By Matthew Santoni

Law360 (February 8, 2021, 6:14 PM EST ) Affiliated FM Insurance issued "talking points" to its employees instructing them on how to deny coverage of business losses due to the COVID-19 pandemic, according to a lawsuit that the owner of Planet Fitness gyms in four states filed in Pennsylvania state court on Friday.

The memo allegedly told employees at AFM and its parent company FM Global to point to a "contamination" exclusion in its policies as a reason for issuing blanket denials of coverage for business lost to the coronavirus or the government closure orders intended to slow its spread, which Keystone PF Acquisition LLC — a company that owns Planet Fitness gyms in Pennsylvania, Delaware, North Carolina and South Carolina — said constituted bad faith and a breach of contract.

"As policyholders started to submit claims, senior executives in FM Global claims department issued an internal memo to AFM's claim handlers titled 'Talking Points on the 2019 Novel Coronavirus.' … The memo contains blanket instructions to deny coverage under other coverage parts without conducting a claims investigation," said the complaint, which was filed in the Philadelphia Court of Common Pleas. "AFM's claim handling department was instructed to use the Talking Points Memo to guide the handling of COVID-19 claims, to provide responses to basic questions regarding coverage of such claims, and to shoehorn coverage for COVID-19 related losses into the communicable disease section of its policies, based on the false assertion that all other coverage for COVID-19 related loss is excluded."

The gyms' parent company, also known as National Fitness Partners, seeks a declaratory judgment from the court that its losses should be covered.

Unlike many other "all-risks" business insurance policies now being contested in courts across the country, AFM's policy with Planet Fitness did not contain the "virus exclusion" language promulgated after the SARS epidemic of 2003, the suit said, though it had a separate exclusion using different language for contamination.

So when National Fitness Partners said that employees at some of its 80 gyms — and at least one customer — began testing positive for COVID-19 in March and state governors ordered fitness centers to close, the company argued that it had a valid claim based on the likelihood that the virus had contaminated its facilities. The company's policy covered up to $100 million in losses, the suit said.

"Every Planet Fitness location that National Fitness Partners owns and operates has suffered direct physical loss or damage due to the spread and presence of the novel coronavirus," the complaint said. "Known examples of COVID-19 positive individuals at National Fitness Partners' insured locations exemplify the concern that necessitated National Fitness Partners to close its insured locations. And, the asymptomatic members and/or employees who unknowingly had COVID-19 and did not know they were contagious also almost certainly brought the novel coronavirus to National Fitness Partners' fitness facilities."

But AFM denied the gyms' insurance claim in April, and when presented with reports that COVID-19-positive members had visited the gyms and could have physically contaminated the facilities, AFM sent back a form letter reiterating the denial without conducting any investigation, according to the lawsuit.

The gyms pointed to the memo allegedly circulated within AFM and FM Global, which said that while a facility closed specifically because of the actual presence of the virus could potentially be covered under the "communicable disease" section of their insurance policies, it would require the actual physical presence of the virus or confirmation from an employee or visitor that they had the virus while inside the facility.

Closures as a result of government orders or an abundance of caution were not covered, said the memo, which was included with the complaint as an exhibit.

Another section of the same memo emphasized that virus contamination would not be considered a physical loss — a term that other courts have grappled with in COVID-19-related cases — and wouldn't be covered.

"A virus will typically not cause physical loss or damage of the type insured," the memo said. "The presence of a communicable disease does not constitute physical damage and is not of the type insured against, as a virus falls within the definition of contamination, which is excluded."

The gyms added that AFM had acted in bad faith when it ignored their claims that people had reported testing positive shortly after visiting Planet Fitness facilities, noting the portion of the insurance company's own talking points that allowed the possibility of coverage if a sick person likely spread the virus within a facility.

"AFM disregarded even the overly restrictive guidelines it unilaterally set in the Talking Points Memo — as well as the plain terms of the policy," the complaint said. "In doing so, AFM improperly placed its own financial interests ahead of the interests of its insured."

"AFM values the long-term relationships we have with our policyholders, and we are proud to be leading the industry for claims service," said Steve Zenofsky, assistant vice president for public relations at FM Global. "It is unfortunate when legal matters arise because we strongly believe our insurance policies are clear on the coverage provided."

Counsel for National Fitness Partners declined to comment Monday.

National Fitness Partners is represented by John S. Stapleton of LeVan Muhic Stapleton LLC, and Shelby S. Guilbert Jr., Nicholas G. Hill and Amy Dehnel of King & Spalding LLP.

Counsel information for AFM was not immediately available.

The case is Keystone PF Acquisition LLC v. Affiliated FM Insurance Co., case number 210200529, in the Court of Common Pleas of Philadelphia County, Pennsylvania.

--Editing by Steven Edelstone.

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