Law360 (May 24, 2021, 7:38 PM EDT) -- A New Jersey federal judge has refused to backtrack on her dismissal of claims brought by owners of hotel and restaurant franchises including Wendy's, TGI Friday's and Marriott seeking insurance coverage for $40 million in losses stemming from the COVID-19 pandemic, saying she didn't overstep her bounds in her previous decision.
In rejecting the motion to vacate her March 17 decision, U.S. District Judge Susan D. Wigenton said Friday she did not take on inappropriate fact-finding, versus limiting the scope of her ruling to an evaluation of the pleadings, in granting American Guarantee & Liability Insurance Co.'s motion to toss claims by Manhattan Partners LLC and others.
"In determining that plaintiffs' allegations failed to set forth facts that would trigger coverage under the relevant commercial insurance policy, this court did not engage in inappropriate fact-finding, but rather limited its analysis to a review of the adequacy of plaintiffs' pleadings and found them wanting," Judge Wigenton wrote in a letter opinion.
In the challenged decision, Judge Wigenton ruled that the pandemic and government shutdown orders didn't trigger coverage because the franchise owners hadn't sufficiently shown there was any physical loss or damage to their properties.
The franchise owners, which also operate Hilton and Zinburger Wine & Burger Bar locations, claimed in their April 14 motion to vacate the dismissal decision that Judge Wigenton's conclusions were based on "unsupported findings of fact."
They said the court "seemingly concluded" that, at the dismissal motion stage, the plaintiffs needed to go beyond just pleading existence of physical loss or damage. That requirement wasn't present in the policy at issue, according to the franchise owners.
"Furthermore, it is obvious that, as we continue to learn more about COVID-19, conclusions as to the virus' inability to cause the type of physical loss or damage necessary to trigger coverage, is premature at best," the franchise owners argued in their motion to vacate.
"Rather than, as a matter of law, accept all well-pleaded facts as true and draw all possible inferences in plaintiffs' favor for the purpose of analyzing the pleadings against a motion to dismiss … the district court endorsed the conclusion that the mere presence of the virus on surfaces cannot ipso facto cause physical loss or damage, as 'intended' by the policy," the motion to vacate said.
The franchise owners pointed to pre-pandemic New Jersey case law holding that coverage for physical loss or damage could be triggered without the existence of permanent physical damage. They also said the court was "deceived'' into believing that a policy provision that removed the virus from a contamination coverage exclusion, known in court filings as the "Louisiana endorsement," was limited to that state.
In a May 3 response to the motion to vacate, the insurer said the franchise owners' assertion that the court committed an error was "absurd" and that any disagreements with respect to the decision should be resolved at the appellate level.
The insurer said its position was backed by federal case law in the Third Circuit.
"The Third Circuit has held that, under New Jersey law, the mere presence of a potentially toxic substance or the general threat of future damage from its presence does not equate to 'direct physical loss or damage to' property as required under the insuring language of a property insurance policy," the insurer said.
The insurer also claimed the Louisiana endorsement was only applicable in that state, and that the franchise owners failed to allege any Louisiana properties in their insurance claims.
The franchise owners operate 120 locations across the United States, according to their October complaint. The pandemic led to "significant losses in revenue, amongst other losses" after it swept the nation in March 2020, the complaint said.
The insurer rejected their claim for losses on or around June 9, according to the complaint. The franchise owners provided the insurer with a partial sworn statement of proof of loss later that month, and then supplemented the proof of loss the following month, the complaint said.
However, the insurer "failed to thoroughly investigate the claim to determine if coverage was available under the policy, despite a duty to do so," the franchise owners claimed. The insurer also never requested any information nor did it consider the supplemental information the franchise owners provided, the complaint said.
"We believe her decision was in error and we are preparing an appeal," an attorney for the franchise owners, Dennis T. D'Antonio of Weg & Myers PC, told Law360 in an email Monday.
Representatives for the insurer didn't immediately respond to a request for comment Monday.
The franchise companies are represented by Joshua L. Mallin and Dennis T. D'Antonio of Weg & Myers PC and Philip Rosenbach of Berman Rosenbach LLC.
American Guarantee is represented by Susan M. Kennedy and Michael Menapace of Wiggin & Dana LLP.
The case is Manhattan Partners LLC et al. v. American Guarantee and Liability Insurance Co., case number 2:20-cv-14342, in the U.S. District Court for the District of New Jersey.
--Additional reporting by Daphne Zhang. Editing by Kelly Duncan.
Update: This article has been updated to include a comment from attorney Dennis T. D'Antonio, representing the franchise owners.
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