By Daphne Zhang

Law360 (April 7, 2021, 10:47 PM EDT) -- A Massachusetts federal judge has tossed a downtown Boston restaurant owner's proposed class action seeking to force Strathmore Insurance Co. to cover its pandemic-related losses, holding Wednesday that COVID-19 does not cause property damage.

U.S. District Judge Nathaniel M. Gorton said Select Hospitality, which owns the Grand Tour Restaurant, failed to show the coronavirus caused any physical alteration of its properties. The judge also said the business owner cannot stretch the coverage to make it pay for pandemic losses.

Although the policy does not contain a virus exclusion, the judge said, the absence of such exclusion does not create pandemic loss-related coverage. In his decision to shoot down the business's suits, Judge Gordon said that a widely cited Missouri federal case against the same insurer, Studio 417 Inc. v. Cincinnati Insurance Co., does not apply to the restaurant owner's claims.

According to court records, the business owner relied on the Missouri federal court's ruling, which found the presence of the virus caused a "direct physical loss," a precondition for coverage under property policies, to argue that its property experienced a loss of use.

But on Wednesday Judge Gordon said "multiple courts" have found that rulings in policyholders' favor, as in Studio 417, were "outliers." "It is clear that the weight of legal authority supports dismissal of plaintiff's claim for business income and extra expense coverage," he said

"The COVID-19 virus does not impact the structural integrity of property in a manner contemplated by the Policy and thus cannot constitute 'direct physical loss of or damage to property,'" the judge said. "A virus is incapable of damaging physical structures because the virus harms human beings, not property."

According to the suit, Grand Tour Restaurant suspended on-site dining last March due to government closure orders and resumed business last June. After the restaurant owner submitted an insurance claim, Strathmore denied coverage last April.

The owner has alleged that Strathmore never thoroughly investigated its claim or went to the restaurant to examine its property loss, as the policy required. It subsequently sued the carrier, alleging breach of contract and seeking to represent all business owners who hold a policy with Strathmore and have suffered pandemic-related losses.

"Strathmore correctly observes that Select has not plausibly alleged that COVID-19 was present at its insured property or that its losses resulted from the presence of the virus," Judge Gordon said on Wednesday.

Even if the restaurant owner was able to show that its business losses were caused by the presence of the novel coronavirus, it still will not be able to get coverage, Judge Gorton said. Massachusetts courts have interpreted direct physical loss "so narrowly" and a policyholder is required to show "tangible material loss" to allege property damage, he said.

Additionally, the restaurant owner is not entitled to civil authority coverage since it never fully lost access to its property and was allowed to provide delivery and take out to customers the whole time during the state-mandated closures, the judge said.

The government shutdown order was carried out to curb the spread of COVID-19 but did not result in property damage as the owner maintained in its "conclusory" allegation, Judge Gordon said.

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

The restaurant owner is represented by Adam M. Stewart, Edward F. Haber, and Michelle H. Blauner of Shapiro Haber & Urmy LLP

The insurer is represented by Gregory P. Varga, Julianna M. Charpentier, Jonathan E. Small, and Wystan M. Ackerman of Robinson & Cole LLP.

The case is Select Hospitality, LLC v. Strathmore Insurance Company, case number 1:20-cv-11414, in the U.S. District Court for the District of Massachusetts.

--Editing by Peter Rozovsky.

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