Law360 (March 8, 2021, 11:19 PM EST) -- An Indiana federal judge on Monday ruled that a hotel group is not entitled to coverage for pandemic-related business interruption losses, finding that a clear virus exclusion in the hotels' policies forecloses their insurance claims.
U.S. District Judge Richard Young said on Monday that beyond the virus exclusion found in the policies from Emcasco Insurance Company and Union Insurance Company of Providence, MHG Hotels did not demonstrate that they suffered any tangible damage to their properties and therefore failed to plead a direct physical loss.
The hotels argued that they were damaged by the state orders issued last year to curb the virus — rather than the actual virus itself — but the judge didn't buy that argument on Monday.
"While the executive orders technically impacted plaintiffs' business operations, the orders only came about because of the spread of COVID-19," the order said. "Thus, even if the court found a direct physical loss to the plaintiffs' properties, the virus exclusion applies and bars plaintiffs' claims."
Monday's decision, which granted the hotels an opportunity to amend one of their claims, is the latest development in the COVID-19 coverage suit lobbed against the insurers in June.
The hotels in the suit argue that government action restricting travel and closing non-essential businesses prevented customers from traveling and staying at their hotels, which significantly dented their revenues.
As a result, the hotels submitted claims to their insurers requesting business interruption loss coverage last March.
But a day later, the hotels' CEO received word from the insurers that they would not be covering the losses, according to the order.
The hotels accuse the insurers of breaching their contract by refusing to cover their business income losses spurred by the coronavirus interrupting their operations.
They also argue that the insurers' agent fraudulently misrepresented that the policy would protect the hotels against damages resulting from travel restrictions, a viral pandemic and business interruption.
The insurers, however, denied those claims and argued in a bid to dismiss the suit that the policy specifically excludes coverage from losses caused by any virus or bacterium.
Specifically, the policy says "any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease" is excluded from coverage, according to the order.
On Monday, the judge ruled in favor of the insurers, and in doing so joined a flurry of other court rulings on COVID-19-related coverage disputes finding that losses tied to the coronavirus do not entitle business interruption coverage.
In his order, the judge found that the group of hotels did not successfully allege that the coronavirus and related orders caused a direct physical loss to their properties.
"Their losses stem from the governmental efforts to slow the spread of COVID-19 and not from a direct physical loss of their property that requires they repair, rebuild, or replace their property," the order said.
The judge threw out the hotels' breach of contract and bad faith claims without leave to amend, but granted them an opportunity to amend their fraudulent misrepresentation claim.
The ruling arrives just days after a luxury New York City hotel sued its insurer in New York state court, arguing it was wrongfully denied coverage for pandemic-related losses. In that suit, the hotel quoted former President Donald Trump, who implied insurers should pay virus claims if pandemics aren't specifically excluded from policies.
Representatives for the parties did not immediately respond to Law360's requests for comment on Monday.
MHG Hotels is represented by Andrew M. Lehmann of Schuckit & Associates PC.
The insurers are represented by Justin K. Curtis of HeplerBroom LLC.
The case is MHG Hotels LLC et al. v. EMC Risk Services LLC, case number 1:20-cv-01620, in the U.S. District Court for the Southern District of Indiana.
--Editing by Ellen Johnson.
Clarification: This story has been updated to clarify which claims were dismissed without leave to amend and which were dismissed with leave to amend.
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