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Law360 (June 28, 2021, 5:53 PM EDT ) A California federal judge has tossed a COVID-19 business interruption suit from the owner of Tocaya Organica restaurants across California and Arizona, saying the policyholder failed to allege that the virus exclusion does not apply to losses caused by government closure orders.
U.S. District Judge John A. Kronstadt on Friday dismissed The Madera Group Inc.'s suit against Mitsui Sumitomo Insurance USA Inc. Although Madera sufficiently alleged that the coronavirus caused physical harm, it could not show that a government order is a separate event from COVID-19, the judge explained.
"The virus exclusion unambiguously applies," Judge Kronstadt said. "Any loss caused by the public health orders was also due to the COVID-19 virus."
However, the judge allowed the restaurant owner to amend its complaint.
Madera is based in West Hollywood and owns 23 restaurants in the two western states, including the Tocaya Mexican food chain. The company has maintained that even if the court believes that COVID-19 caused its restaurants' losses, the virus was only one of the events that caused them. Its predominant cause of loss was the government closure order covered by the policy's civil authority provision, so it is entitled to coverage despite the virus exclusion, the restaurant owner said.
"Such a chain of causation, however, is not alleged in the complaint," Judge Kronstadt said, pointing out Madera's suit "includes express allegations that the public health orders were caused by COVID-19."
The Madera Group first sued Mitsui in Los Angeles Superior Court before the carrier removed it to federal court in August 2020. The restaurant owner has alleged that the carrier should be estopped from enforcing the virus exclusion because the insurer misrepresented the exclusion to get it approved by regulators in 2006, and that Madera's losses were not caused by the coronavirus but government closure orders instead.
Mitsui, on the other hand, has argued that neither the suspected presence of the COVID-19 virus nor government orders caused "direct physical loss of or damage to property," a precondition to coverage.
On Friday, Judge Kronstadt said the restaurant owner failed to allege that California's and Arizona's closure orders were a distinct cause of loss separate from the virus.
"The complaint sufficiently alleges that respiratory droplets, which transmit COVID-19, are physical objects that may attach to surfaces," the judge said. In contrast, the complaint does not sufficiently allege that the public health orders caused "direct physical loss of or damage to property."
"Most district courts in the Ninth Circuit have concluded that such orders do not cause physical loss or damage," he added.
Representatives for the parties could not be immediately reached for comment Monday.
Madera is represented by Ashley B. Jordan, John N Ellison and Luke E. Debevec of Reed Smith LLP
Mitsui Sumitomo is represented by Kristopher S. Davis of Faegre Drinker Biddle and Reath LLP and Brian E. O'Donnell, Jeffrey M. Beyer and Maura C. Smith of Riker Danzig Scherer Hyland & Perretti LLP.
The case is The Madera Group LLC v. Mitsui Sumitomo Insurance USA Inc., case number 2:20-cv-07132, in the U.S. District Court for the Central District of California.
--Editing by Bruce Goldman.
For a reprint of this article, please contact reprints@law360.com.
