By Shawn Rice

Law360 (March 22, 2021, 3:19 PM EDT) -- The franchisee of 100 Outback Steakhouse restaurants isn't covered by Affiliated FM Insurance Co. for its pandemic-related losses, a California federal judge said, finding that neither the presence of the coronavirus nor government shutdown orders caused any loss or damage to the restaurants.

In Friday's order, U.S. Magistrate Judge Thomas S. Hixson found coverage wasn't triggered for Out West Restaurant Group, which operates Outback locations in California, Arizona, Colorado, Nevada and New Mexico. The Outback owner didn't show a "direct physical loss of or damage to" its locations, he said.

"The overwhelming majority of courts have concluded that neither COVID-19 nor the governmental orders associated with it cause or constitute property loss or damage for purposes of insurance coverage," Judge Hixson said, granting judgment on the pleadings to Affiliated FM.

The presence of COVID-19 doesn't cause a change to the Outback owner's properties, he said.

Scott P. DeVries of Hunton Andrews Kurth LLP, counsel for Out West, told Law360 on Monday, his client was disappointed with the ruling which it believes contradicts California law and the policy's terms.

"The court did not construe the undefined term 'loss or damage' expansively as it is required to do under California law so as to provide coverage. Instead, it construed the term narrowly, adding a requirement of 'structural damage' which doesn't appear in the policy," DeVries said, in a statement.

DeVries also said the court ignored more than 45 other judges across the country who have found the "loss or damage" provision potentially covers the presence of COVID-19 as well the government orders. "Out West will challenge these and other issues on appeal," DeVries said.

Out West and related entities sued Affiliated FM, seeking to hold the insurer responsible for their business interruption losses caused by the COVID-19 pandemic and shutdown orders.

The restaurant management company, which cited 100 positive COVID-19 cases with its employees, alleged the virus was present on the surfaces and in the air at its restaurant locations. After a positive case is known, Out West said it then spent costs on deep cleaning and sanitation measures to fix the issue.

Judge Hixson, in Friday's order, dismissed the breach of contract and bad faith claims with prejudice, finding Affiliated FM doesn't cover for losses to the restaurant businesses caused by COVID-19. As a result, the magistrate judge didn't have to consider the contamination and loss of use exclusions.

Judge Hixson said the overwhelming courts in the state have ruled that coverage isn't triggered by the COVID-19 pandemic or the government shutdown orders tied to the pandemic. Ultimately, the coronavirus doesn't cause any change to Out West's physical properties, he said.

Since the start of this year, California courts have given policyholders and insurers different results in their business interruption suits. Two flower importers saw their $2 million pandemic-related suit tossed because a governmental action exclusion barred all losses resulting from state lockdown orders.

A California federal judge granted judgment on the pleadings to an insurer after finding a San Diego-area café couldn't show a direct physical loss occurred for its business income losses from the pandemic. A Los Angeles restaurant's suit was dismissed because its policy's virus exclusion precluded coverage.

However, Goodwill Industries escaped dismissal because a California state judge found the possibility that COVID-19 and shutdown orders caused direct physical loss and damage. A beauty salon was also allowed to proceed with its proposed federal class action because there was a possible direct physical loss.

Steve Zenofsky, assistant vice president of public relations for Affiliated FM, said in a statement on Monday that the insurer values its relationship with policyholders.

"It is unfortunate when legal matters arise because we strongly believe our insurance policies are clear on the coverage provided," the spokesperson said in the statement.

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

Affiliated FM is represented by Steven D. Turner and Mariyetta A. Meyers-Lopez of Jones Turner LLP and Joyce C. Wang of Carlson Calladine & Peterson LLP.

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.

--Additional reporting by Daphne Zhang, Dave Simpson and Hailey Konnath. Editing by Amy Rowe.

Update: This story has been updated with comments from Out West.

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