By Hailey Konnath

Law360 (April 26, 2021, 10:02 PM EDT ) A Louisiana federal judge on Monday refused to toss a New Orleans restaurant's COVID-19 insurance coverage suit against State Farm, finding that although the eatery hasn't shown that its loss should be covered by the policy, it is permitted to fix the deficiencies in its complaint.

The restaurant, Muriel's Jackson Square, is claiming that State Farm Fire and Casualty Co. has wrongly refused to cover its business income losses stemming from the pandemic and resulting closures. According to the June 2020 suit, Muriel's purchased an "all-risk" policy that included a civil authority provision that should've applied to those losses.

Meanwhile, like other insurers facing similar claims, State Farm contends that Muriel's didn't suffer physical loss or damage. The restaurant's policy also included a virus exclusion that prevents the coverage Muriel's is seeking, State Farm has said.

Chief Judge Nannette Jolivette Brown on Monday agreed with State Farm that Muriel's has not sufficiently alleged direct physical loss to the covered property and that the policy's virus exclusion precludes the restaurant's claim for coverage.

"The court finds Muriel's multiple attempts to obfuscate the plain language of the virus exclusion unpersuasive," Judge Brown said.

The judge also held that the civil authority coverage is inapplicable to Muriel's situation because that coverage is contingent on the claimed loss stemming from direct physical loss and not being excluded by one of the policy's exclusions.

Still, Judge Brown said that "cognizant of the economic hardships resulting from the COVID-19 virus and its ongoing effects, the court grants plaintiff leave to amend the complaint to address the deficiencies identified in this order." Muriel's has until May 10 to file its updated complaint, according to the order.

State Farm is accordingly granted leave to respond to the amended complaint if necessary, the judge added.

State Farm told Law360 on Tuesday that it is confident it has honored the terms of its customer's contract.

"We do not collect premiums to protect against losses resulting from viruses," the company said. "Still, we know this is a difficult time and empathize with all those who have suffered amidst COVID-19."

Muriel's initially lodged its suit in Louisiana state court in June 2020, and it was removed to federal court in August. According to the complaint, the State Farm policy covered Muriel's insured property from June 2019 through June 2020. In March and April of last year, both Louisiana's governor and New Orleans' mayor issued orders and proclamations restricting public gatherings and limiting restaurant operations. During that time, Muriel's said it suffered a "massive and detrimental hit to its business income."

Muriel's lost the use of its physical property during that time, and that constitutes "damage" that should've triggered coverage under State Farm's policy, the restaurant alleged. On top of that, Muriel's said its losses should also be covered under the policy's civil authority provision.

In its motion to dismiss, State Farm argued that its "unambiguous" virus exclusion provision bars Muriel's breach of contract claim because the policy provides coverage for "accidental direct physical loss[es]" that are "not excluded" by the policy's exclusions.

Regardless, Muriel's hasn't alleged losses that are covered by the policy, State Farm said, arguing that the alleged loss in the suit isn't direct physical loss. State Farm added that the civil authority provision in the policy doesn't apply to Muriel's purported losses because the restaurant hasn't alleged damage to a nearby property, nor has it pled "a prohibition on access to its property."

Insurers are facing a deluge of litigation over denying coverage of COVID-19 claims in the last year. As of late February, 1,554 such cases have been filed since the beginning of the pandemic, according to data from the University of Connecticut's Insurance Law Center.

Restaurants and bars have lodged most of these suits, with "food services and drinking places" responsible for nearly 590 of the suits, per the data.

Thus far, courts have largely sided with insurers in the disputes. However, a notable exception came last month when a Pennsylvania state judge gave her blessing to claims from a Pittsburgh-area dental practice aimed at holding a CNA Financial Corp. unit liable for financial losses suffered by a class of businesses after the pandemic forced them to shut their doors last year.

In the Pennsylvania order, Judge Christine Ward in the Allegheny County Court of Common Pleas granted Smile Savers Dentistry PC's motion for summary judgment, ruling that its "loss of use of its property was both 'direct' and 'physical.'"

A State Farm representative and counsel for Muriel's didn't immediately return requests for comment late Monday.

Muriel's is represented by Charles Zimmer, Daniel E. Davillier and Jonathan D. Lewis of Davillier Law Group LLC, Roderick Alvendia of Alvendia Kelly & Demarest and James M. Williams of Chehardy Sherman Williams Murray Recile Stakleum & Hayes LLP.

State Farm is represented by David A. Strauss and Robin D. Cassedy of Strauss Massey Dinneen LLC and Douglas W. Dunham and Bert L. Wolff of Dechert LLP.

The case is Muriel's New Orleans LLC v. State Farm Fire and Casualty Co., case number 2:20-cv-02295, in the U.S. District Court for the Eastern District of Louisiana.

--Additional reporting by Matt Fair and Shawn Rice. Editing by Michael Watanabe.

Update: This story has been updated to include comment from State Farm.

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