By Rosie Manins

Law360 (October 9, 2020, 7:32 PM EDT) -- A Georgia federal judge's first-of-its-kind ruling that an Atlanta restaurant can't get insurance coverage for its pandemic-related business losses isn't the end of the road for COVID-19-related policy disputes in the Peach State, where policyholders continue to fight virus exclusions.

U.S. District Judge Thomas W. Thrash Jr. found Allied Insurance Co. of America didn't have to cover business losses Henry's Louisiana Grill sustained when it closed its dining rooms due to the pandemic. And he said Henry's couldn't use a March order from the state's governor as the basis to claim coverage through a "civil authority clause" in its policy that would provide coverage when a government denies access to the insured property.

Attorneys representing insurers praised the decision as being in line with rulings across the country and in keeping with long-standing Georgia law. They said it will help them defend insurers in pending and future cases.

But policyholder attorneys say that though the ruling was a blow, it isn't a sign the insurance industry will dominate in all coronavirus-related claims in the state. They say the Henry's complaint was flawed and that they have other arguments, backed by precedent, in favor of winning coverage for pandemic-related losses.

The Henry's ruling, issued Oct. 6, is distinguishable because of flaws in the pleading and runs counter to what a dozen courts in other states have held, said Sherilyn Pastor of McCarter & English LLP, who chairs the firm's insurance practice. Pastor said properly pled complaints have been held to state a sufficient cause of action for coverage of COVID-19 losses, and the same can be true in Georgia for a better-framed lawsuit.

And there are many questions still to be answered in the thousands of David vs. Goliath coverage battles percolating in the courts as struggling small businesses seek relief from the devastating losses they've faced as the pandemic drags on, she said.

"The insurers should have to put their money where their mouth is," Pastor said. "What did they file with insurance regulators? What did they understand? What were they intending to supposedly exclude? And then, as importantly, what was the premium adjustment?"

More than 5,000 coronavirus-related civil suits have been filed across the country to date, the American Tort Reform Association told Law360. Of the almost 30 cases in which judges have ruled on motions to dismiss, most have been tossed — many for good.

Henry's sued Ohio-based Allied Insurance in June, arguing the virus exclusion in its business income loss policy didn't apply under its civil authority clause. It said an order by Georgia Gov. Brian Kemp in March urging people to stay home was the reason it closed its dining rooms and that Kemp's order changed its dining rooms from satisfactory to unsatisfactory, which equated to a direct physical loss in the availability of its main revenue source.

But Judge Thrash said that interpretation would "massively expand" the scope of Henry's coverage. He said the restaurant's decision was likely prudent, but it was not forced by the state.

"The [governor's] order did not impose limitations on businesses or their operations," Judge Thrash said in his opinion. "The only possible change was an increased public and private perception of the existing threat, which cannot be deemed a physical change that rendered the property unsatisfactory."

Judge Thrash also said because the restaurant had not detected COVID-19 on its property, it couldn't claim a physical change as a result of the virus' presence.

Similar suits in Missouri that survived motions to dismiss in August alleged the virus was present at the plaintiffs' salons and restaurants, case records show.

Pastor said other arguments could move Georgia policyholders further than Henry's was able to bring its claim, pointing to an August ruling in New Jersey state court in Optical Services USA/JCI v. Franklin Mutual Insurance Co. that rejected the insurer's argument that COVID-19 did not trigger coverage for physical loss.

And Pastor said a Florida court's September ruling in favor of a gynecologist's office showed skepticism about virus exclusions and how they are being broadly applied by insurers.

"There is some hope for these arguments," Ross A. Williams of Bell Nunnally & Martin LLP told Law360. "I think that this is actually a really close question. I don't think that there's a lot of law that directly addresses what's supposed to happen in a pandemic."

Williams, who advises clients on their insurance coverage rights with respect to COVID-19, also said prepandemic rulings have held a coverable loss didn't have to include a structural or material change. He said there could be parallels between coronavirus-related cases and rulings like one from a Louisiana federal court that determined a change in perception of the quality of coffee beans stored at a facility during Hurricane Katrina was enough to trigger coverage even without physical changes to the beans.

"I think we're probably at the end of the first wave of this litigation cycle and your second wave of litigants are sitting back and saying, 'What's working here and what's not working?'" Williams said.

Rachel E. Hudgins of Hunton Andrews Kurth LLP, a policyholder attorney, said the fact that some judges are agreeing with plaintiffs over coronavirus-related coverage shows policyholders' interpretations are reasonable. She said the thousands of cases still pending will be better argued because the decisions issued so far have provided a road map to coverage.

Yet Scott M. Seaman, co-chair of global insurance services at Hinshaw & Culbertson LLP, said it's generally true that coronavirus claims don't satisfy the physical loss requirements of insurance policies. He said that Judge Thrash's ruling is in line with Georgia precedent, but that parties on both sides will no doubt push cases into appellate courts in a "COVID-19 coverage war" that's just beginning.

And Atlanta attorneys Kristin Tucker and Christy M. Maple of Swift Currie McGhee & Hiers LLP, who currently represent insurance companies in pandemic coverage cases, told Law360 that insurers have the upper hand because the clear language of most policies is enough to exclude coronavirus claims, as Judge Thrash found.

"No one in the world was prepared for a pandemic except the insurance industry, which had already developed virus or bacteria exclusions," Maple said.

"But I don't expect policyholders to take this lying down; there's simply too much money at stake," she said.

Tiger Joyce, president of the American Tort Reform Association, said the battle between business owners and insurers over who should shoulder the financial burden of the health crisis is too big for courts to handle alone. He said it is a societal issue requiring governmental and community remedies.

"The physical damage requirement is a pretty significant burden for a business to overcome," Joyce told Law360. "That's just the unfortunate nature of where things are. Our view is that this is a problem that the civil justice system isn't really equipped to deal with and it shouldn't be looked to as the forum for resolving that."

Joyce said the association is working nationwide to help shape reform legislation to balance the interests of businesses and address the significant problems posed by the pandemic.

"Your heart goes out to the restaurants because this is not their doing," he said.

The case is Henry's Louisiana Grill Inc. v. Allied Insurance Co. of America, case number 1:20-cv-02939, in the U.S. District Court for the Northern District of Georgia.

--Editing by Breda Lund.

For a reprint of this article, please contact reprints@law360.com.