The insurer said First Watch Restaurants Inc. can't get coverage for its economic losses resulting from the COVID-19 pandemic because it hasn't suffered any related direct physical loss of, or damage to, property at its 400 brunch locations in 29 states.
First Watch argued on appeal of a lower court's dismissal of its suit that its commercial property insurance policy with Zurich covered a drop in revenue due to pandemic restrictions on in-person dining.
"That argument makes a mockery of the policy's plain wording and standard canons of contract construction," Zurich said in its appellee's brief. "First Watch seeks to rewrite the policy and well-established Florida law along the way, demanding that the court set aside its common sense."
Zurich successfully moved to toss First Watch's October complaint, which a Florida trial judge dismissed with prejudice in February.
The insurer said Wednesday that COVID-19 orders from federal and state lawmakers, regulating what activities a business can or cannot conduct on its property, do not constitute or cause direct physical loss of, or damage to, property.
"First Watch challenges the district court's observation of that unassailable fact, but its challenge has no merit," Zurich said in its brief.
The restaurant chain argued in October that its Zurich policy limits were $215.2 million in property damage and $80.8 million in "time element" coverage, which is for losses resulting due to direct physical loss of, or damage to, property that occur over a period of time.
In a letter to Zurich at the end of March 2020, First Watch said its dine-in service was prohibited or restricted because of the pandemic at 350 locations in 29 states, case filings show.
U.S. District Court Judge Virginia M. Hernandez Covington said in her Feb. 4 order that economic losses such as First Watch's cannot be covered by property insurance policies. She said other Florida courts had determined while examining almost identical policies that a business interruption loss must result from a physical problem with the property.
Zurich urged the Eleventh Circuit to affirm the trial judge's ruling, saying First Watch's contention that the policy requires only damage, not modified by the words direct or physical, further tortures the policy's clear language.
"First Watch's argument also leads to an absurd reading of the policy under which any government regulation with a 'bad effect' on First Watch's business activities is swept within policy terms designed to insure against direct physical loss of, or damage to, property," Zurich said.
The insurer said government orders regulating business activity, like those implemented in Florida and other states during the coronavirus pandemic, cannot be used to put insurance companies on the hook for damages outside policy limits. And a contrary conclusion "threatens a sweeping expansion of property insurance coverage for every government regulation impacting a business's activities or income."
Zurich said its policy for First Watch also contained a contamination exclusion, so even if the presence of a virus could be construed as causing direct physical loss or damage, coverage would be denied. The contamination exclusion applied to any cost, including the inability to use or occupy property, it said.
Because First Watch did not allege that any property needed to be repaired or replaced, or seek insurance coverage for any property repair or replacement, its claim was rightly denied, Zurich said. None of the chain's properties were tangibly altered by pandemic restrictions, and First Watch was not permanently physically deprived of any property, the insurer said.
"Instead, First Watch's restaurants remained in the same condition they were in the moment after the [pandemic] orders went into effect," Zurich said.
The Eleventh Circuit has previously ruled in an unpublished opinion that COVID-19-related business interruptions are only economic losses not covered by property insurance policies. But First Watch said in its appellant's brief that its policy with Zurich is unique and different from other commercial property policies.
Counsel for Zurich declined to comment on Wednesday.
Counsel for First Watch did not immediately respond to a request for comment.
Zurich American Insurance Co. is represented by Patrick E. Hofer, Timothy A. Carroll and Gabriela A. Richeimer of Clyde & Co. LLP and Katherine E. Giddings, Gary J. Guzzi and Anthony W. Morris of Akerman LLP.
First Watch is represented by Bard D. Rockenbach and Nichole J. Segal of Burlington & Rockenbach PA and Kenneth J. McKenna and Ryan K. Young of Dellecker Wilson King McKenna Ruffier & Sos LLP.
The case is First Watch Restaurants Inc. v. Zurich American Insurance Co., case number 21-10671, in the U.S. Court of Appeals for the Eleventh Circuit.
--Additional reporting by Daphne Zhang. Editing by Jill Coffey.
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