Insurer tells restaurants state is to blame for losses

Oregon Mutual Insurance is the latest insurer to maintain its business interruption policies do not cover government-ordered shutdowns because there was no physical damage to the property.

In a bid to dismiss a class action, the insurer urged two San Francisco restaurants to place the blame on state and local governments for imposing sweeping stay-at-home orders.

"Their loss of business income was squarely the result of governmental orders," wrote defense attorney Clarke Holland of Pacific Law Partners in the Thursday filing. "Plaintiffs lost earnings by shutting down or limiting their operations in compliance with the orders -- as the complaint repeatedly alleges, by 'following the orders.'"

Michelin star-awarded Kin Khao and Nari Suda sued Oregon Mutual in May amid a wave of litigation challenging insurers' denial of claims arising from lost income stemming from business shutdowns to combat the coronavirus pandemic.

The restaurants had all-risk property damage policies that covered any harm to physical property except those that are specifically excluded, according to the complaint. The insurer chose not to include language in its policies that would exclude catastrophic disease outbreaks, according to plaintiffs' attorney Robert J. Nelson, a partner at Lieff Cabraser Heimann & Bernstein.

But like insurers in other cases, Oregon Mutual is arguing coverage requires "direct physical loss of or damage to property." Nari Suda LLC v. Oregon Mutual Insurance Company, 20-CV-03057 (N.D. Cal., filed May 4, 2020).

The requirement of physical loss is "widely held to exclude alleged losses that are intangible or incorporeal" and bars claims "when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property," Holland wrote.

In a similar case against State Farm that went up to the 4th U.S. Circuit Court of Appeals, the insured and its insurer disputed whether a broken magnetic resonance imaging machine had suffered direct physical damage. The plaintiff alleged State Farm remained responsible for covering the cost of the machine even though there was no readily apparent damage.

The court held there "must be a distinct, demonstrable, physical change in the condition of the property" for the loss to be covered. It said there must be "some external force" that causes damage. MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co., 187 Cal. App. 4th 766, 779-80 (2010).

Joshua Borger of Boscia Legal, however, said courts have held insurers liable in cases in which the property is unusable even in the absence of physical alterations.

Nelson emphasized the restaurants lost the ability to use dining rooms. He said, "This is where the rubber meets the road as to whether or not there is loss of physical use."

Oregon Mutual is also arguing that even if courts inferred the virus might have been on objects or surfaces at the restaurants, it would not constitute direct physical damage because they can be cleaned.

"The viruses can be quickly eliminated through disinfectant cleaning without resulting in damage to the objects on which they might land," Holland wrote.

The insurance industry collectively has $18.4 billion in reserves for future payouts, according to credit rating firm A.M. Best Co. The American Property Casualty Insurance Association has projected as many as 30 million business interruption claim filings from small businesses this year.

Nelson questioned whether there was an industry-wide effort to issue blanket denial of such claims. The firm also filed identical lawsuits in San Francisco Superior Court for two California restaurants denied coverage by Farmers Group Inc. and Mid-Century Insurance Co.

"It's almost like they're doing this as a political decision rather than as an insurance policy decision, hoping that others -- maybe the government -- will come to restaurants' aid when these restaurants paid the insurance companies to do precisely this," he said.

More than 100 lawsuits challenging the denial of business interruption coverage have been consolidated, according to court filings.