By Daphne Zhang

Law360 (October 1, 2020, 8:56 PM EDT) -- A shuttered South Carolina restaurant urged Pennsylvania federal court not to grant an insurer's bid to toss its suit seeking pandemic loss coverage, arguing the case must proceed because the insurer's ambiguous policy terms need to be resolved.

Richard Kahn and his company, AARK Enterprise LLC, told U.S. District Judge John E. Jones III Wednesday it is premature to make a ruling on the case because the policy terms are ambiguous enough for the insurer and the policyholder to have conflicting interpretations on what the policy covers.

Kahn, who owned a restaurant called "Mauldin's" in Mauldin, South Carolina, argued his loss was caused by civil authority closure orders, while Pennsylvania National Mutual Insurance Co. maintained the restaurant's loss was caused by COVID-19, an excluded virus event under the policy. 

"As held by numerous courts in this circuit, as well as some considering claims arising from related COVID-19 insurance denials, defendant's motion should be denied because genuine issues of fact exist that should not be adjudicated at the pleading stage," the restaurant owner said.

Kahn's restaurant was permanently closed due to loss of income during the pandemic and Pennsylvania National has denied coverage for its claim of loss, according to the suit.

On Wednesday, the restaurant owner said he should not be required to show structural alteration to allege property damage because the insurer never defined the terms "direct physical loss" or "direct physical damage" in the policy.

"A multitude of courts within this circuit and throughout the nation have held that an event rendering a property unusable for its intended purpose can cause 'direct physical loss of or damage to' the property even if the structure itself is not altered or harmed," the owner said.

Pennsylvania National's insistence that he must show structural change to allege physical damage is ignoring the restaurant's physical loss of use, Kahn said. The point that the novel coronavirus may not permanently stay on or change a property should not be a determining factor for physical loss or damage, he added.

"Even if a restaurant regularly cleans all its surfaces, any patron visiting thereafter can reintroduce COVID-19 and contaminate the property anew," the restaurant owner said.

Khan also cited previous case law which ruled that a property suffered physical loss or damage after asbestos contamination because the contamination can make the physical space "useless or uninhabitable." Khan said COVID-19 was spreading "near and around" his restaurant, contaminating the space, and making it lose function before it was shut down.

Additionally, the policy never required an entire loss of access to the covered property for the civil authority coverage to apply, the owner said. So he does not need to show "an absolute prohibition on business operation" because of the order's "devastating and permanent" impact on his business, Kahn said.

Pennsylvania National failed to show that the policy's virus exclusion applies because it was the government closure orders instead of COVID-19 that caused his losses, he added.

Representatives for the parties could not be immediately reached for comment Thursday. 

Kahn is represented by Benjamin Johns of Chimicles Schwartz Kriner & Donaldson-Smith LLP and Bradley King of Ahdoot & Wolfson PC.

Pennsylvania National is represented by Richard Mason of Cozen O'Connor.

The case is Kahn et al. v. Pennsylvania National Mutual Casualty Insurance Co., case number 1:20-cv-00781, in the U.S. District Court for the Middle District of Pennsylvania.

--Editing by Janice Carter Brown.

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