By Dave Simpson

Law360 (February 3, 2021, 10:42 PM EST) -- A California federal judge dismissed a San Diego-area cafe's lawsuit seeking coverage from the Hanover Insurance Group for lost business because of state- and city-mandated restrictions amid the COVID-19 pandemic, finding Wednesday the restaurant did not experience a direct physical loss.

U.S. District Judge Anthony J. Battaglia granted the insurer's motion for judgment on the pleadings, nixing the July coverage suit from Wellness Eatery, which operates Parakeet Café in three locations. The judge, like numerous other courts, ruled that a government-ordered temporary closure does not constitute a direct loss of property.

Given that an "overwhelming majority" of courts have ruled similarly, an amended complaint is "likely to be futile," he said.

"In the interest of justice, however, and before allowing an amendment, plaintiffs must file a motion for leave to amend with a redlined version of the proposed amended complaint attached," he said.

Wellness Eatery, which serves "health-conscious food, coffee, tea, and freshly baked goods," sued in California state court in July. The suit was moved to federal court later that month. It argued that under its policy with Hanover, it was entitled to coverage for the loss of business it has incurred during the pandemic. Hanover's denial of coverage constituted, among many other claims, a breach of contract.

In an attempt to show physical loss, Wellness Eatery alleged that COVID-19 droplets fell "onto virtually every surface and object in, on, and around" the eateries. But the judge ruled Wednesday that the company failed to show that its losses were from COVID-19, instead finding that they resulted from government-mandated closures.

"The court acknowledges that plaintiffs allege that the closure orders 'were issued due to droplets containing the Coronavirus being on surfaces and objects in, on, around and in the immediate area of the Parakeet Cafe locations,'" the judge said. "However, the Closure Orders referenced in plaintiffs' complaint make no mention of COVID-19 presence at Parakeet Café."

The finding in Wednesday's decision echoes dozens of others across the country, which declined to assign coverage to losses stemming from government-required closures.

Last month, a California federal judge granted Travelers Indemnity Co.'s bid to toss a Los Angeles restaurant's suit seeking COVID-19-related loss coverage, ruling that the eatery failed to allege a "direct physical loss" and that coverage is barred by the policy's virus exclusion.

A rare exception to the trend came later last month when an Ohio federal judge ruled that Zurich American Insurance Co. must cover losses suffered by more than a dozen steak and seafood restaurants due to COVID-19 shutdown orders, finding that the eateries' policy can reasonably be interpreted to cover the loss of use of property.

U.S. District Judge Dan Aaron Polster found that Zurich had breached its obligation to provide lost business income coverage to Henderson Road Restaurant System and a slew of related companies that operate 16 restaurants in Ohio, Michigan, Florida, Indiana and Pennsylvania, including 13 locations of the Hyde Park Prime Steakhouse chain.

The insurance company argued that tangible structural damage to the restaurants was necessary to satisfy the policy's threshold requirement that business income losses be tied to "direct physical loss of or damage to" property. According to Zurich, this prerequisite clearly was not met here because the eateries specifically stated in court filings that their properties did not sustain any structural damage — from the novel coronavirus or otherwise.

But Judge Polster rebuffed Zurich's assertions, instead agreeing with the restaurants that the business income provision can also reasonably be read to extend coverage in instances where the policyholder merely loses its ability to use its insured properties for their intended purpose. He said that, under that interpretation, the eateries have shown they suffered a covered loss of use because the various state and local pandemic closure orders temporarily prohibited them from offering in-person dining, which is the cornerstone of their business model.

Wellness Eatery is represented by Francis A. Bottini of Bottini & Bottini Inc.

Hanover is represented by Stephen Michael Hayes of Hayes Scott Bonino Ellingson Guslani Simonson & Clause LLP.

The case is Wellness Eatery La Jolla LLC et al v. The Hanover Insurance Group et al, case number 3:20-cv-01277, in the U.S. District Court for the Southern District of California.

--Additional reporting by Jeff Sistrunk. Editing by Emily Kokoll.

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