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Insurers win restaurants’ COVID-19 cases


Federal courts in Massachusetts and Arizona have ruled in favor of insurers in COVID-19 business interruption litigation filed by restaurants, holding in both cases the plaintiffs had not provided evidence of physical damage.

Legal Sea Foods LLC, a 34-restaurant Boston-based chain, filed suit against its insurer, New York-based Strathmore Insurance Co., a unit of the Greater New York Group, in May.

It said Strathmore had refused to pay business interruption expense in connection with the coronavirus pandemic even though its policy was issued in March, when the pandemic was already widely acknowledged, and that the coverage did not include a virus exclusion.

It filed an amended complaint in September, in which it alleged COVID-19’s actual presence, according to Friday’s ruling by the U.S. District Court in Boston in Legal Sea Foods, LLC v. Strathmore Insurance Co. 

“Legal does not plausibly allege that its business interruption losses resulted from the presence of COVID-19 at the Designated Properties,” the ruling said. “Instead, it indicates in the (amended complaint) that ‘(t)he Orders caused and are continuing to cause’ the losses for which it claims entitlement to coverage.”

The ruling said also, that “even if Legal had properly alleged that COVID-19 caused business interruption losses due to its presence at the Designated Properties, it would not be entitled to coverage under the policy.

“Courts in Massachusetts have had occasion to interpret the phrase ‘direct physical loss’ and have done so narrowly, concluding that it requires some kind of tangible, material loss,” the ruling said.

“The COVID-19 virus does not impact the structural integrity of property in the manner contemplated by the Policy and thus cannot constitute ‘direct physical loss of or damage to’ property,” it said.

The ruling said also the policy requires the insurer to pay for the chain’s business interruption losses resulting from a civil authority’s action only if it “prohibits access” to the properties, and does not apply to those that “merely ‘limit’ such access.”

“Although Legal alleges that the orders mandated the closure of and prohibited access to some of its insured restaurants, plaintiff fails to identify any specific Order that expressly and completely prohibited access to any of the Designated Properties,” the ruling said,

“It is immaterial whether it is economically feasible for Legal to continue restaurant operations solely for carry-out and delivery sales. Rather, the relevant inquiry is whether the Orders prohibited access to the Designated Properties, which they clearly did not,” the ruling said, in dismissing the case.

Legal Sea Foods attorney Michael S. Levine, a partner with Hunton Andrews Kurth LLP in Washington, said in a statement the company is disappointed in the ruling.

“Legal’s case is based on the physical loss and damage caused by the actual presence of COVID-19 in its restaurants, not solely government orders. This oversight is just one of several critical errors in the Court’s decision.

“In addition, like certain other federal courts, this Court jumped to an evidentiary conclusion about how COVID-19 affects property. This issue was not before the Court. The only issue the Court should have been weighing is whether Legal “plausibly” plead a covered claim; proof was not yet necessary, although Legal is able to clear that hurdle, if given the opportunity. 

“In light of these and other errors in the Court’s decision, Legal is considering its options.”

Thomas D. Hughes, the insurer’s executive vice president, general counsel and corporate secretary, said, “We don’t comment on pending litigation.”

In the Arizona case, Mesa-based B Street Grill and Bar LLC filed suit against Cincinnati Insurance Co. on behalf of its three restaurants, according to Friday’s ruling by the U.S. District Court in Phoenix in B Street Grill and Bar LLC, et al. v. Cincinnati Insurance Co.

The chain said in its complaint that both its director of food and beverage and one of its owners had tested positive for COVID-19.

“Central to the policy is that the loss must be tied to ‘accidental physical loss or accidental physical damage’ to the properties,” the ruling said. “The policy in question requires actual physical damage to Plaintiff’s property,” which plaintiffs have not alleged.

It “attempted to demonstrate physical damage in the complaint by alleging that two people who regularly worked in their restaurants contracted COVID-19” and by contending that their lost income due to COVID-19 and the government restrictions constituted actual physical damage, it said. 

However, “The mere fact that Plaintiffs needed to clean surfaces that could host the virus does not constitute actual physical damage entitling them to coverage under the policy,” the ruling said.
“Plaintiffs could easily remedy the problem by diligently cleaning, and clearly no repairs were necessary.”

The ruling also said, “Although Plaintiff argues the policy does not contain an exclusion for viruses or communicable diseases, the Court is not persuaded that Plaintiff’s allegations could trigger coverage.”

A Cincinnati Insurance spokeswoman said in a statement, "We agree with the court’s decision that the coronavirus does not constitute a direct physical loss or damage to property – a prerequisite for coverage.

"We recognize the challenges facing many small businesses. We have been, and continue to be, committed to doing our part to support the families and businesses in our agents’ communities, including helping them to proactively manage risks and promptly paying covered claims.”

The restaurants’ attorneys did not respond to a request for comment.

Last week, a federal district court agreed to dismiss COVID-19-related business interruption litigation filed by a Las Vegas restaurant chain against a Tokio Marine Group of Cos. unit, stating the insurer’s coverage applies to ingestible items, not service. 








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