By Mike Curley

Law360 (October 28, 2020, 3:39 PM EDT) -- A Philadelphia judge won't let Lloyd's London underwriters escape a bar and restaurant's suit alleging the insurer wrongly denied it coverage for losses stemming from the COVID-19 pandemic, after the parties sparred over whether the virus constitutes a physical loss.

Judge Gary S. Glazer's two-page order does not go into his reasoning for overruling Lloyd's preliminary objection to the suit filed by Taps & Bourbon on Terrace LLC.

Like many restaurants and other businesses in the last eight months, Taps & Bourbon sought coverage from its insurer after state orders mandated that nonessential businesses like restaurants close their doors, or operate in limited capacity, to slow the spread of the coronavirus that causes COVID-19, which has infected more than 8.8 million and killed more than 227,000 in the U.S. as of late October.

Lloyd's denied coverage, saying the virus does not cause "physical damage or loss," as it does not physically alter the property, and because the policy has a virus exclusion that would bar coverage even if it did, prompting Taps & Bourbon's lawsuit.

Lloyd's preliminary objection and Taps & Bourbon's response centered on four main arguments.

First, the parties disputed whether the virus and the shutdown orders constitute a physical loss. Lloyd's argued the policy requires there be physical alteration to the property, while Taps & Bourbon argued that courts in the Third Circuit have held that loss of use counts as a physical loss.

The bar alternately argued that the virus is a physical object, and is the direct cause of the restaurant's loss.

"A virus is made up of atoms just like water, smoke, asbestos, or, even, a tree that may have fallen during the last storm," the restaurant said in its response. "Just like smoke, water, asbestos, or that tree, as soon as it lands on a surface, it alters that surface. While any of these items can be cleaned from that surface, its effect is nevertheless physical in nature."

In addition, Taps & Bourbon argued that if a virus could not cause physical loss, there would be no reason for Lloyd's to include a specific exclusion to deny coverage for virus-related losses.

In response to the insurer's argument that the lawsuit didn't allege the virus was even present at the restaurant, Taps & Bourbon said the policy covers not just the physical loss, but the "risk" posed by the presence of COVID-19 in the region that forced the shutdown.

The second issue centered on the civil authority endorsement. Lloyd's argued Taps & Bourbon was not prohibited from accessing its property, while the restaurant argued that one of the orders did force it to shut down, and later orders severely limited its capacity to make revenue.

The third issue was the virus exclusion, which holds the insurer won't cover any loss "caused by or resulting from any virus." Lloyd's said the amended complaint clearly triggers the exclusion, as it unquestionably blames the virus for the shutdown orders.

Taps & Bourbon argued the exclusion should not be enforced because it is ambiguous, and said the restaurant shut down because of government orders, not because the virus is present at its location. The restaurant added that the exclusion was removed from the policy by another endorsement.

Finally, the insurer and bar contested whether an endorsement for food contamination triggered coverage. Taps & Bourbon argued it needed to disinfect its premises to guard against the virus, and food was present on the site, warranting suspicion the virus may have contaminated the food.

Lloyd's, however, argued the virus does not trigger the endorsement because it is intended for coverage of incidents of food poisoning of a patron, which has not been alleged.

"This case is a step in the right direction for small businesses that have been negatively impacted by the shut down orders," Anthony DiUlio of Wheeler DiUlio & Barnabei, representing the restaurant, told Law360 on Wednesday. "The losses have been devastating, and this case demonstrated exactly why these businesses maintained insurance for loss of business income and loss from acts of civil authority. We look forward to continuing to fight for all businesses that have seen a downturn because of the recent crisis."

Representatives for Lloyd's could not immediately be reached for comment Wednesday.

Taps & Bourbon is represented by Anthony DiUlio and Jonathan Wheeler of Wheeler DiUlio & Barnabei.

Lloyd's is represented by Theodore M. Schaer and Noah S. Shapiro of Zarwin Baum DeVito Kaplan Schaer & Toddy PC.

The case is Taps & Bourbon on Terrace LLC v. Those Certain Underwriters at Lloyd's, London et al., case number 200700375, in the Court of Common Pleas for Philadelphia County, Pennsylvania.

--Editing by Marygrace Murphy.

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