Insurer Says It Shouldn't Cover Restaurants' COVID-19 Losses

By Lauraann Wood
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Law360 (July 29, 2020, 8:54 PM EDT) -- State Auto Property and Casualty Insurance Co. asked an Illinois federal judge Wednesday to declare it has no duty to cover the losses 31 franchise restaurants suffered under state-mandated coronavirus closures, arguing the losses aren't covered in the relevant policies.

State Auto's suit claims that a group of franchise Denny's and Ruby Tuesday restaurants operating in Illinois, Indiana and Wisconsin are mistaken when they say the insurance policies they purchased cover the economic losses they have suffered in light of state orders mandating nonessential businesses temporarily stop operating to prevent the spread of COVID-19.

The ongoing pandemic has impacted the restaurants in extraordinary ways, but "the insurance contracts at issue simply were not designed to cover the economic fallout from a global pandemic," State Auto said. Instead, their policies are "rooted in a much narrower risk" that covers business losses resulting from "direct physical loss of or damage to property" either at or in the immediate vicinity of the restaurants, the insurer claimed.

The restaurants, which operate under franchisees Classic Dining Group LLC, RT Real Estate of Southern Wisconsin and RT Restaurants of Southern Wisconsin, are asking for coverage of business slowdowns that resulted from state orders restricting social gathering, "none of which were issued in response to direct physical loss of or damage to property at any one of the insureds' restaurants," State Auto said.

"The presence, or suspected presence, of COVID-19 in the general public community does not constitute direct physical loss of or damage to property at the insured premises, as necessary to satisfy the insuring agreements of the State Auto Property policies," the insurer claimed.

State Auto launched its claims to combat an Ohio state court suit the restaurants lobbed against the company about a month ago, asking for a declaration that their insurer should cover their coronavirus-related business losses. State Auto is asking for the opposite declaration in Chicago, arguing its insureds' losses don't qualify for coverage under their policies.

The restaurants submitted business loss claims to State Auto the day after governors and health authorities in Illinois, Indiana and Wisconsin began implementing executive orders in March aiming to curb COVID-19's spread, according to the insurer's lawsuit. Among other restrictions, the executive orders limited the restaurants to serving food and beverages on either a to-go or delivery basis, the suit said.

State Auto replied in early April saying that the relevant insurance policies didn't appear to include coverage for the restaurants' claims, but the restaurants wrote back demanding coverage for their claims, according to the suit.

The insurer has asked the judge overseeing the Ohio litigation to find the restaurants lobbed their suit in an inconvenient forum since it involves two Illinois insurance policies, the application of Illinois contract law, Illinois orders and insured properties in the state, according to the Wednesday suit.

But State Auto's federal complaint also admits that Ohio is its principal place of business, "and I think that's significant because they're trying to say their own home court is such an inconvenient forum for them that they have to move courts," the restaurants' attorney, Christopher O'Malley of King & Spalding LLP, told Law360 Wednesday.

"It underscores that the mirror-image complaint is nothing more than a tactic to delay litigation on the merits of their liability," O'Malley said.

Representatives for State Auto declined to comment Wednesday.

State Auto is represented by Adam Fleischer, David Buishas and Elise Allen of BatesCarey LLP.

The restaurants are represented by Christopher O'Malley, Joseph Englert and Shelby Guilbert Jr. of King & Spalding LLP.

The case is State Auto Property and Casualty Co. v. Classic Dining Group LLC et al., case number 1:20-cv-04434, in the U.S. District Court for the Northern District of Illinois.

--Editing by Daniel King.

For a reprint of this article, please contact reprints@law360.com.

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