App.5th at pages 1069–1070
(COVID-19 virus contamination falls within trigger-of-coverage language in
“communicable disease extension” specifying covered costs for “ ‘direct
physical loss or damage’ ” to include “ ‘necessary costs incurred to [¶] . . . [¶]
(c) [m]itigate, contain, remediate, treat, clean, detoxify, disinfect, neutralize,
cleanup, remove, dispose of, test for, monitor, and assess the effects [of] the
communicable disease’ ”).

                                        26
or damage” within the special definition in Subparagraph B.1.b. of the
Limited Fungi or Virus Coverage Endorsement, it should have been given
leave to amend. We must agree. Because there is a reasonable possibility on
this record that John’s Grill can allege that mitigation steps were taken to
remove a virus that was present on its property, the trial court abused its
discretion in sustaining Sentinel’s demurrer without leave to amend.
         d. The “Loss or Damage” Mitigation Provisions (Subparagraph
            B.1.b.) and the Business Interruption Provisions (Subparagraph
            B.1.f.) Are Linked Together
      If the pervasive presence of a virus on the interior surfaces of John’s
Grill’s premises led patrons to cease coming to its restaurant for a period of
time due to the fear of contracting a potentially fatal illness—which is what
is alleged here—we believe a reasonable insured would also have an
expectation of coverage under Subparagraph B.1.f. for the resulting loss of its
ability to use the restaurant for its intended purpose. Subparagraph B.1.f.
covers business interruption losses during a “ ‘period of restoration.’ ”
A “Period of Restoration” is defined in Subparagraph G.12. of the Special
Property Coverage Form to begin on the date of “physical loss or physical
damage caused by or resulting from a Covered Cause of Loss” and to end
when the property “should be repaired, rebuilt or replaced with reasonable
speed and similar quality” or the business resumes at a new location.
      Subparagraphs B.1.b. and B.1.f. are part of the same series of clauses
setting forth terms of the Limited Virus Coverage and are therefore linked.
The specially defined term “loss or damage” appears in both of them.
Subparagraph B.1.f. affords coverage “if a Time Element Coverage applies to
the ‘scheduled premises’ and only if the suspension of ‘operations’ satisfies all
the terms and conditions of the applicable Time Element Coverage.” As
numerous courts that have construed property insurance policies in the wake

                                       27
of the pandemic have observed, Lost Business Income and Extra Expense
coverages are forms of Time Element Coverage. (See Cosmetic Laser, Inc. v.
Twin City Fire Insurance (D.Conn. 2021) 554 F.Supp.3d 389, 394 (Cosmetic
Laser); Q Clothier New Orleans LLC v. Twin City Fire Ins. (E.D.La. 2021)
535 F.Supp.3d 574, 585.)
      Sentinel acknowledges the more expansive breadth of the trigger-of-
coverage language in the specially defined phrase “loss or damage,” but tries
to confine it strictly to Subparagraph B.1.b., leaving Subparagraph B.1.f.
unaffected by the definition. We reject that argument. What Sentinel
ignores is that the Limited Fungi or Virus Coverage Endorsement, by its
terms—as stated in the lead-in sentence, following the title of the
endorsement—“modifies insurance provided under the following: [¶] Special
Property Coverage Form . . . .” That is what endorsements typically do. They
modify the main body of an otherwise standardized form, thereby
customizing it for purposes of the endorsement, which is an objective the
parties to this insurance contract plainly had, given the tailored nature of
several of the endorsements they agreed upon.
      We decline to read Subparagraph B.1.b. in isolation, which would
effectively give the specially defined phrase “loss or damage” in
Subparagraphs B.1.b. and B.1.f. two different meanings. Instead, we think
the special definition of “loss or damage” has the effect of broadening the
trigger of coverage language in all provisions of the Limited Fungi or Virus
Coverage Endorsement, and that the Limited Fungi or Virus Coverage
Endorsement in turn modifies the Special Property Coverage Form for
purposes of the endorsement—here specifically for risks of loss or damage
caused by virus.

                                       28
      In another effort to wall off the Lost Business Income and Extra
Expense coverage afforded by Subparagraph B.1.f. from being affected by
whatever interpretation we place on Subparagraph B.1.b., Sentinel argues
that Time Element Coverage is available only if “ ‘all the terms and
conditions of the applicable Time Element Coverage’ ” are satisfied. And
since John’s Grill has not alleged “direct physical loss of or physical damage
to Covered Property” sufficient to trigger coverage under the Special Property
Coverage Form, so the argument goes, there cannot possibly be coverage
under Subparagraph B.1.f. of the Limited Fungi or Virus Coverage
Endorsement.
      This position—which is where Sentinel’s argument circles back to the
Mudpie line of cases—runs as follows. According to Sentinel, when, and only
when, an event of “[d]irect physical loss of or physical damage to Covered
Property” occurs, there may be coverage for the costs of tearing out or
replacing property to gain access to a virus or to test for a virus. Similarly,
when, and only when, an event of “[d]irect physical loss of or physical damage
to Covered Property” occurs which does not itself cause a suspension of
business operations, but a virus does cause such a suspension, then there
may be coverage under the Lost Business Income and Extra Expense
Endorsement (a form of Time Element Coverage), subject to the specified
limits.
      We are prepared to accept, and we assume arguendo, that the insuring
agreement in the Special Property Coverage Form, read on its own, without
change, would have established a baseline of coverage in accordance with the
Mudpie rule limited to loss or damage of “a physical nature that can be
physically fixed, or if incapable of being physically fixed because it is so
heavily destroyed, requires a complete move to a new location.” (Inns-by-the-

                                        29
Sea, supra, 71 Cal.App.5th at p. 707.) But at best for Sentinel, the Policy is
ambiguous when read in light of the modifications made by the Limited
Fungi or Virus Coverage Endorsement. Because the Limited Fungi or Virus
Coverage Endorsement contains an additional affirmative grant of coverage,
and because there is a special definition of “loss or damage” in the triggering
clause for that additional coverage, we cannot simply import the reasoning of
the Mudpie line of cases. What appears to have happened here is that the
parties customized the first party insurance John’s Grill bought to
accommodate additional coverage for losses caused by insidious, difficult to
access and detect forms of property damage from fungi, wet rot, dry rot,
bacteria or virus that may occur in a restaurant environment. And under the
endorsement language the parties agreed upon to accomplish this objective,
the wording is broad enough to bring within the scope of coverage loss of use
of property.
      Sentinel is adamant that a ruling for John’s Grill would run contrary to
the avalanche of precedent nationwide agreeing with Mudpie, but we think
not. What we decide today does no more than follow the established principle
that we must interpret the provisions of a contract to avoid rendering the
instrument “illusory.” (Scottsdale Ins. Co. v. Essex Ins. Co. (2002)
98 Cal.App.4th 86, 94–95.) Contracts of insurance do not enjoy any special
exemption from that basic principle. By insisting that Mudpie always
supplies the bedrock rule despite the breadth of the particular insuring
agreement we are dealing with, Sentinel’s interpretation violates “two related
principles applicable to all insurance contracts: first, that ‘the policy or its
endorsements cannot be so interpreted as to become meaningless, or to
withhold coverage which the [layperson] would normally expect from it . . . ,’
and second, that ‘ “. . . [t]he courts will not sanction a construction of the

                                        30
insurer’s language that will defeat the very purpose or object of the
insurance.” ’ ” (Howell v. State Farm Fire & Casualty Co. (1990)
218 Cal.App.3d 1446, 1468 (conc. opn. of Barry-Deal, J.), disapproved on
another issue, Reid v. Google, Inc. (2010) 50 Cal.4th 512, 532, fn. 7.)
      Accordingly, we hold as follows: Reading Subparagraphs B.1.b. and
B.1.f. of the Limited Virus Coverage in harmony with each other, and
consistently with the rest of the Policy, the specially defined triggering
phrase “loss or damage” in each provision encompasses virus contamination
so pervasive within a covered building that the virus is present on surfaces
throughout the premises, thereby requiring cleaning of the contaminated
surfaces and rendering the building unfit for its intended purpose. Under
this reading of the Policy, when Subparagraph B.1.b. is triggered, so is
Subparagraph B.1.f., since the special definition of “loss or damage” in the
Limited Fungi or Virus Coverage Endorsement broadened the scope of the
Special Property Coverage Form trigger language for purposes of virus risk.
Physical alteration of property is not required. 15
      To the extent the allegations of the operative complaint are inadequate
to show other requisite elements of Time Element Coverage under
Subparagraph B.1.f.—such as whether there was a “period of restoration”
during which business operations were suspended—here again leave to
amend should have been granted. The operative complaint does allege
generally that “some or all of the period of John’s Grill’s closure [was] within
the period of restoration under the Policy.” It is reasonable to expect John’s
Grill could have alleged further particulars showing that, after coverage was

      15We have no occasion to address the contention in Sentinel’s
supplemental briefing that Subparagraph B.1.f. does not supply an
“independent” grant of coverage. We do not suggest that it does.

                                        31
triggered under Subparagraph B.1.b., the alleged period of closure lasted
until it could complete whatever “repair[],” “rebuil[ding],” or “replace[ment]”
was necessary to permit a resumption of operations under safe conditions
(such as the construction of a parklet or the reconfiguration of its space to
permit socially distanced dining). Whether John’s Grill can add specific facts
in support of its allegation that there was a “period of restoration,” we are
unable to say because the issue was not a focus of attention in the trial court.
We simply hold it was entitled to try.
         e. The Specified Causes Clause, as Sentinel Seeks To Apply It on
            This Record, Renders the Limited Virus Coverage “Virtually
            Illusory”
      To plead there is coverage under a first party insurance policy, it is not
enough for an insured merely to allege a triggering event. All the “trigger of
coverage” does, as we noted above in our summary of California insurance
coverage principles, is show a potential for coverage. If there are conditions
attached to the grant of coverage, the insured must also plead that those
conditions have been met. For Sentinel, that is the crux of the matter
regardless of how we interpret and apply the specially defined phrase “loss or
damage” in the Limited Virus Coverage provisions. Because the operative
complaint fails to allege any of the listed causes of virus in the Specified
Causes Clause, we are told, John’s Grill is ineligible for coverage under the
Limited Virus Coverage as a matter of law. John’s Grill responds that the
Specified Causes Clause is written so broadly that it is effectively impossible
to meet. As a result, John’s Grill argues, the Specified Causes Clause
renders the Limited Virus Coverage virtually “illusory” (Julian v. Hartford
Underwriters Ins. Co. (2005) 35 Cal.4th 747, 760) and is therefore
unenforceable.

                                         32
      We agree with John’s Grill. Under well-established principles of
contract law, “ ‘Words of promise which by their terms make performance
entirely optional with the “promisor” . . . do not constitute a promise.’ ” (Peleg
v. Neiman Marcus Group, Inc. (2012) 204 Cal.App.4th 1425, 1438.) 16 Plain
and clear coverage conditions or limitations will always be enforced.
(Scottsdale Ins. Co. v. Essex Ins. Co., supra, 98 Cal.App.4th at p. 94
[“nonstandard but not unusual” clause obligating builder to obtain
certificates of insurance from all subcontractors made coverage “conditional
but not illusory”].) But in construing ambiguous policy language, California
courts eschew interpretations of exclusionary or limiting language written so
broadly as to make it optional for the insurer to recognize the existence of
coverage. That, in our view, is just what Sentinel’s proposed application of
the Specified Causes Clause would do.
      Literally read, Subparagraph B.1.a. of the Limited Fungi or Virus
Coverage Endorsement is indecipherable when applied to viruses. The
critical limiting phrase is that, for the Limited Virus Coverage to apply, the
virus must be the “result of ” one of a number of enumerated causes. But

      16 “ ‘Although such words are often referred to as forming an illusory
promise, they do not fall within the present definition of promise. They may
not even manifest any intention on the part of the promisor. Even if a
present intention is manifested, the reservation of an option to change that
intention means that there can be no promisee who is justified in an
expectation of performance.’ (Rest.2d Contracts, § 2, com. e, p. 10; accord, id.,
§ 77, com. a, p. 195; 1 Corbin on Contracts (rev. ed. 1993) § 1.17, p. 47.) ‘One
of the most common types of promise that is too indefinite for legal
enforcement is the promise where the promisor retains an unlimited right to
decide later the nature or extent of his or her performance. This unlimited
choice in effect destroys the promise and makes it illusory.’ (1 Williston on
Contracts (4th ed. 2007) § 4:27, pp. 804–805, fns. omitted; accord, 1 Witkin,
Summary of Cal. Law (10th ed. 2005) Contracts, §§ 230–231, pp. 264–266.)”
(Peleg, supra, 204 Cal.App.4th at pp. 1438–1439.)

                                       33
none of the listed causes has anything to do with the biological processes that
actually cause a virus. For some of the other listed perils in Subparagraph
B.1.a., it is readily apparent how they might be the “result of ” an enumerated
cause (e.g., wet rot resulting from water damage). Not so for viruses. Only if
the words are taken to refer to circumstances in which a specified cause is a
vector for transmission of a virus does the language begin to make any sense
in the context of this particular peril. But that is not what the words say,
and more importantly, it is not the only interpretation to which the phrase
“result of ” is reasonably susceptible. Pathogenic causation—in the sense
that, say, cancer may be said to be the “result of ” a toxic carcinogen—is
another perfectly reasonable interpretation that could be adopted, 17 and it
tends to favor John’s Grill’s contention that the Specified Causes Clause is
impossible to meet. The applicable principles for interpreting insurance
contracts do not compel us to resolve the ambiguity by placing a gloss on the
text of the Policy, friendly to Sentinel, so that Subparagraph B.1.a. makes
sense as applied.
      Sentinel’s first pass at this issue is to wave it off by pointing out that
we are dealing not just with virus coverage, but as more fully stated in the
title of the endorsement, with “Limited Fungi, Bacteria or Virus Coverage”

      17 Causation in the pathogenic sense is a well-known standard in tort
law scenarios where the decisional focus is on whether microscopic
particulates “cause” disease. (See Rutherford v. Owens-Illinois, Inc. (1997)
16 Cal.4th 953, 982 [asbestos exposure].) The operative complaint can be
reasonably read to rely upon this theory of causation. John’s Grill alleges
that “viruses are unique in that they cannot reproduce without access to a
living host cell, whereas the other agents covered by the Policy’s [Limited
Virus Coverage] can and often do reproduce outside a host organism, such as
when fungus or mold spores land in a humid environment, reproduce, grow,
and proliferate. By contrast, a virus may survive briefly outside a host
organism (such as when virus is shed), but it cannot reproduce there.”

                                        34
(italics added). Given the disjunctive phrasing in the covered risks, Sentinel
argues, so long as there is a possibility of coverage under some combination of
covered risks and specified causes (e.g., wet rot caused by water damage), the
illusory coverage doctrine does not apply. We reject that argument. It not
only flies in the face of the principle that we must give effect to all the words
of the Policy, but is precisely the kind of “heads I win, tails you lose” position
the illusory coverage doctrine forbids. (Cf. Energy Ins. Mutual Limited v. Ace
American Ins. Co. (2017) 14 Cal.App.5th 281, 306 [comprehensive general
liability coverage afforded under umbrella liability policy not “completely
withdraw[n]” for claims arising from failure to provide professional services,
since grant of coverage was not for errors and omissions liability].) Insurers
cannot take in premium for a coverage grant that names a specifically
covered risk—here virus contamination—and then justify denying coverage
for it under all circumstances because some other risk may be covered under
the same coverage grant.
      Sentinel’s fallback argument is that, if we squint hard enough, the
Limited Virus Coverage grant, as narrowed by the Specified Causes Clause,
does indeed provide for a sliver of coverage, which is why the coverage is
described as “Limited.” According to Sentinel, it is conceivable a virus can be
the “result of ” one of the enumerated perils and then cause property loss or
damage, though those circumstances may be exceedingly rare, even freakish.
We are then asked to imagine how. “It is . . . easy to imagine a virus
resulting from other specified causes of loss,” Sentinel tells us. “For example,
‘water damage’ could result in waterborne viruses infecting property,
including plant[s] or animals. ‘Vandalism’ might also cause a virus to spread
on property, causing physical loss or damage to living property. And even if
it were impossible for a virus to result from a specified cause of loss, the

                                        35
Limited Coverage would still not be illusory if an equipment breakdown could
cause a virus to spread on property.”
      We do not think these possibilities are so easy to see. Focusing on the
precise text of the Specified Causes Clause, we explored some of them with
counsel at oral argument. The scenario of an equipment breakdown led
nowhere, as it quickly became apparent during our colloquy with counsel that
while, for example, a malfunctioning air conditioning system might in theory
create a heightened risk of airborne disease transmission within a building
(as with, say, Legionnaires’ disease), that scenario would involve risk to
people—and hence implicate liability coverage, not property coverage—so it
led back to the essential problem of whether a virus can ever cause the
alteration of, and thus damage to, property. Other than problems with an air
conditioning system, Sentinel has suggested no other scenario in which
“Equipment Breakdown Accident” might lead to virus-caused loss or damage,
presumably because the definition of “Equipment Breakdown Accident”
speaks of explosions, electrical arcing, rupture, or bursting of various
machinery, events which have no demonstrable connection to the spread of a
virus or any other microbial phenomena, even if we were to interpret the
phrase “result of ” generously to refer to vectors of virus transmission.
      When pressed for more and better examples at oral argument,
Sentinel’s counsel retreated to the theme that there might be any number of
scenarios in which a virus could damage “living property.” To illustrate how
this could occur, Sentinel’s counsel cited Curtis O. Griess & Sons v. Farm
Bur. Ins. (Neb. 1995) 528 N.W.2d 329, a first party insurance version of
Palsgraf v. Long Island R. Co. (1928) 162 N.E. 99, but without the
universally recognized legal significance that a weird causation scenario
provided there. Griess, a more quotidian case, is best limited to its peculiar

                                        36
factual context. There, a farmer in Nebraska claimed coverage under a first
party policy for the value of his pigs after the animals became sick and died
when, due to a windstorm, a virus from a neighboring farm infected them.
The court held that, “where a virus has been transmitted by means of a
covered peril, the covered peril has been held to be the proximate cause of the
loss,” citing an Iowa case, Qualls v. Farm Bureau Mutual Insurance Company
(Iowa 1971) 184 N.W.2d 710, in which “14 heifers owned by the insured died
of pseudorabies transmitted by wild animals which had attacked the heifers.”
(Griess, supra, 528 N.W.2d at p. 333, quoting Qualls, supra, 184 N.W.2d at
p. 712.) Under the efficient loss causation rule in those states, these courts
found that there was coverage for “living property” despite the attenuated
chain of causation that led to the claimed losses at issue.
      We fail to see what these oddball scenarios have to do with this case.
Even if Griess could be read to support a reading of the phrase “result of ”
that means vector of viral transmission, there is still the matter of finding
some nexus to property loss or damage, which is presumably why Sentinel
emphasizes the risk to “living property” that Griess illustrates. But John’s
Grill is not a farm, and even assuming pets may be found on its premises
from time to time, coverage is afforded for animals under the Policy only if
“[t]hey are owned by others and boarded by you, or owned by you and held for
sale or sold but not delivered.” If John’s Grill were operating a dog kennel or
a pet store, perhaps the Griess case might have some relevance, but not on
the actual business circumstances we are dealing with here. Nor is it self-
evident to us that plant viruses may be transmitted through the same vectors
of transmission that we intuitively associate with human disease (after all,
plants do not ingest water or breathe in the same way humans do), but even
if plant viruses may be transmitted by air or water, we have no idea whether

                                       37
plants are, in fact, part of the covered property environment on John’s Grill’s
premises. So in the end, all Griess shows is that it is possible to conjure up
many scenarios that might notionally pose a risk of damage to some form of
“living property” for some businesses. But on this record, none of these
abstract risks bear on the insurance policy Sentinel underwrote for this
insured.
      The parties argue back and forth about how unlikely coverage must be
in order to justify application of the illusory coverage doctrine. Sentinel
suggests that John’s Grill is simply complaining it is “hard” to show that a
claim falls within the Limited Virus Coverage, while John’s Grill urges us to
hold that it has “no realistic prospect” of benefitting from the Limited Virus
Coverage. According to John’s Grill, it “is misleading and contrary to the
reasonable expectations of the insured to market an endorsement” with the
word virus in the “title if there is no realistic prospect it will ever pay out a
claim for losses caused by virus.” We are disinclined to transform the
doctrine of illusory coverage into a species of false advertising by tying it to
how a policy was “marketed,” but we agree that the test for illusory coverage
must focus on objective reality and the insured’s reasonable expectations of
coverage. (Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc.
(2000) 78 Cal.App.4th 847, 874.) Imaginary exercises involving pigs caught
in windstorms and cows encountering wild animals will not do.
      It takes more than a “a mere drafting fiction” to overcome a well-
pleaded illusory coverage argument. (Julian v. Hartford Underwriters Ins.
Co., supra, 35 Cal.4th at p. 760.) Where an insured properly raises the issue
of illusory coverage, as John’s Grill has done here, unsubstantiated
speculation, untethered to the insured’s actual business circumstances as
underwritten by the insurer, is not enough to defeat the argument. (Cf.

                                        38
Blackhawk Corp. v. Gotham Ins. Co. (1997) 54 Cal.App.4th 1090, 1096–1097
[in light of insured’s actual business “as developer of raw land,” subsidence
exclusions not illusory when applied to housing development on property sold
by insured].) Because Sentinel has not proffered enough to demonstrate a
realistic prospect of John’s Grill ever benefitting from the Limited Virus
Coverage based on events the parties might reasonably have anticipated
during the Policy period, we agree that Sentinel has, “through sweeping
language,” rendered the Policy’s virus coverage terms “virtually illusory.”
(Julian, supra, at p. 756.)
           f. We Decline To Apply The Federal Case Law Cited by Sentinel
      Sentinel claims that “dozens of courts—in California and across the
country—have agreed with the superior court that th[e] exact ‘Virus
Exclusion’ ” found in its Policy “ ‘unambiguously forecloses coverage of . . .
alleged losses due to either COVID contamination or the Closure Orders.’ ” It
claims further that “[t]hese decisions join dozens more that have found that
similar ‘virus exclusions clearly and without doubt preclude coverage for the
losses and expenses alleged by’ businesses forced to shut down due to the
coronavirus and related closure orders.” Half of this argument is correct. If
all we had to do here was apply an absolute, unqualified exclusion, without
an affirmative grant of coverage, the body of case law Sentinel relies upon
would likely be dispositive. But we have more than that. At oral argument,
Sentinel lowered the number of cases applying the same Limited Fungi or
Virus Coverage Endorsement at issue in this case down from “dozens” to
seventeen in total, 18 and of those cases, nine have applied California

      18 All of these cases appear to involve Sentinel, Twin City Fire
Insurance Company, or Hartford Fire Insurance Company, each of which is
an affiliated company in the HFSG family of Hartford companies, a finding

                                       39
insurance coverage law. 19 This appears to be the body of case law to which
Sentinel refers in claiming that “every California court to address” the
illusory coverage argument made by John’s Grill has rejected it. The cases
are all non-binding decisions from federal district judges sitting in diversity.
      The district judges in the nine cases applying California law take
various analytical routes to rejecting the coverage theory asserted by John’s
Grill under the Limited Fungi or Virus Coverage Endorsement. Some of the
opinions construe the Policy to require physical alteration of property under
the Mudpie line of cases, thus in effect giving the trigger clause in the
Limited Virus Coverage no greater breadth than the coverage trigger in the
main first party coverage grant, and failing to recognize that the special

that the trial court in this case made with respect to Sentinel and that we see
trial courts have made elsewhere with respect to Twin City Fire and Hartford
Fire. (See, e.g., Rosalez v. Hartford Financial Services Group, Inc. (D.Ariz.,
Feb. 3, 2021, No. CV-20-00766-PHX-JJT) 2021 WL 363856.)
      19Barbizon School of San Francisco, Inc. v. Sentinel Ins. Co., Ltd.
(N.D.Cal., Dec. 3, 2021, No. 20-cv-08578-TSH) 2021 WL 5758890; Mostre
Exhibits, LLC v. Sentinel Ins. Co., Ltd. (S.D.Cal., Oct. 15, 2021, No. 20-cv-
1332-BAS-BLM) 2021 WL 4819411; Protégé Restaurant Partners LLC v.
Sentinel Ins. Co., Ltd. (N.D.Cal., Sept. 28, 2021, No. 20-cv-03674-BLF)
2021 WL 4442652, *4, affd. (9th Cir. 2022) 2022 WL 14476377 (mem. opn.);
Ets-Hokin v. Sentinel Ins. Co., Ltd. (N.D.Cal., Aug. 27, 2021, No. 20-cv-06518-
JST) 2021 WL 4472692; Hair Perfect International, Inc. v. Sentinel Ins. Co.,
Ltd. (C.D.Cal., May 20, 2021, No. LA CV20-03729 JAK (KSx)) 2021 WL
2143459; French Laundry Partners, LP v. Hartford Fire Ins. Co. (N.D.Cal.
2021) 535 F.Supp.3d 897 (French Laundry); Westside Head & Neck v.
Hartford Fin. Servs. Group (C.D.Cal. 2021) 526 F.Supp.3d 727; Colgan v.
Sentinel Ins. Company, Ltd. (N.D.Cal. 2021) 515 F.Supp.3d 1082 (Colgan);
Franklin EWC, Inc. v. Hartford Fin. Servs. Group (N.D.Cal. 2020)
506 F.Supp.3d 854 (Franklin EWC).

                                       40
definition of “loss or damage” creates ambiguity. 20 Some say that any
conceivable “possibility of coverage” is enough to defeat the illusory coverage
doctrine, either accepting the Griess case as an example of how the grant of
Limited Virus Coverage might be triggered, 21 or accepting the idea that any
potential for coverage for one peril in a multi-peril grant of coverage is
enough to show the requisite possibility of coverage, 22 or both. Some
complete their coverage analysis by invoking the Virus Exclusion without
considering the principle that exclusions are construed narrowly and
exceptions to exclusions are construed broadly, and without addressing the
illusory coverage doctrine at all. 23 And some rule on a combination of these
grounds, with most of the cases citing to one another. 24
      We reach a different conclusion at each step of the analysis. We
recognize that the nine cases Sentinel cites are in line with a number of
federal district court opinions in diversity cases across the country that have
applied the same Limited Fungi or Virus Coverage Endorsement form we are
dealing with, but we find none of the others any more persuasive than the

       See, e.g., Mostre Exhibits, LLC v. Sentinel Ins. Co., Ltd., supra,
      20

2021 WL 4819411 at pages *6, *8; Colgan, supra, 515 F.Supp.3d at pages
1086–1087.
       See, e.g., French Laundry, supra, 535 F.Supp.3d at pages 903–904;
      21

Franklin EWC, supra, 506 F.Supp.3d at page 861.
      22See, e.g., Barbizon School of San Francisco, Inc. v. Sentinel Ins. Co.,
Ltd., supra, 2021 WL 5758890 at page *9.
      23   See, e.g., Colgan, supra, 515 F.Supp.3d at page 1088.
      24See, e.g., Ets-Hokin v. Sentinel Ins. Co., Ltd., supra, 2021 WL
4472692 at page *2; French Laundry, supra, 535 F.Supp.3d at pages 903–904;
Franklin EWC, supra, 506 F.Supp.3d at pages 860–861; Hair Perfect
International, Inc. v. Sentinel Ins. Co., Ltd., supra, 2021 WL 2143459 at
page *9; Westside Head & Neck v. Hartford Fin. Servs. Group, supra,
526 F.Supp.3d at pages 733–734.

                                        41
diversity cases from California. Rather than deal with all the non-California
cases applying the Limited Fungi or Virus Coverage Endorsement form, we
will treat one particular case, Cosmetic Laser, supra, 554 F.Supp.3d 389, as
illustrative because it is one of the more thoroughly reasoned and frequently
cited of the cases of its type. In our view, Cosmetic Laser highlights
particularly well why this vein of precedent cannot be transplanted to
California.
      Applying Connecticut and Ohio law, the Cosmetic Laser court first
analyzes the Virus Exclusion, and finds its exclusionary language clear and
unambiguous. (Cosmetic Laser, supra, 554 F.Supp.3d at p. 401 & fn. 9.) It
then goes on to say that the insured’s proposed reading of Subparagraph
B.1.f.—the Time Element Coverage clause—“would swallow the Virus
Exclusion as a whole.” (Cosmetic Laser, at p. 404.) The court explains: “The
Virus Exclusion begins by firmly stating that loss or damage resulting from a
virus ‘is excluded regardless of any other cause or event that contributes
concurrently or in any sequence to the loss.’ ” (Ibid.) After observing that
“Cosmetic Laser’s interpretation of Subsection B.1.f. would conflict with the
function of the Virus Exclusion” (ibid.), the court concludes as follows: “On
[the insured’s proposed] reading, that same Virus Exclusion, just one page
later, would grant coverage—without limitation—for suspension of business
operations due to a virus. I will not ‘read[] the Limited Coverage provision in
the Virus Exclusion to subsume the Policy and the exclusion, itself ’ ” (ibid.,
italics added).
      We have no reason to delve into whether the principles of Connecticut
law, Ohio law, and California law are the same. We also recognize that the
insured in Cosmetic Laser made different arguments in favor of coverage
than John’s Grill does, but that court’s conflation of the Virus Exclusion and

                                       42
the Limited Virus Coverage grant demonstrates why a different analysis is
required here. What the Cosmetic Laser court perceived as an internal
conflict between the Virus Exclusion and the Limited Virus Coverage grant
(at least as it was proposed to be construed by the insured there) is easily
resolved under California law by giving primacy to the insuring agreement in
the Limited Virus Coverage provisions, broadly read, and dealing with the
Virus Exclusion, narrowly read, only after completing the first step of the
analysis (since the Virus Exclusion is inapplicable by its plain terms
wherever there is Limited Virus Coverage).
      Instead, the Cosmetic Laser court gave primacy to the Virus Exclusion,
and went on from there, never directly addressing the full scope of the
coverage grant in the Limited Virus Coverage provisions. This approach to
analyzing the Limited Fungi or Virus Coverage Endorsement—which
happens to be the same general approach Sentinel persuaded the trial court
to take in this case (probably not coincidentally, since counsel for the insurer
in Cosmetic Laser is also counsel for Sentinel in this case)—follows the
organization of the endorsement itself: Virus Exclusion first, Specified
Causes Clause second, Limited Fungi or Virus Coverage provisions third.
But the layout of the Limited Fungi or Virus Coverage Endorsement cannot
dictate the proper approach to analyzing coverage. The legal analysis we
must apply is governed by settled principles of insurance contract
interpretation, not by the format of the endorsement. Using the Limited
Fungi or Virus Coverage Endorsement as a self-contained map to the
analysis effectively treats it in isolation from the rest of the Policy, contrary
to those principles.
      That is not how we proceed in this state. The sequence of analysis
matters. Because insuring agreements and exceptions to exclusions are to be

                                        43
read broadly in favor of coverage, the key question here is not whether the
Limited Virus Coverage would swallow the Virus Exclusion, which was a
stated concern of the Cosmetic Laser court. Rather, it is just the opposite.
Under California law we are concerned with giving an affirmative grant of
coverage its fullest reach, in accord with its text and structure, while bearing
in mind that ambiguities must be resolved in accordance with the reasonable
expectations of the insured. The applicability of the Virus Exclusion may be
determined only after that threshold question is answered, keeping in mind
the exclusion is to be given narrow scope.
                            III. DISPOSITION
      The judgment is affirmed in part (as to HFSG) and reversed in part (as
to Sentinel) and remanded for further proceedings, if any are warranted
following the reported settlement. The parties are to bear their own costs on
appeal.
                                                    STREETER, J.

WE CONCUR:

POLLAK, P. J.
GOLDMAN, J.

                                       44
Trial Court: Superior Court of California, County of San Francisco

Trial Judge: Hon. Ethan P. Schulman

Counsel:          Cotchett, Pitre & McCarthy, Nanci E. Nishimura, Brian Danitz,
                    Andrew F. Kirtley, Julia Q. Peng, for Plaintiffs and
                    Appellants.

                  Steptoe & Johnson, Anthony J. Anscombe; Wiggin and Dana,
                     Tadhg Dooley, David R. Roth, for Defendants and
                     Respondents.

John’s Grill, Inc., et al. v. The Hartford Financial Services Group, Inc., et al. - A162709