By Eli Flesch

Law360 (June 29, 2021, 5:03 PM EDT) -- A legal advocacy group tied to the National Restaurant Association has urged the First Circuit to overturn a decision finding that a group of Massachusetts eateries were not entitled to coverage for pandemic losses sustained because of government shutdowns.

In a Monday brief, the Restaurant Law Center and the Massachusetts Restaurant Association said insurers have improperly denied coverage to restaurants under their "all-risk" policies despite government restrictions that have had the effect of forcing restaurants to make physical and detrimental changes to their premises.

"Insurance carriers have refused coverage and issued blanket denials without just cause," the industry groups wrote. "Those denials are frequently rapid, featuring boilerplate language asserting that coverage is excluded because the restaurant supposedly has not satisfied the industry-standard 'loss or damage' requirement."

The groups are supporting American Foods Systems Inc. and related restaurants in Andover, Arlington, Lexington, Saugus, Shrewsbury and Waltham in their fight against insurers Fireman's Fund and Allianz Global Risks United States Insurance Co.

Angelo Amador, executive director of the Restaurant Law Center, told Law360 that the center had been waiting to weigh in on an appropriate case in the First Circuit and was involved in coronavirus coverage suits in almost all the other federal circuit courts. He criticized the district court's decision to dismiss the suit as ruling on improper grounds.

"Federal courts are supposed to be applying state law in business interruption insurance cases," Angelo said. "However, while, for example, roughly half of state courts have concluded that plaintiffs have stated a proper legal claim, the district court in this case appears to treat other federal district court decisions as establishing some sort of federal common law on business interruption insurance."

The trade groups pushed back on the district court's finding that for coverage, the restaurants needed to have demonstrated some sort of "enduring impact" to the actual integrity of their properties. Reasonable policyholders wouldn't expect such a requirement from the language included in their policies, the groups argued.

Allan Kanner, an attorney for the restaurants from Kanner & Whiteley LLC, told Law360 that the trial court was "reading restrictions into coverage language and expanding exclusions beyond their plain meaning and the reasonable expectation of consumers."

Instead, the groups said that business interruption coverage is meant to protect policyholders from the risk that they can't use their properties for their intended purpose. That type of business interruption resulted from government restrictions, they said.

"In barring or limiting on-premises dining, those orders caused the loss of millions of square feet of vital physical space," the trade groups said in their 43-page brief. "The orders dispossessed restaurants of their tangible spaces and forced very real, material detrimental physical changes and alterations to their premises."

In a brief last week, the restaurants said the district court errantly implied that their policies contained a virus exclusion where none existed. The court found that a fungi and bacteria exclusion barred coverage for viruses, according to court documents.

"Any ambiguities in the language of an insurance contract must be interpreted against the insurer who used them and in favor of the insured," Amador said. "This rule applies with particular force to exclusionary provisions, as the ones in question in this case, and an insurer bears the burden of proving that a particular exclusion is applicable."

The restaurants aimed in their opening brief to convince the appeals court that U.S. District Judge Richard G. Stearns mistakenly interpreted pandemic losses — stemming from government-mandated capacity limits to complete closures — as "transient phenomena of no lasting effect" on the businesses.

"There is no exclusion or limitation in the policy relative to transient phenomena and no lay person would think that about the policy," the restaurants said in their brief. "Likewise, no reasonable lay person would imagine their coverage was predicated on some enduring impact to the actual integrity of any covered property."

The restaurant owners, led by American Food Systems Inc., filed an amended complaint in January, accusing their insurers of breach of contract, bad faith and violation of Massachusetts' law on unfair trade and deceptive practices.

Counsel for the insurers and the restaurants did not immediately respond to requests for comment.

The insurers are represented by Bruce E. Falby, Jamie Kurtz and Brett D. Solberg of DLA Piper.

The restaurants are represented by Allan Kanner and Cynthia St. Amant of Kanner & Whiteley LLC, and by Thomas T. Merrigan, Jonathan T. Merrigan, Peter M. Merrigan and Evan K. Buchberger of Sweeney Merrigan Law LLP.

The trade groups are represented by Gabriel K. Gillett, John H. Mathias Jr. and David M. Kroeger of Jenner & Block LLP, and by Angelo I. Amador of the Restaurant Law Center.

The case is American Food Systems Inc. et al. v. Fireman's Fund Insurance Co. et al., case number 21-1307, in the U.S. Court of Appeals for the First Circuit.

--Additional reporting by Brian Dowling. Editing by Leah Bennett.

Update: This article has been updated to include comments from counsel for the restaurants. 

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