U.S. District Judge Dan Aaron Polster found that Zurich had breached its obligation to provide lost business income coverage to Henderson Road Restaurant System and a slew of related companies that operate 16 restaurants in Ohio, Michigan, Florida, Indiana and Pennsylvania, including 13 locations of the Hyde Park Prime Steakhouse chain.
The insurance company argued that tangible structural damage to the restaurants was necessary to satisfy the policy's threshold requirement that business income losses be tied to "direct physical loss of or damage to" property. According to Zurich, this prerequisite clearly was not met here because the eateries specifically stated in court filings that their properties did not sustain any structural damage — from the novel coronavirus or otherwise.
But Judge Polster rebuffed Zurich's assertions, instead agreeing with the restaurants that the business income provision can also reasonably be read to extend coverage in instances where the policyholder merely loses its ability to use its insured properties for their intended purpose. He said that, under that interpretation, the eateries have shown they suffered a covered loss of use because the various state and local pandemic closure orders temporarily prohibited them from offering in-person dining, which is the cornerstone of their business model.
"Plaintiffs argue that they lost their real property when the state governments ordered that the properties could no longer be used for their intended purposes — as dine-in restaurants," Judge Polster wrote. "The policy's language is susceptible to this interpretation."
While Judge Polster granted summary judgment to the restaurants on their breach of contract claim against Zurich, he rejected their bad faith claim, saying the disagreement among courts around the country as to the availability of business interruption coverage for pandemic-related losses means the insurer had a reasonable basis for denying coverage.
The restaurants' troubles date back to March when government orders in the five states in which they operate limited them to providing takeout, curbside pickup or delivery services — options the eateries had virtually never offered. As a result, nearly all of the eateries ceased operations immediately, with the exception of the four Ohio steakhouses, which briefly tried to offer takeout services before shuttering as well, according to court documents. Filings indicate that some of the restaurants have since been permitted to reopen and offer in-person dining at reduced capacity.
Shortly after Zurich denied the restaurants' insurance claim in late April, they filed suit in Ohio state court. The insurer swiftly removed the case to federal court, and the two sides filed competing motions for summary judgment in October.
Zurich took the position that, even if the restaurants could show their lost income was caused by the requisite physical loss of or damage to property, coverage would separately be barred by exclusions for claims tied to microorganisms or "loss of use."
In Tuesday's order, after finding that the eateries had fulfilled the policy's threshold physical loss or damage requirement, Judge Polster held that neither exclusion precludes coverage.
The judge agreed with the restaurants that the microorganism exclusion doesn't apply because the losses at issue were caused not by COVID-19 itself, but by the government shutdown orders. He noted that Zurich could have included language to explicitly exclude losses resulting from government-mandated closures but did not do so.
"Because Zurich's microorganism exclusion did not identify the possibility that, even absent 'the presence, growth, proliferation, spread or any activity of 'microorganisms' damaging the plaintiffs' properties, the plaintiffs may be required to close their dine-in restaurants due to government orders responding to a public health crisis, the microorganism exclusion does not apply," Judge Polster wrote.
As for the loss of use exclusion, the judge said it does not apply because it cannot be reconciled with the language of the business income provision, which can reasonably be interpreted to extend coverage for the policyholder's loss of use of its properties.
"Here, the loss of use exclusion would vitiate the loss of business income coverage," the judge wrote.
Judge Polster's decision marked only the fourth time a judge has ruled outright that a policyholder is entitled to coverage for pandemic-related losses, according to data compiled by the University of Pennsylvania's Carey School of Law. Earlier this month, the Cherokee Nation prevailed in a COVID-19 business interruption coverage dispute with several of its insurers in Oklahoma state court, and restaurants in North Carolina and Washington state notched summary judgment victories last year.
Counsel for the restaurants and a Zurich representative did not immediately respond to requests for comment Wednesday.
The restaurants are represented by Mark R. Koberna, Rick D. Sonkin and Sean T. Koran of Sonkin & Koberna LLC.
Zurich is represented by Kevin M. Young and Jennifer L. Mesko of Tucker Ellis LLP and Jonathan Gross of Mound Cotton Wollan & Greengrass LLP.
The case is Henderson Road Restaurant Systems Inc. dba Hyde Park Grill et al. v. Zurich American Insurance Co., case number 1:20-cv-01239, in the U.S. District Court for the Northern District of Ohio, Eastern Division.
--Editing by Janice Carter Brown.
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