By Shane Dilworth

Law360 (July 1, 2021, 3:27 PM EDT ) A California federal judge has pulled the plug on a class action brought by restaurants seeking to recover pandemic-related losses from two Liberty Mutual units, finding that the eateries failed to show that their properties were physically damaged by the virus.

The judge held on Wednesday that the suspension of in-person dining did not trigger coverage under the business income, extra expense and civil authority provisions in policies issued by American Fire & Casualty Co. and Ohio Security Insurance Co. to the owners of two San Diego-area restaurants, Park 101 and Louisiana Purchase, because the losses were not caused by any distinct, physical alterations to the restaurants.

The Liberty Mutual units argued that in order for them to provide coverage, the restaurants were required to show that their business losses were caused by physical loss or damage to their properties. The restaurants challenged the insurers' interpretation of the "direct physical loss" but failed to persuade Judge Anthony J. Battaglia.

"A resounding majority of decisions support an insurer's position that business losses arising out of COVID-19 do not constitute direct physical loss or damage," the judge wrote.

California Gov. Gavin Newsom declared a state of emergency in the state on March 4, 2020, and San Diego Mayor Kevin Faulconer entered an order March 16 that limited gatherings of 50 people or more and prohibited in-person dining. Governor Newsom issued a shelter-in-place order three days later, which the restaurants say caused them to incur business losses under their policies' business income, extra expense and civil authority provisions.

The San Diego restaurants initiated their coverage dispute in May 2020 on behalf of a proposed statewide class for policyholders whose claims for pandemic-related losses were denied, asserting that directives issued by the governor and the city's mayor caused them to suspend their operations.

Judge Battaglia disagreed, saying that the stay-at-home order was not issued in response to physical damage at the restaurants and that it did not force the businesses to close. Those facts are fatal to the restaurants' claims under all three coverage provisions they invoked, the judge said.

"In fact, the [first amended complaint] indicates that the March 16 order prohibited merely 'in-person' dining, but allowed for permitted patrons to access the property to purchase food and beverages for delivery or take-out services," Judge Battaglia said.

"On that same token, the court notes that the civil authority coverage provision provides coverage only to the extent that access to plaintiffs' physical premises is prohibited — not if plaintiffs are simply prohibited from operating the on-site consumption aspect of their business," the judge continued.

Judge Battaglia also explained that the policies' use of the phrases "period of restoration" and "repaired, rebuilt or replaced" show that physical damage to the properties is necessary to trigger coverage.

Counsel for the parties did not immediately respond to requests for comment on Thursday.

The restaurants are represented by Kevin F. Ruf and Lee Albert of Glancy Prongay & Murray LLP

American Fire and Ohio Security are represented by Kathy Huang, Lisa L. Garcia and Daniel F. Diffley of Alston & Bird LLP and Melissa M. D'Alelio of Robins Kaplan LLP.

The case is Park 101 LLC et al. v. American Fire And Casualty Company et al., case number 3:20-cv-00972, in the U.S. District Court for the Southern District of California.

--Editing by Rich Mills.

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