By Daphne Zhang

Law360 (August 26, 2020, 4:25 PM EDT) -- A group of 23 U.S. strip clubs is suing multiple Lloyd's of London syndicates for refusing to cover their claimed business losses stemming from government-issued COVID-19 closure orders, alleging the insurer is seeking to rewrite the policy's mold exclusion by saying it includes the concept of a virus.

The clubs and an "adult superstore" say in Monday's complaint that their policy with Lloyd's does not exclude loss caused by government orders and that none of the policy exclusions apply. They say they hold an "all risk" policy with the insurer that provides a coverage limit of $10 million per occurrence.

The strip clubs, which operate in several U.S. states including California, Florida and Pennsylvania, say that they lost millions of dollars after 17 of them were forced to close and in six others in Iowa, Texas and Minnesota had to limit operations due to government orders in March.

The clubs say the nature of their operation can make COVID-19 easily transmittable, since their businesses are conducted exclusively indoors with employees in "close proximity" to customers. Lloyd's denied their claims in late May, saying they had sustained no physical damage or physical loss.

There is no question the policy defines physical damage as meaning physical alteration on a property, but the group says a loss should be interpreted as indicating losing possession and a loss of use, which is what the clubs experienced by not being able to use the premises to conduct business.

The clubs say they experienced direct physical loss from state-mandated closures and that the policy never excluded loss caused by government orders.

"The policy does not contain any exclusion that applies to orders, such as the COVID-19 governmental order issued by states, such as California and other states or other government authorities that prevent the plaintiffs from continuing their business operations because of public health and safety issues," the suit says. "Accordingly, the shutdown orders constitute a covered risk."

The clubs say Lloyd's wrongly relied on a mold exclusion to avoid paying claims, since the COVID-19 virus is not a living organism and cannot be defined as a mold or fungus. They argue that Lloyd's is asking a court to rewrite the mold exclusion to make it include the concept of a virus.

And even if the mold exclusion applied, the clubs say, their losses are solely caused by shutdown orders, not the coronavirus, and the policy never stated it bars coverage for government orders. They add that the contamination exclusion also fails to apply, because it is only triggered when the properties are contaminated, and since the strip clubs were closed, there were no findings of contamination from COVID-19.

Under California law, pollution exclusions apply only to situations "commonly" understood as environmental pollution, the group said, so even if the virus were found to have contaminated their properties, the contamination exclusion does not apply since the circumstances at issue do not arise out of environmental pollution.

The strip clubs are demanding actual and compensatory damages to be determined in a jury trial, along with attorney fees.

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

The clubs are represented by Matthew A. Berliner, Peter E. Garrell, Salvatore Picariello and Stanley H. Shure of Fortis LLP.

Counsel information for the defendants was not immediately available.

The case is Rialto Pockets Inc. et al. v. Certain Underwriters at Lloyd's London, Including Beazley Furlonge Ltd., case number 2:20-cv-07709, in the U.S. District Court for the Central District of California.

--Editing by Daniel King.

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