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Law360 (June 22, 2020, 4:10 PM EDT) -- Penn National Insurance told a Pennsylvania federal judge on Friday that absence of physical damage to businesses forced to shut down due to the COVID-19 pandemic meant that the insurer was not obligated to provide coverage for the resulting financial hit.
The insurer argued in a motion to dismiss that its policy with Mauldin's restaurant, which launched class claims against Penn National last month, only contemplated coverage for loss of income sustained as a result of "physical loss or damage."
"The transient presence of a virus in a structure does not result in any physical alteration of the structure and thus does not constitute 'physical loss or damage,'" the insurer said.
Mauldin's, which is located outside of Greenville, South Carolina, sued last month, claiming it was improperly denied business interruption coverage after it closed its doors in March as Gov. Henry McMaster recommended that all public gatherings be canceled or postponed. Mauldin's is seeking to lead a class of similarly situated restaurants.
McMaster ultimately issued an order on April 6 requiring all South Carolinians to limit their travel outside the home to only essential activities, according to the suit.
Mauldin's says it asked Penn National to provide business interruption coverage, but it received a denial letter from the insurer at the end of March citing a policy provision excluding claims related to viruses and other microorganisms.
In seeking to dismiss Mauldin's subsequent lawsuit, however, Penn National looked to even more basic policy terms than the virus exclusion.
Virus exclusion aside, Penn National argued in its motion that the policy only provided coverage for "physical loss or damage" or, in the event of an interruption due to actions taken by a civil authority, physical loss or damage to another property.
Reading "physical loss or damage" to include the threat of the coronavirus, the insurer said, would effectively ignore subsequent language aimed at providing coverage only for loss of income sustained while the business underwent "restoration."
"[The] complaint implies that the alleged 'damage' pertains to the temporary existence of viral organisms," the insurer said. "To construe that circumstance as triggering ... coverage would nullify the 'period of restoration' provisions."
Moreover, the motion said that the restaurant could have continued to operate on a take-out-only basis even if potential customers would have been unable to dine inside the business.
"Taken as true, this only alleges that customers were kept away from the dining room of a functional restaurant," the insurer said. "It is not alleged that the food-preparation equipment at the restaurant no longer worked."
And even if the closure could constitute a physical loss, the insurer argued that the virus exclusion still applied.
Representatives for the parties did not immediately return messages seeking comment on Monday.
Kahn is represented by Benjamin Johns of Chimicles Schwartz Kriner & Donaldson-Smith LLP, and Tina Wolfson and Bradley King of Ahdoot & Wolfson PC.
Penn National is represented by Richard Mason of Cozen O'Connor.
The case is Kahn et al. v. Pennsylvania National Mutual Casualty Insurance Co., case number 1:20-cv-00781, in the U.S. District Court for the Middle District of Pennsylvania.
--Editing by Adam LoBelia.
For a reprint of this article, please contact reprints@law360.com.
