Restaurant Chain Sues Insurer Over COVID-19 Loss Coverage

By Daphne Zhang
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Law360 (October 16, 2020, 4:53 PM EDT) -- A California restaurant chain has sued Affiliated FM Insurance Co., alleging the carrier failed to investigate and wrongfully denied its coverage claim by only agreeing to offer a communicable disease sublimit to one of its 66 locations hit by COVID-19 government closure orders.

Islands Restaurants LP said Affiliated did not meet its obligation to investigate its claim, and breached the insurance contract in refusing to cover its loss. The restaurant owner sued the carrier in California state court in September before Affiliated moved the suit to federal court on Wednesday.

In the suit, Islands said it filed a claim in late March and had repeatedly asked the insurer when they would conduct an investigation and how long the potential investigation would last. Yet, Affiliated never went to any of its 66 restaurants and cafes that have allegedly suffered revenue losses during the pandemic, it added.

"Affiliated FM did not visit, inspect, or test any of the locations, nor had it asked for any pictures or videos or spoken with anyone at the restaurants," the owner said.

Islands operated 59 restaurants in California and other western states. In 2015, it formed a partnership, CFBC LLC, and took ownership of seven cafes called Champagne French Bakery Cafés in California. Islands and CFBC held a policy with Affiliated that covers all of the 66 restaurants and cafes, according to the suit.

In the complaint, Islands said that government closure orders, which prohibited onsite dining, have devastated its business, which is centered on the dining experience. Takeout only constitutes a very small part of its revenue, Islands said.

Although its eateries and cafes experienced an increase in revenue once in-person dining resumed, it still suffered a severe revenue reduction compared to previous years because the government orders limit indoor dining, it added.

The chain owner said Affiliated denied coverage for all of its locations in late July, saying that the communicable disease provision is potentially available only for its Agoura Hills, California, location because two employees tested positive for COVID-19 around March.

According to the suit, Affiliated said that "COVID-19 does not cause any distinct, demonstrable, physical change to property," and COVID-19 "constitutes contamination excluded under the policy" in the July coverage denial letter.

Islands argued that the insurer never defined physical damage or loss in the policy, and it has suffered physical damage from COVID-19 and business interruption from civil authority orders, which should be covered under the policy.

The owner also said that because each of its restaurants and cafes suffered a separate revenue loss, the sublimits of the communicable disease coverage should apply separately to each individual location.

Islands is asking the court to hold that Affiliated is obligated to cover its pandemic losses, seeking a judgment that the insurer breached the contract and good faith, and demanding damages to be determined in a jury trial plus attorney fees.

Representatives for the parties could not be immediately reached for comment on Friday.

Islands is represented by Michael J. Bidart of Shernoff Bidart Echeverria Bentley LLP.

Affiliated is represented by Daniel Allender of Robins Kaplan LLP.

The case is Islands Restaurants LP et al. v. Affiliated FM Insurance Company et al., case number 3:20-cv-02013, in the U.S. District Court for the Southern District of California

--Editing by Amy Rowe.

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Case Information

Case Title

Islands Restaurants, LP et al v. Affiliated FM Insurance Company et al

Case Number



California Southern

Nature of Suit



Marilyn L. Huff

Date Filed

October 14, 2020

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