Pa. Eatery Argues COVID-19 Insurance Exclusions Are Invalid

By Matthew Santoni
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Law360 (June 12, 2020, 4:48 PM EDT) -- A Pennsylvania restaurant seeking insurance coverage for losses caused by the COVID-19 pandemic argued to a federal court in a proposed class action that the "virus exclusion" in many policies is invalid because the insurance industry allegedly misrepresented the exclusion to state regulators nearly 15 years ago.

1 S.A.N.T. Inc., doing business as the Town & Country Bar and Grill in New Castle, filed a lawsuit Thursday seeking a declaration that Berkshire Hathaway unit National Fire and Marine Insurance Co. owes it coverage for the business lost during state-ordered coronavirus closures.

The restaurant argued, in part, that exclusions in policies for losses due to contamination by viruses and bacteria were invalid because they had been misrepresented to state regulators as something that wouldn't significantly narrow coverage.

"In securing approval for the adoption of the virus exclusion by misrepresenting to the state regulators that the virus exclusion would not change the scope of coverage, the insurance industry effectively narrowed the scope of the insuring agreement without a commensurate reduction in premiums charged," the complaint said. "Under the doctrine of regulatory estoppel, the court should not permit the insurance industry to benefit from this type of duplicitous conduct before the state regulators."

As hundreds of businesses around the country demand that their insurance policies cover losses from the pandemic, many insurers are pointing to the virus exclusions as a reason for denial. Town & Country seeks to represent a national class of National Fire customers that have been denied coverage of their coronavirus losses, seeking damages equal to their lost business or the limits of their policies.

According to the complaint, Town & Country was one of many "nonessential" businesses forced to close their physical locations in March due to government orders intended to limit person-to-person transmission of COVID-19. Those government orders caused a physical loss to the business, and should have been covered, the suit said.

The complaint said that in 2006, insurance trade groups Insurance Services Office, Inc. and the American Association of Insurance Services represented hundreds of insurers, including National Fire, in front of different states' regulators seeking approval of putting virus and bacteria exclusions into their policies.

"ISO and AAIS represented that the adoption of the virus exclusion was only meant to 'clarify' that coverage for 'disease-causing agents' has never been in effect, and was never intended to be included, in the property policies," the complaint said. "The foregoing assertions by the insurance industry (including defendant), made to obtain regulatory approval of the virus exclusion, were in fact misrepresentations and for this reason, among other public policy concerns, insurers should now be estopped from enforcing the virus exclusion to avoid coverage of claims related to the COVID-19 pandemic."

The insurers had specifically cited the possibility of a pandemic as something they hadn't intended their policies to cover, the complaint said. But the lawsuit said there was precedent at the time that contamination by viruses or bacteria were "physical losses" that should be covered.

"By 2006, the time of the state applications to approve the virus exclusion, courts had repeatedly found that property insurance policies covered claims involving disease-causing agents, and had held on numerous occasions that any condition making it impossible to use property for its intended use constituted 'physical loss or damage to such property,'" the complaint said.

The lawsuit also pointed to language in Town & Country's policy that said "direct physical loss of or damage" could trigger coverage, with particular emphasis on the "or." The government orders constituted a physical loss, even if there wasn't physical damage, the suit said.

"The use of the disjunctive 'or' in the phrase 'direct physical loss of or damage to' means that coverage is triggered if either a physical loss of property or damage to property occurs," the complaint said. "Physical loss of, or damage to, property may be reasonably interpreted to occur when a covered cause of loss threatens or renders property unusable or unsuitable for its intended purpose or unsafe for normal human occupancy and/or continued use."

An attorney for the restaurant declined to comment.

Representatives of Berkshire Hathaway and National Fire did not immediately respond to requests for comment Friday.

Town & Country is represented by Gary F. Lynch, R. Bruce Carlson and Kelly K. Iverson of Carlson Lynch LLP.

Counsel information for the insurer was not immediately available.

The case is 1 S.A.N.T. Inc. v. Berkshire Hathaway et al., case number 2:20-cv-00862, in the U.S. District Court for the Western District of Pennsylvania.

--Editing by Alanna Weissman.

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