By Joyce Hanson

Law360 (May 7, 2021, 5:59 PM EDT) -- An Alabama federal judge has allowed a group of restaurants to proceed with its COVID-19 coverage case saying that Cincinnati Insurance Co. wrongfully denied their claims for pandemic-related losses, bucking a strong trend within the Eleventh Circuit to favor insurers.

U.S. District Judge Madeline Hughes Haikala ruled Thursday in favor of five related Alabama eateries owned by Serendipitous LLC — several grilled-cheese spots called Melt, a Melt food truck and a now-closed restaurant called Fancy's on 5th — seeking payment on their commercial property claims with The Cincinnati Insurance Co., which insured the restaurants from all risks not excluded by their policy.

In tossing the insurer's motion to dismiss the lawsuit, Judge Haikala was convinced by the eateries' argument that their policy includes coverage for loss of use of property due to the coronavirus pandemic, as well as business interruption and civil authority coverages. And the policy doesn't include a virus exclusion, which commercial property insurance policies sometimes do, the judge said.

"The fact that the COVID-19 virus has not physically altered the restaurants' property does not mean that coverage necessarily is not available for impacts to the property that are invisible to the naked eye," Judge Haikala wrote. "The policy language indicates that the insurer understands that an insured may suffer physical loss without physical alteration of property because the policy excludes from coverage some expenses incurred because of invisible substances like vapor and fumes. Cincinnati could have excluded invisible substances like viruses but did not."

The policy was in effect from March 11 through June 19, when the Melt plaintiffs filed their action against Cincinnati Insurance, according to court filings.

The latest complaint, filed on July 13, states that the World Health Organization declared COVID-19 a pandemic on March 11, and the state of Alabama, Jefferson County and the city of Birmingham issued orders that temporarily closed many businesses or required them to operate under significant restraints — including Serendipitous' five eateries in the Birmingham area and Huntsville.

Under these civil authority orders, the restaurants for months could provide only "curbside" pickup, and later they were able to seat customers but at a restricted capacity, the court filings show.

But when the Melt restaurants submitted a claim to Cincinnati Insurance to cover their business income losses, the company denied their claim on the grounds that business disruption caused by COVID-19 was not covered by the policy, according to the July 13 complaint.

Cincinnati argued in its Aug. 26 motion to dismiss that Melt has not adequately pled a direct physical loss under the terms of the policy and is thus not entitled to coverage under the policy's civil authority provision.

"The plaintiffs' allegations establish that they have not sustained any losses attributable to direct physical loss to property," according to the motion. "Instead, plaintiffs allege that the coronavirus pandemic spreads COVID-19 among humans. Moreover, the same direct physical loss requirement applies to all the coverages for which plaintiffs sue, including the civil authority coverage as well as the business income coverage."

Throughout its motion to dismiss, Cincinnati cited a number of "physical damage to property" rulings around the Eleventh Circuit that side with insurance companies refusing policyholders' coronavirus claims.

In particular, Cincinnati pointed to an Aug. 18 circuit decision in Mama Jo's Inc. d/b/a Berries v. Sparta Insurance Co. , which affirmed that the insurer did not have to cover a Miami restaurant's lost income and extra cleaning costs due to dust from nearby roadwork, agreeing with a Florida federal judge that the eatery's claimed losses did not result from covered "direct physical loss of or damage to" its property.

"Like the dust in Mama Jo's ... plaintiffs admit in this case that the coronavirus does not cause direct physical loss because it can be cleaned," Cincinnati's motion said.

However, Judge Haikala rejected the reasoning of the influential Mama Jo's decision, saying that what distinguishes the Melt restaurants' case from Mama Jo's is their allegation that they had to close entirely when employees tested positive for COVID-19.

"The highly contagious nature of COVID-19 caused civil authorities to temporarily limit capacity in restaurants to prevent the spread of the physical but invisible virus in restaurants," according to Judge Haikala's order. "Cleaning was only one precaution for COVID-19; physical distancing was another, and that distancing, allegedly by civil order and not by choice, deprived the restaurants of the use of their property, i.e. their tables and seating, while the temporary orders were in place."

Judge Haikala also found that Mama Jo's is a summary judgment opinion, and does not require dismissal of the complaint in the Melt action.

Her ruling bucks a trend within the Eleventh Circuit, where recent decisions have favored insurers.

For instance, an Alabama federal magistrate judge on May 5 shut down claims by retailer Dukes Clothing LLC and hotel operator Ascent Hospitality Management Co. LLC, finding that properties contaminated with virus particles need only a routine cleaning, not the fixing or repairing for buildings that have been physically damaged, a requirement for coverage in the businesses' policies.

And a Florida restaurant owner, SA Palm Beach LLC, on Feb. 2 urged the Eleventh Circuit to revive its proposed class action against Lloyd's of London seeking COVID-19-related loss coverage, asking it to certify insurance questions to the state's high court that a lower court had tossed when finding the property didn't sustain any physical damage.

A lawyer for the Melt restaurants, Jim Williams of Sirote & Permutt PC, told Law360 in an email Friday, "We are delighted with the court's decision, and we look forward to proceeding with the lawsuit."

Betsy Ertel, a spokeswoman for Cincinnati Insurance, said Friday the company believes that the language of the policy contract with the Melt eateries will ultimately be enforced.

"Our commercial property insurance policies require direct physical loss or damage to property and do not provide coverage in this case," Ertel said in a statement.

The eateries are represented by Thomas A. Woodall, James S. Williams and Alyse N. Windsor of Sirote & Permutt PC.

Cincinnati Insurance is represented by Augusta S. Dowd of White Arnold & Dowd PC.

The case is Serendipitous LLC/Melt et al. v. The Cincinnati Insurance Co., case number 2:20-cv-00873, in the U.S. District Court for the Northern District of Alabama.

--Editing by Michael Watanabe.

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