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Law360 (June 7, 2021, 10:14 PM EDT) -- A Providence strip club can proceed with its COVID-19 business interruption suit, a Rhode Island state judge has ruled, saying the owner has sufficiently shown it is entitled to civil authority coverage despite the policy's virus exclusion.
Judge Brian P. Stern on Friday gave green light to Club Desire's suit against Scottsdale Insurance Co., saying the business has demonstrated that it lost function as an adult entertainment venue due to government closure orders.
Although the policy has a virus exclusion, it is too early to determine whether the exclusion precludes losses caused by state shutdown orders at the pleading stage, the judge said. The ruling marked the first COVID-19 coverage suit decided under Rhode Island law.
"The Court is not convinced by Scottsdale's argument that the Virus Exclusion precludes Civil Authority coverage when Atwells did not allege that its loss or damage was caused by or resulted from a virus," but from government closure orders instead, Judge Stern said.
Atwells Realty Corp. owns the three-floor Providence-based nightclub, which can hold up to 522 people at one time. The club has contended that it incurred a loss of use of its properties after its customers could not visit the strip club due to government closure orders last year.
The business sued Scottsdale last year after the insurer refused to cover its pandemic-related losses. Scottsdale has argued that the nightclub failed to allege direct physical loss or damage, and that it never lost its access to the premises since it offered food delivery services during the lockdown.
On Friday, Judge Stern said that although the club was able to offer food take-out, it was insured as a nightclub instead of a restaurant. The club has adequately shown that its premise became uninhabitable as government orders suspended all adult entertainment services, making it not able to operate the intended business at all, the judge said.
"As a 'Night Club,' Atwells alleges that it was precluded from allowing their patrons access to its premises, unlike restaurants, which were allowed to operate in some capacity," the judge said.
The policy's civil authority provision is also ambiguous, and that the club's interpretation that it only needs to show its customers lost access to the property — instead of its staff — is reasonable, Judge Stern said, pointing out that "the policy does not specify who must be prohibited from accessing the premises."
And although the virus exclusion bars a virus-caused loss on the club's property, it does not preclude that on other properties that could damage the club, the judge said.
The "virus exclusion can only have an operative effect on the insured," Judge Stern said. And the club adequately alleged that COVID-19 can survive on surfaces and cause damage to its surrounding properties, the judge said.
Club Desire has shown that it was forced to shut down due to government orders issued over concerns about the virus' dangerous presence in the community, including the area within one mile of its premises, he added.
Moreover, although other courts have ruled that a policyholder cannot get civil authority coverage if they cannot allege a specific neighboring property with COVID-19's presence, Rhode Island law does not require that, Judge Stern said. The strip club's allegation over the virus' general threat in the neighborhood is enough to trigger coverage, he added.
Judge Stern, however, sided with Scottsdale by holding that the club cannot get business income coverage because it failed to show any tangible physical damage. Even though the strip club owner alleged that COVID-19 could cause physical damage, it "stopped short" by saying that none of its customers or employees contracted the virus, and that the property was not contaminated by it.
Representatives for the parties could not be immediately reached for comment on Monday.
The club is represented by Nicholas J. Hemond of Darrow Everett LLP.
Scottsdale is represented by Stephen Adams of Barton Gilman LLP
The case is Atwells Realty Corp. v. Scottsdale Insurance Company, case number 2020-04607, in the Providence County Superior Court of Rhode Island.
--Editing by Regan Estes.
For a reprint of this article, please contact reprints@law360.com.
