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Law360 (November 12, 2020, 8:12 PM EST) -- A California judge has ruled that Mitsui Sumitomo Insurance USA Inc. is not obligated to cover an iconic Hollywood-based restaurant's financial losses due to COVID-19 closure orders, finding that the eatery failed to allege it suffered requisite "direct physical loss of or damage to" its property.
Los Angeles Superior Court Judge Monica Bachner held that because Musso & Frank Grill Co. Inc. has not established that it is potentially entitled to coverage under its "all risk" policy with Mitsui, its breach-of-contract and bad faith claims against the insurer are not viable.
In dismissing Musso & Frank's complaint without leave to amend on Nov. 9, Judge Bachner rebuffed the restaurant's assertion that the policy's direct physical loss or damage requirement can be satisfied by a mere loss of use of the ability to use a property for its intended purpose. Musso & Frank has argued that a series of COVID-19 stay-at-home orders issued by Los Angeles Mayor Eric Garcetti have barred it from operating since mid-March, since its business is reliant on prohibited dine-in services.
"Losses from inability to use property do not amount to direct physical loss of or damage to property; 'there must be a "distinct, demonstrable, physical alteration" of the property,'" Judge Bachner wrote. "Here, plaintiff has not alleged facts suggesting actual or potential physical damage or loss or that plaintiff has been deprived of its possession of its physical property. Rather, the public health orders cited in the complaint restricted restaurants from operating in-person dining, not from operating entirely."
Musso & Frank lodged its complaint against Mitsui and insurance broker HUB International Insurance Services Inc. on May 1, a month after the insurer denied its claim for coverage of its coronavirus-related losses.
The eatery, which has operated in Hollywood for more than a century and in 2019 became the first restaurant to receive a star on the Walk of Fame, said it has suffered substantial losses since Garcetti issued a March 15 order directing all Los Angeles restaurants to cease dine-in operations. Musso & Frank briefly offered delivery and pickup orders for several weeks this past summer, but ceased those services July 30 pending a future order allowing its dining rooms to reopen, according to the restaurant's website.
In denying Musso & Frank's insurance claim, Mitsui said the restaurant had not suffered requisite direct physical loss of or damage to its property, and, even if it had, the policy's exclusion for virus-related losses would apply.
Musso & Frank, however, contended that its loss of use of its property for dine-in operations satisfied the physical loss or damage requirement. Moreover, it argued that the virus exclusion should not apply because the government stay-at-home orders, not the novel coronavirus itself, was the primary cause of its losses.
Judge Bachner, however, did not buy either argument. With respect to the virus exclusion, the judge emphasized that the stay-at-home orders were issued to halt COVID-19's spread, "which amounts to an allegation that COVID-19 was the predominate or efficient cause of the orders which resulted in plaintiff's closure."
"Plaintiff has not alleged facts suggesting the policy's virus exclusion does not apply to plaintiff's submitted claim," Judge Bachner wrote.
An attorney for Musso & Frank, Michael J. Bidart of Shernoff Bidart Echeverria LLP, told Law360, "We expect these cases will ultimately be decided in the courts of appeal, and possibly the California Supreme Court.
"The issue is whether there are any perils working in conjunction with the virus, and our position is the orders are that peril," he said. "We believe this is a question of fact for a jury, to determine which of the two causes is the predominant cause."
Counsel for Mitsui did not immediately respond to a request for comment.
Judge Bachner's decision adds to a burgeoning body of case law regarding coverage for businesses' losses amid the COVID-19 pandemic.
According to a Law360 review of court records, state and federal judges have granted insurance companies' motions to dismiss in at least 40 similar suits brought by policyholders, while an estimated 19 cases have survived insurers' dismissal bids and proceeded to discovery. In addition, a group of restaurants in North Carolina last month obtained a first-of-its kind ruling in which a state judge granted them summary judgment and ordered The Cincinnati Insurance Co. to cover their coronavirus-related losses — a decision that Cincinnati swiftly appealed.
Musso & Frank is represented by Michael J. Bidart and William M. Shernoff of Shernoff Bidart Echeverria LLP.
Mitsui is represented by Larry Mark Golub and Kent Keller of Hinshaw & Culbertson LLP, and Brian E. O'Donnell of Riker Danzig Scherer Hyland & Perretti LLP.
HUB is represented by Joseph C. Campo of Lewis Brisbois Bisgaard & Smith LLP.
The case is Musso & Frank Grill Co. Inc. v. Mitsui Sumitomo Insurance USA Inc., case number 20STCV16681, in the Superior Court of the State of California, County of Los Angeles.
--Editing by Michael Watanabe.
Correction: A previous version of this story misidentified the party Joseph C. Campo is representing. The error has been corrected.
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