By Mike Curley

Law360 (December 15, 2020, 7:32 PM EST) -- A Texas magistrate judge is recommending dismissal of a suit by two Texas restaurants seeking coverage for their losses after state orders suspended operations to stem the tide of COVID-19, saying they haven't alleged the virus caused physical damage or loss to the properties necessary to trigger coverage.

In a report filed Monday, U.S. Magistrate Judge Susan Hightower urged U.S. District Judge Robert Pitman to throw out the suit by Austin-based Terry Black's Barbecue LLC and its Dallas counterpart that alleges State Automobile Mutual Insurance Co. breached its contract by denying coverage.

Like hundreds of businesses since the pandemic hit the U.S., the barbecue restaurants had to curtail operations in response to government orders intended to prevent the spread of COVID-19 and sued State Auto in May seeking coverage for their losses, alleging they were owed business interruption coverage because of the virus and the shutdown orders.

Judge Hightower, however, sided with State Auto, noting the relevant phrasing includes the words "to property" and saying the restaurants haven't alleged that COVID-19 has caused any physical alteration to their properties, only that they have suffered economic damages that are not covered by the policy.

Nor did the civil authority orders cause damage to the properties, Judge Hightower added, saying the businesses were only precluded from fully operating the restaurants during the orders. In addition, she said the businesses were never fully shut down; they were able to continue to offer take-out and limited dine-in services.

And just as the restaurants couldn't show that COVID-19 damaged their properties, they cannot show that the civil authority orders were in response to physical damage to nearby properties as required by the policy, she said.

While the restaurants also pointed to a restaurant extension endorsement that provided coverage for business income stemming from exposure to a contagious or infectious disease, Judge Hightower wrote that the businesses failed to allege the virus was ever actually present at the restaurants.

The restaurants speculate that the virus could have been present because of its prevalence in Austin and Dallas, but that's not enough to trigger coverage, Judge Hightower said, adding the civil authority coverage under that endorsement must also be in response to the virus' presence at the restaurants themselves.

The judge also recommended tossing the restaurants' insurance code and bad-faith claims, as they are premised on the argument that coverage was wrongly denied.

Kenneth B. Chaiken of Chaiken & Chaiken PC, representing the restaurants, said he and his clients respectfully disagree with the recommendation.

"We will ask Judge Pitman to review it and if there is a dismissal we will seek weigh-in from the Fifth Circuit on this crucial issue that impacts so many, on a basis where courts are split so significantly," Chaiken told Law360 on Tuesday. "If there is no coverage under our specific policy, then the public consumers or buyers of all risk coverages have been severely duped by the insurance industry."

Attorneys for State Auto declined to comment Tuesday.

State Auto is represented by Christopher W. Martin and Clinton J. Wolbert of Martin Disiere Jefferson & Wisdom LLP and Adam H. Fleischer, Matthew P. Fortin and Lindsey D. Dean of BatesCarey LLP.

The restaurants are represented by Kenneth B. Chaiken and Robert L. Chaiken of Chaiken & Chaiken PC.

The case is Terry Black's Barbecue LLC et al. v. State Automobile Mutual Insurance Co. et al., case number 1:20-cv-00665, in the U.S. District Court for the Western District of Texas.

--Editing by Janice Carter Brown.

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