By Mike Curley

Law360 (September 30, 2020, 6:27 PM EDT) -- The operators of 100 Outback Steakhouse locations in California, Arizona, Colorado, Nevada and New Mexico are taking Affiliated FM Insurance Co. to California federal court, saying the insurer has denied claims for COVID-19 related losses on a $100 million policy despite several provisions granting coverage.

In a complaint filed Tuesday, Out West Restaurant Group Inc. said Affiliated FM distributed "talking points" to its insurance adjusters in a scheme to blanket deny all coverage for losses stemming from the COVID-19 pandemic before it even issued its policy to the steakhouses in February. Affiliated FM also misled Out West into believing it would be covered, according to the complaint.

Now, after many of the restaurants were forced to shut down or limit operations because of the pandemic and government orders closing nonessential businesses, Affiliated FM is trying to "shoehorn" the claim into a more narrow and limited area of coverage while contending it's excluded from other areas.

"AFM's conduct as respects Out West is consistent with and part of an orchestrated campaign that AFM has engaged in throughout the country, misrepresenting policy terms and making burdensome information requests to innumerable other AFM policyholders, with the objective of dissuading them from pursuing covered insurance claims," Out West told the court.

According to the complaint, Affiliated FM is attempting to limit the restaurants' recovery to that offered under the "communicable disease" riders, but Out West said those clauses are in addition to, not limiting, the physical loss or damage clause in the policy.

The restaurants further argued that the policy refers to communicable diseases like COVID-19 as damaging to property, so the presence of the virus at the Outback Steakhouse locations triggers the all-risks policy, which allows for full recovery. In addition, Out West argued that the government shutdown orders explicitly note that COVID-19 causes physical damage to property.

While the all-risks policy does not require that COVID-19 be present at a covered location, Out West said it is aware of more than 100 employees testing positive at various locations and several others may have had customers visit who had tested positive.

In addition to the physical loss and communicable disease clauses, Out West argued that it is further owed coverage for its efforts to protect and clean its properties, as well as extra expenses it incurred to keep its operations opened in a limited capacity during the pandemic.

The policy also includes coverage for losses incurred by the closure of nearby attraction properties, such as sports arenas near the restaurant's Anaheim, California, location or resorts near the Nevada locations. In one case, Out West said a location within a Nevada casino couldn't operate because the casino itself had closed.

While Affiliated FM had pointed to the contamination exclusion to bar coverage, Out West said it does not apply to things like COVID-19, otherwise, the communicable disease endorsement would be meaningless. If Affiliated FM had wanted to exclude COVID-19 from coverage, it could have as it was already aware of the virus before it issued the policy, Out West said.

The restaurant owner group is also putting forth claims for breach of good faith, saying that Affiliated FM failed to conduct a thorough and fair investigation of its claim, instead simply making it company policy to deny any and all claims stemming from COVID-19.

"AFM values the long-term relationships we have with our policyholders and we are proud to be leading the industry for claims service," a spokesperson for the insurer told Law360 on Wednesday. "It is unfortunate when legal matters arise because we strongly believe our insurance policies are clear on the coverage provided."

Attorneys for Out West declined to comment.

Out West is represented by Scott P. DeVries, Michael L. Huggins, Walter J. Andrews and Andrea DeField of Hunton Andrews Kurth LLP.

Counsel information for Affiliated FM was not available.

The case is Out West Restaurant Group Inc. et al. v. Affiliated FM Insurance Co., case number 3:20-cv-06786, in the U.S. District Court for the Northern District of California.

--Editing by JoVona Taylor.

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