By Bill Wichert

Law360 (April 16, 2021, 3:51 PM EDT) -- A group of Jersey Shore restaurants told a federal court that a unit of The Hartford can't lean on their insurance policies' virus exclusion to avoid covering the eateries' losses related to the coronavirus outbreak, saying the provision applies to conditions on their properties and not the effects of a pandemic outside their doors.

JRJ Hospitality Inc. and related plaintiffs urged the court Thursday to reject Twin City Fire Insurance Co.'s bid for a judgment in its favor in the restaurants' suit over the denial of such coverage, claiming the exclusion "does not bar coverage because it applies to conditions of the premises, not to protecting against a pandemic."

The restaurants said they are not seeking coverage over on-site conditions but instead for the financial blows they suffered after being forced to curtail their operations due to government restrictions aimed at curbing the spread of COVID-19.

"Because the exclusion at issue does not specify pandemics or viruses outside the premises that cause injuries or illness such as COVID-19, defendant should not be permitted to contort the plain and ordinary meaning of the exclusion to deny coverage," the eateries said in their brief.

The plaintiffs operate four restaurants in New Jersey's Monmouth and Ocean counties. The virus exclusion in their policies states that Twin City "will not pay for loss or damage caused directly or indirectly by ... presence, growth, proliferation, spread or any activity of 'fungi,' wet rot, dry rot, bacteria or virus."

In its March 1 motion for judgment on the pleadings, Twin City, a subsidiary of Hartford Financial Services Group Inc., contended that the clause barred coverage for the restaurants' pandemic-related losses, saying COVID-19 is "a 'virus' within the meaning of this exclusion, and plaintiffs' alleged business losses were 'caused directly or indirectly' by it."

"Although measures aimed at slowing the spread of the coronavirus have upended lives and resulted in broad disruption to the economy, the unprecedented fallout from a global pandemic does not provide a basis to override the plain terms of an insurance contract," Twin City said in its brief.

But the restaurants countered Thursday that the terms in the exclusion, "read in their plain and ordinary meaning as they must ... suggest a virus associated with rotting, soaking, and deteriorating conditions of the premises caused by the owner's negligence."

The businesses also pointed to another section of the policies stating that "under most circumstances, Twin City will not pay for 'the cost of removal of the "fungi," wet rot, dry rot, bacteria or virus' or '[t]he cost to tear out and replace any part of the building or other property as needed to gain access to the "fungi," wet rot, dry rot, bacteria or virus.'"

"Read together, the policy is clearly intended to protect against the inept or negligent owner who allows conditions to exist on their property that result in the '[p]resence, growth, proliferation, spread, or any activity' causing damage to the premises," the restaurants said. "This case is not about damage to plaintiffs' restaurants or the negligence of plaintiffs, and thus, the exclusion does not apply."

The eateries also took aim at Twin City's reliance on a series of decisions in which the company and other insurers have defeated COVID-19 coverage suits based on virus exclusions.

For example, Twin City argued in its brief that the restaurants' claims are "also substantially similar to the COVID-19 business interruption claims that this court dismissed with prejudice" in Causeway Automotive LLC et al. v. Zurich American Insurance Co. "based on a similar virus exclusion."

In that Feb. 10 opinion, U.S. District Judge Freda L. Wolfson found that the exclusion barred a group of car dealerships from obtaining coverage from Zurich American for losses related to the outbreak.

But the restaurants noted Thursday that the provision at issue in that matter "excluded losses caused by 'a virus, bacteria or other microorganism that induces or is capable of inducing physical distress, illness or disease.'" That language, commonly known as the insurance service office, or ISO, exclusion, is not in play in the eateries' case, they said.

"The different ISO exclusion is also at issue in the laundry list of other cases cited by defendant applying New Jersey law and other states' laws, and thus none of those cases are applicable here," the restaurants said.

Twin City also cited U.S. District Judge Kevin McNulty's Feb. 8 opinion in The Eye Care Center of New Jersey PA v. Twin City Fire Insurance Co. , which tossed a proposed class action against the company from an eye care practice challenging the insurer's refusal to cover its pandemic-related losses. The judge found that a policy's virus exclusion barred such coverage.

While that matter "does address the same exclusion at issue," the restaurants said, "the court, like defendant, relied on cases that interpreted different exclusions."

"Treating an exclusion focused on disease as interchangeable with an exclusion focused on the condition of the premises is inappropriate," they said.

Counsel for the parties did not immediately respond to requests for comment Friday.

The restaurants are represented by Jonathan Lindenfeld, Lynn A. Ellenberger, Elizabeth A. Fegan and Nathaniel D. French of Fegan Scott LLC.

Twin City is represented by James L. Brochin and Sarah D. Gordon of Steptoe & Johnson LLP.

The case is JRJ Hospitality Inc. et al. v. Twin City Fire Insurance Co., case number 3:20-cv-13095, in the U.S. District Court for the District of New Jersey.

--Editing by Aaron Pelc.

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