Law360 (June 9, 2021, 6:50 PM EDT) -- The operators of 23 U.S. strip clubs have urged the Ninth Circuit to revive their suit seeking to force a Lloyd's of London syndicate to cover their claimed business losses stemming from government-issued COVID-19 closure orders, saying physical damage isn't required to trigger physical loss in the policy.
The strip clubs and an "adult superstore" — led by Rialto Pockets Inc. — argued in their opening brief Monday that Beazley Underwriting Ltd. must cover their physical loss from not being able to operate their businesses during pandemic lockdowns, despite a California federal court finding that physical damage or alteration to the insured property is required before the policy kicks in.
And while Beazley said dispossession of property could constitute physical loss under the policy as long as it's a permanent dispossession, the clubs argued that this interpretation of the policy doesn't hold up.
"Beazley's policy provides for recovery if Rialto is 'wholly or partially prevented from ... continuing business operations or services,' and is devoid of any language that would alert Rialto that a temporary physical loss of real property is not covered," the clubs said.
The strip clubs sued Beazley in August, saying that their policy with the Lloyd's syndicate 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 six others in Iowa, Texas and Minnesota had to limit operations due to government orders last 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 clubs say 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 suit was first tossed without prejudice in January before it was thrown out for good in February, court records show. U.S. District Judge Dale S. Fischer found that the clubs had "not suffered physical loss in any articulable way" and that intangible losses are excluded in the policy.
On Monday, the clubs told the Ninth Circuit that Judge Fischer got it wrong, arguing that "physical loss" doesn't overlap with "physical damage" and that in this case "physical loss" was the clubs' inability to use their insured buildings to run their businesses.
And the clubs rejected Beazley's argument that there is a distinction between permanent and temporary physical loss of property, telling the appellate court that the policy doesn't contain any such language requiring permanent loss for coverage.
"No reasonable layperson interpreting Beazley's policy language in context would discern that ... coverage for 'physical loss' exists only if there is a 'direct [permanent] physical loss' or understand why the policy's promise to pay for the 'partial' cessation of business operations does not exist when the interruption of business operations is occasioned by 'physical loss,'" the clubs said.
The clubs asked the appellate court to reverse the trial court's ruling and revive their suit.
Representatives for the parties did not immediately respond to requests for comment Wednesday.
The clubs are represented by Stanley H. Shure, Peter E. Garrell and Salvatore Picariello of Fortis LLP.
Beazley is represented by W. Eric Blumhardt, Julian J. Pardini II and Rebecca R. Weinreich of Lewis Brisbois Bisgaard & Smith LLP, and Paul L. Fields Jr., Stephen A. Kahn and Gregory L. Mast of Fields Howell LLP.
The case is Rialto Pockets Inc. et al. v. Beazley Underwriting Ltd. et al., case number 21-55196, in the U.S. Court of Appeals for the Ninth Circuit.
--Additional reporting by Daphne Zhang. Editing by Rich Mills.
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