By Hailey Konnath

Law360 (March 10, 2021, 11:29 PM EST) -- Colony Insurance Co. isn't obligated to cover a Florida restaurant chain's business losses stemming from the COVID-19 pandemic, a Virginia federal judge ruled Wednesday, finding that the chain hasn't pointed to direct physical loss as a result of the virus.

U.S. District Judge Henry E. Hudson said he would follow the "rising tides" of courts finding that there's no coverage for loss of business as a result of the pandemic under policies that require "direct physical loss of or damage" to property.

"Skillets did not suffer a direct physical loss as a result of COVID-19 or the closure orders, and its business losses incurred as a result of these events are therefore not covered by the policy," Judge Hudson said.

Notably, Judge Hudson said Skillets had failed to recognize that alterations removable by cleaning — for instance, the presence of a virus in a property — do not constitute direct physical loss. And Skillets looks to recoup business losses incurred from operating at reduced capacity mandated by closure orders as a result of the pandemic, the judge said.

"[O]ther courts that frequently interpret Florida law have denied this exact theory," he said.

Skillets LLC and Good Breakfast LLC, which operate nine Skillets Restaurants locations in southwest Florida, said they were forced to temporarily stop in-person dining in the midst of the pandemic. Skillets said in its proposed class action that Colony wrongfully denied its reimbursement request for virus-related losses.

Colony argued in its November motion to dismiss, however, that courts have uniformly held that losses incurred by Florida restaurants during the pandemic and related closure orders don't count as "direct physical loss" covered by the policy.

According to Skillets' August 2020 suit, the chain purchased an "all-risk" policy that covers "direct physical loss of or damage to covered property at the premises" between December 2019 and December 2020. The policy doesn't include a virus exclusion provision, Skillets told the court.

As the pandemic tore across Florida, Gov. Ron DeSantis ordered restaurants to reduce capacity and eventually cease all indoor dining, Skillets said. The governor permitted restaurants to open back up at 50% capacity by mid-May.

The chain submitted claims to Colony in June and July for relief under its policy, but the insurer refused to cover its losses. Skillets claimed that the pandemic structurally altered and diminished the functional space in its restaurants and the governor's orders hindered access to its properties covered by the policy.

Judge Hudson's decision to the contrary is in line with dozens of others across the country, which declined to assign coverage to losses stemming from government-required closures.

Last month, Zurich American Insurance Co. defeated a bar and grill's COVID-19 insurance coverage suit, with an Ohio federal judge ruling that the Buckeye State eatery hadn't experienced a direct physical loss that would trigger coverage under its Zurich policy.

In January, a California federal judge granted Travelers Indemnity Co.'s bid to toss a Los Angeles restaurant's suit seeking COVID-19-related loss coverage, ruling that the eatery failed to allege a "direct physical loss" and that coverage is barred by the policy's virus exclusion.

A rare exception to the trend came later in January when an Ohio federal judge ruled that Zurich must cover losses suffered by more than a dozen steak and seafood restaurants due to COVID-19 shutdown orders, finding that the eateries' policy can reasonably be interpreted to cover the loss of use of property.

Colony declined to comment and counsel for the restaurant chain didn't immediately return a request for comment late Wednesday.

The chain is represented by Lisa S. Brook and E. Kyle McNew of MichieHamlett Attorneys at Law, Adam J. Levitt, Amy E. Keller, Daniel R. Ferri, Mark Hamill, Laura E. Reasons, Mark A. DiCello, Kenneth P. Abbarno and Mark Abramowitz of DiCello Levitt Gutzler LLC, Mark Lanier, Alex Brown and Ralph McBride of The Lanier Law Firm PC, Timothy W. Burns, Jeff J. Bowen, Jesse J. Bair and Freya K. Bowen of Burns Bowen Bair LLP, and Douglas Daniels of Daniels & Tredennick.

Colony Insurance is represented by Gary W. Berdeen and William F. Stewart of Stewart Smith Law.

The case is Skillets LLC et al. v. Colony Insurance Co., case number 3:20-cv-00678, in the U.S. District Court for the Eastern District of Virginia.

--Additional reporting by Joyce Hanson, Jeff Sistrunk and Shawn Rice. Editing by Regan Estes.

For a reprint of this article, please contact reprints@law360.com.