By Craig Clough

Law360 (December 10, 2020, 11:14 PM EST ) Nearly two dozen hotels and hotel management companies in four states sued Harford Mutual Insurance Co. in Pennsylvania federal court Thursday in a bid to obtain COVID-19 loss coverage, arguing the "virus exclusion" in their policy is not a valid reason to deny their claims.

The hotel properties located in Delaware, New Jersey, Pennsylvania and Virginia are all owned or affiliated with SSN Hotels in Delaware and claim they took out a policy with Harford that included coverage in the event of "sudden suspension of operations for reasons outside of its control."

The hotels said the policy expressly includes "civil authority" coverage, which "promises to pay for losses caused by a civil or governmental authority that prohibits access to the covered properties," but Harford refused to honor their claims for losses.

"Plaintiffs faithfully paid the policy premiums and reasonably expected that the business interruption, extra expense, and/or civil authority coverage provided by defendant would protect against losses in the event of loss or damage to property, including in a pandemic, or that state and/or local officials ordered the closure of its business due to public safety concerns," the hotels said.

Government orders, including from the governors of the states, forced the closure of the hotels in March for various lengths of time, according to the complaint. The hotels argued their claims for business interruption, extra expense, and civil authority coverage should be honored, but they were denied by Harford in May.

The hotels said that although the policy includes an exclusion "for loss or damage caused by or resulting from any virus, bacterium or other microorganism," the exclusion does not preclude coverage on their claims under the policy because COVID-19 caused a physical loss to the properties and access to the properties was prevented by civil authorities.

With insurance companies in other coronavirus-related lawsuits successfully arguing that the virus did not cause a "physical loss" to properties, the hotels directly addressed the issue in the complaint and argued they have, in fact, suffered a physical loss.

"The risk of COVID-19 entering the covered property and contaminating the surfaces is direct physical loss of and damage to the covered property," the hotels said. "The COVID-19 pandemic renders the covered properties unsafe, uninhabitable, damaged, or otherwise unfit for its intended use, which constitutes direct physical loss."

The hotels also argued two two insurance industry trade groups, Insurance Services Office, Inc. and the American Association of Insurance Services, represented hundreds of insurers in 2006 while seeking approval from state regulators for the virus exclusion but made false representations when doing so. 

The ISO and AAIS told regulators that that coverage for "disease-causing agents" has never been in effect, but that was not true, as various courts by then had held that "property insurance policies covered claims involving disease-causing agents," the hotels said. 

Regulators "relied on the industry's and defendant's representation" and "the court should not permit defendant to benefit from this type of duplicitous conduct before the state regulators," the hotels said.

The hotels also said that a "business and/or property owner who was even aware of the virus exclusion would conclude that the exclusion related to liability claims against the insured for transmitting the virus, not property damage claims. Defendant should be estopped from enforcing the virus exclusion, on principles of regulatory estoppel, as well as general public policy."

The hotels are seeking, among other things, a declaratory judgment that their loss claims due to COVID-19 are valid under the policy.

Harford Mutual Insurance Co. and counsel for the hotels did not immediately respond to requests for comment.

The hotels are represented by Sol H. Weiss, James R. Ronca, Gregory S. Spizer, Stanford B. Ponson and Paola Pearson of Anapol Weiss.

Counsel for Harford Mutual Insurance Co. could not immediately be determined.

The case is SSN Hotel Management LLC et al. v. Harford Mutual Insurance Co., case number 2:20-cv-06228, in the U.S. District Court for the Eastern District of Pennsylvania.

--Editing by Jay Jackson Jr.

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