By Daphne Zhang

Law360 (July 6, 2020, 11:32 PM EDT) -- A Dallas restaurant group shot back against Cincinnati Insurance Co.'s efforts to get out of covering COVID-19-related losses, telling a Texas court that if "viruses could not cause physical damage, there would be no reason to specifically exclude it."

Vandelay Hospitality Group LP said Friday that the insurer has failed to point to any specific reasons why the over $1 million damages it suffered from the pandemic and state-mandated closures could not be covered. The restaurant group argued that civil authority orders have called COVID-19 a "disaster," meaning that it is an "occurrence" covered under its policy terms.

"Unless specifically excluded from the policy, COVID-19 is a disaster that poses an imminent threat of severe damage, injury, or loss of property. As there is no express written exclusion for 'disaster,' 'virus' or 'pandemic' in this policy," Vandelay said Friday, responding to the insurer's request to toss the case.

The restaurant group cited Texas Gov. Greg Abbott's declaration on June 26 that COVID-19 is a "disaster," saying that government code defines "disaster" as "the occurrence" of damage, injury, or loss of life or property. And its all risk commercial policy with Cincinnati defines an occurrence as "disasters arising from a single happening," Vandelay said, claiming that the COVID-19 pandemic is the same as other natural disasters that should be covered under property insurance.

"If, as Cincinnati posits, the presence of bacteria and viruses could never result in 'physical loss or damage,' then there would be no need for Cincinnati and others to promulgate, much less sell, policies with endorsements that specifically exclude them from the scope of coverage on a policy that insures against just that, 'physical loss or damage,''' Vandelay said.

Vandelay first sued Cincinnati in Texas state court in late April before Cincinnati moved it to a Texas federal court in May. Vandelay submitted its business loss claim to Cincinnati in early March and heard back a few weeks later that the pandemic is not covered under its policy. The group closed its three restaurants in response to the state shutdown orders on March 17, according to court records.

In Friday's response, Vandelay said Cincinnati denied coverage to prevent financial exposure, rather than conducting an investigation of the claims as required under the Texas Insurance Code. The restaurant group also alleged that the insurer never provided it with a decision regarding "the full extent of the claimed damages" but only "a reservation of rights" letter on March 23.

The restaurant owner called Cincinnati's argument that direct physical loss needs visible alteration of an insured structure overly narrow, saying that physical damage is not limited to "structure loss" or "physical alteration of property," but includes any reduction or loss of "value or usefulness."

Vandelay said that COVID-19's actual physical presence in its properties prevents its restaurants from functioning fully. It alleged that Cincinnati has tried to ignore the loss its business has suffered due to COVID-19 and state-mandated closures.

Shauna A. Izadi, an attorney representing Vandelay, said Cincinnati's attempt to toss the case is the "insurance industry's systematic, scorched earth policy to deny valid claims as a result of the COVID-19 crisis."

"Cincinnati received substantial compensation in exchange for this insurance coverage, and rather than live up to their obligations, Cincinnati has filed this motion to dismiss, which mirrors other motions it has filed in other cases throughout the nation in further effort to avoid its obligations," Izadi said.

In the response, Vandelay cited previous cases that ruled that foul smells and gasoline vapors constitute direct physical loss and are covered by property insurance, contending that loss caused by COVID-19 should be covered as well. The virus can stay on an object's surface for days and the risk of transmission and property damage increases in restaurants, where air is recirculated and space is limited, it said.

"Had Cincinnati intended to exclude viruses or held a belief that viruses could not cause structural damage then Cincinnati could have availed itself to the industry virus exclusion," it said in the response.

Counsel for Cincinnati could not be immediately reached for comment. 

Cincinnati is represented by Susan Jan Hueber of Litchfield Cavo LLP.

Vandelay is represented by Shauna A. Izadi and Jason H. Friedman of Friedman Feiger LLP

The case is Vandelay Hospitality Group v. The Cincinnati Insurance Company et al., case number 3:20-cv-01348, in the U.S. District Court for the Northern District of Texas.

--Editing by Michael Watanabe.

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