By Daphne Zhang

Law360 (December 9, 2020, 1:38 PM EST) -- An Alabama federal judge axed Auto-Owners Insurance Co. from an ongoing COVID-19 coverage dispute involving a shoe company after the company voluntarily dismissed Auto-Owners as a misnamed defendant and dropped its negligence claim against the insurer in September.

U.S. District Judge L. Scott Coogler said Tuesday that Wagner Shoes LLC had agreed to dismiss its negligence and wantonness allegations against Auto-Owners with prejudice in a telephone conference held on Sept. 22. The judge's Tuesday order cemented the dismissal of Auto-Owners, leaving subsidiary Owners Insurance Co. as the remaining defendant in the case.

"The COVID case against Owners Insurance is alive and well," said Ted Colquett, an attorney representing Wagner. "We are now afforded the opportunity to discover what Owners Insurance preplanned to deny COVID/business interruption claims."

In August, Wagner urged the court to reject Auto-Owners' bid to toss its suit, arguing that no Alabama court has held that physical damage on a property requires physical alteration. The shoe company maintained that its policy is "silent" on the definition of direct physical loss or damage and that Alabama courts have routinely held that undefined or ambiguous terms in an insurance policy must be read in favor of the policyholder.

"We strongly believe the carrier was using denial letters that were and are substantially the same in form and content in Alabama and across the country," said Colquett. "The insurance industry simply resolved that no COVID claim would be paid voluntarily or in the exercise of good faith claim handling."

Auto-Owners has argued that the company experienced no physical loss or damage, that there is no allegation that COVID-19 presented on Wagner's properties, and that "direct physical loss does not mean business losses occasioned by civil ordinance," according to court records.

In October, Auto-Owners filed a supplemental document to support its dismissal motion. The filing cited Hillcrest Optical Inc. v. Continental Casualty Co. , a case in which an Alabama federal judge dismissed a COVID-19 business interruption insurance suit with prejudice for failure to plead "direct physical loss of or damage" to property under Alabama law.

In Hillcrest, U.S. District Judge Jeffrey Beaverstock ruled that a "direct physical loss" should only be interpreted as a "tangible physical alteration" to the property when considering insurance policy terms based on guidance from Alabama case law.

"A reasonable insured would not understand a 'direct physical loss of property' to have occurred as a consequence of the state orders" under the insured's all-risk property policy, Judge Beaverstock said in October.

Wagner, of Tuscaloosa, Alabama, owns retail stores to sell shoes through brands including Asics, Michael Kors, and Under Armour, according to the suit. The company holds a business owner policy with Auto-Owners and sued the insurer in April, seeking a declaration that its claimed property damage from COVID-19 should be covered.

Counsel for Owners Insurance did not immediately respond to questions and a request for comment.
 
Wagner is represented by R. Matt Glover of Prince Glover & Hayes PC and P. Ted Colquett of Colquett Law LLC.

Owners Insurance is represented by Forrest S. Latta, Katherine Edwards West, Robert S. W. Given and S. Greg Burge of Burr & Forman LLP.

The case is Wagner Shoes LLC v. Auto-Owners Insurance Co., case number 7:20-cv-00465, in the U.S. District Court for the Northern District of Alabama.

--Editing by Daniel King.

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