By Nathan Hale

Law360 (May 4, 2021, 9:16 PM EDT) -- Chubb Ltd. unit Westchester Surplus Lines Insurance Co. on Tuesday secured another court victory for insurers in a wave of suits over denials of business interruption coverage claims arising from the COVID-19 pandemic, as a Florida federal judge found that a restaurant's inability to sufficiently allege physical property damage doomed its claims.

Miami-based U.S. Magistrate Judge Jonathan Goodman permanently dismissed the suit filed by Cafe International Holding Co. LLC, which owns IT Italy Ristorante Cafe & Bar in downtown Fort Lauderdale, Florida. While he expressed empathy for the plaintiff's suffering during the pandemic and said its counsel's arguments showed "Passion. Creativity. Tenacity," he still found that they could not overcome the unambiguous policy language.

"In effect, plaintiff is trying to fit a square legal argument peg into a round contract hole," Judge Goodman said. "Cafe International has been persistent and creative, there's no doubt about that. But that resourcefulness does not change the reality that the hole still remains round after being subjected to legal pulls."

The bottom line, the judge said, was that the precise coverage language in Cafe International's policy required it to show "direct physical loss of or damage to" the restaurant, and its counsel proved unable to provide specific facts to support what he said were conclusory allegations of physical damage when pressed during a recent two-and-a-half-hour Zoom hearing on Westchester's motion for a judgment on the pleadings.

"Plaintiff may have lost business because of the pandemic, but a decline in restaurant revenue or profits is merely an economic loss, not a loss covered by the policy," Judge Goodman said. "The simple fact that the coronavirus may have been somehow 'present' at plaintiff's restaurant does not give rise to the direct physical loss or damage necessary to generate coverage."

The judge said he found guidance in the Eleventh Circuit's decision last year in Mama Jo's Inc. v. Sparta Ins. Co. , in which the appeals court rejected a Miami restaurant's claim for coverage due to dust from nearby roadwork that it claimed had led to loss of income.

He said that decision supported his determination that the plain meaning of the policy required Cafe International to allege "demonstrable physical alteration to the premises itself," noting the Eleventh Circuit's finding that "an item or structure that merely needs to be cleaned has not suffered a 'loss' which is both 'direct' and 'physical.'"

Other courts in the Southern District of Florida have also rejected a "physical contamination theory" of damage based on "the mere attachment of coronavirus to any part of the restaurant," he added.

During the hearing, Westchester counsel Steven J. Brodie of Carlton Fields PA told the court that the defense was aware at the time of 32 decisions in which state and federal courts had applied Florida law to insurers' motions to dismiss, ruling in the insurers' favor in all of them.

Facing those stiff "legal headwinds," Judge Goodman credited Cafe International with putting forth two relatively novel theories in the case, though he was ultimately not swayed by either one.

In the first, the restaurant argued that its case was distinguishable from others because its policy lacked a virus exclusion while other Westchester-issued policies had one.

During the hearing, Cafe International attorney Pablo Rojas of Podhurst Orseck PA argued that Westchester's decision to exclude virus-related losses from some all-risk policies showed that the insurer understood that a virus could cause physical loss or damage.

But Judge Goodman agreed with Westchester that the Florida Supreme Court has previously rejected such an argument and has said that the existence or absence of an exclusion cannot create coverage.

"Plaintiff's 'but-we-don't-have-a-virus-exclusion' argument conflates two separate questions: first, whether there is coverage, and second, if so, whether coverage is excluded by some other provision," the judge said.

Rojas also asserted that the Florida Supreme Court has repeatedly held that coverage language must be construed in a way that is harmonious with any exclusions, but Westchester's position that Cafe International's policy covers only tangible, structural damage would make exclusions in the restaurant's policy for failures by power or other utilities and fungus or bacteria superfluous.

The Florida Supreme Court's rulings should keep the restaurant's argument about the lack of a virus exclusion in play, Rojas argued, and in turn, its claim that the nature of its "all-risks" policy means it has broad coverage where "the boundaries of coverage are defined by sort of chipping away at that coverage language through exclusions."

But Judge Goodman agreed with Westchester that reading the policy as a whole only confirmed that Cafe International had not alleged direct physical loss or damage, adding that the "harmonious construction" argument falls flat in this case.

"But the policy here has no virus exclusion, so it is difficult to understand how any interpretation of the coverage provision could inappropriately render irrelevant an exclusion which is not present in the first place," he said.

The judge also rejected Cafe International's claims that Westchester should pay out under its "civil authority" coverage for the loss of business income caused by the government prohibiting access to the restaurant, saying the allegations failed to satisfy requirements that authorities' emergency orders resulted from damage to property elsewhere or that the orders actually prohibited access to the restaurant, which was allowed to stay open for delivery and takeout orders.

"While we are disappointed in the recent ruling, our objective moving forward remains the same — to hold insurers accountable for their contractual obligations and bring justice for businesses who rely on these insurance policies to cover everything from rent to payroll," Podhurst Orseck's Rojas said in a statement.

Representatives for Cafe International did not respond to a inquiry as to whether it intends to appeal the ruling.

Representatives for Westchester did not immediately respond to requests for comment late Tuesday.

Cafe International is represented by Stephen N. Zack, Bruce Weil, James Lee and Marshall Dore Louis of Boies Schiller Flexner LLP and Steven C. Marks, Aaron S. Podhurst, Lea P. Bucciero, Matthew P. Weinshall, Kristina M. Infante and Pablo Rojas of Podhurst Orseck PA.

Westchester Surplus Lines is represented by Richard B. Goetz, Allen Burton, Amy Laurendeau and Daniel M. Petrocelli of O'Melveny & Myers LLP and Steven J. Brodie, Heidi Hudson Raschke and Andrew K. Daechsel of Carlton Fields PA.

The case is Cafe International Holding Co. LLC v. Westchester Surplus Lines Insurance Co., case number 1:20-cv-21641, in the U.S. District Court for the Southern District of Florida.

--Editing by Steven Edelstone.

Update: This story has been updated to include comment from Cafe International's counsel.

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