Federal appellate court takes on closed Aspen restaurant’s case against insurer
L’Hostaria Ristorante might be closed for business, but its case against an insurer remains open.
The 10th Circuit Court of Appeals is the latest venue in a dispute over whether an insurance company should have covered the once-popular Aspen restaurant’s business losses stemming from the coronavirus pandemic. L’Hostaria already lost its lawsuit on the district court level in September, when a federal judge dismissed the restaurant’s complaint against Cincinnati Insurance Co., meaning the carrier did not have to cover financial losses caused by business interruptions brought on by public-health orders in 2020.
Attorneys for Sagome Inc., which is the corporate name for L’Hostaria Ristorante, are appealing the dismissal. They have amicus support from United Policyholders, a nonprofit that advocates for consumers of insurance coverage.
Written arguments in the case continued to flow in last week. Much of the debate centers around whether viral contamination constituted property damage. L’Hostaria’s side has argued it did, which should have validated its claim for business-interruption losses.
“SARS-CoV-2 and COVID-19 are precisely the kind of novel, unanticipated, unknown risks that all-risks insurance is designed to cover,” contended Timothy Garvey, a Denver attorney representing United Policyholders, in a brief of amicus curiae filing dated Jan. 18. “When viral particles from infected persons are deposited on and adhere to the surfaces of a policyholder’s property, they physically transform objects once safe into a vector for disease. The industry knows this to be true, and the District Court’s dismissal of L’Hostaria’s complaint was premature and unjust, denying L’Hostaria of its day in court on the ambiguities of Cincinnati’s all-risks policy.”
L’Hostaria — which temporarily closed from March 16 through April 27, 2020, in part because of public health orders and the pandemic — took Cincinnati Insurance to Pitkin County District Court that December after it denied its claim seeking coverage for monthly business-interruption losses of up to $40,000 during spring and summer of that year. The case was transferred to Denver federal court in January 2021.
In his September order dismissing the suit, U.S. District Judge William J. Martinez noted that viral contamination at the restaurant did not constitute physical damage to its property under the terms of its insurance coverage. The judge’s ruling also said a majority of U.S. courts had sided with defendant insurance carriers in coverage disputes stemming from the pandemic.
“The Court can discern no reason to deviate from such conclusion, and similarly finds that COVID-19 contamination is not physical damage as covered by the Policy,” Martinez’s ruling said.
Now that the case is being appealed, Cincinnati Insurance has lined up the backing of American Property Casualty Insurance Co., a national trade association that filed a friend-of-the-court brief in support of the defendant. In its amicus brief filed March 22 in appellate court, the lobbying group argued the language in the policy Cincinnati Insurance provided L’Hostaria was clear and left nothing to chance.
“Commercial property policies provide important coverage for losses caused by perils such as fire, wind, hail, and vandalism,” said the brief, which was submitted by Washington, D.C., attorney Laura A. Foggan. “They do not — and were never intended to — provide coverage for economic losses untethered to physical loss or physical damage.”
Like other insurance carriers in similar positions, Cincinnati Insurance rejected L’Hostaria’s claim because the restaurant’s general insurance policy excluded viruses as a payable claim, which also meant that its civil authority coverage, which was a clause in the policy, did not apply. Civil authority coverage can be applied when a government entity blocks access to the insured business’s premises, such as during a natural disaster or life-threatening event.
L’Hostaria attorneys have contended that the civil authority coverage was triggered by city and county health orders that closed restaurants but then re-opened them to delivery, curbside pickup and limited indoor dining. Additionally, the Denver law firm Levin Sitcoff, on behalf of L’Hostaria, argued the potential for COVID-19 exposure at the restaurant qualified as physical property damage.
Yet according to American Property Casualty Insurance’s friend-of-court brief, the matter should appear settled given the recent outcomes in similar litigation: “Over 575 trial and appellate courts nationwide, including nine federal circuits applying the law of many different states and six state appellate courts, agree: COVID-19 related claims for business income losses do not meet the requirement for physical loss of or damage to property under insurance policies like this one.”
American Property also contended that to “retroactively convert Cincinnati’s property policy into pandemic insurance would violate the plain language of that policy and distort the insurance mechanism,” and also hurt both the insurance industry and consumers.
“Retroactively imposing a new, massive, and extra-contractual risk on insurance carriers could well lead to insurer insolvencies, creating an anticompetitive market and impairing the availability and affordability of insurance in Colorado,” American Property’s brief said. “The effect would reach all property and casualty insurers providing primary coverage, as well as excess insurance carriers and reinsurers. Any insurer insolvency would affect insurance guaranty associations and also clog the courts with complex insurance rehabilitation and liquidation proceedings.”
L’Hostaria’s opening brief in its appeal addressed the matter of retroactive policy coverage, and alleged Cincinnati Insurance changed the parameters of its policy after the restaurant filed a pandemic-related claim.
“The district court erroneously held that the presence of the COVID-19 virus on L’Hostaria’s premises, and consequential contamination, do not constitute ‘physical loss’ or ‘physical damage,’ even though the Policy provisions do not require physical ‘alteration’ of the premises to occur — a condition that Cincinnati placed on its insured to avoid payment of benefits after the Policy was issued and a claim for loss was submitted,” the brief said.
In the United Policyholders’ supporting brief, Garvey said the insurance industry’s contention that it faces dire times with a ruling favorable toward L’Hostaria doesn’t hold up.
“Insurers often complain that they will be forced into bankruptcy if courts compel them to cover claims during crises,” the briefs said. “They should not be believed. These outcome-determinative arguments have no place in insurance contract disputes. They are transparent attempts for sympathy that ignore insurers’ duty to pay covered claims regardless of outcome on company profitability. They’re also overtly false.”
L’Hostaria Ristorante, located in the garden level in the 600 block of East Hyman Avenue, closed in 2021 after 25 years in Aspen. The Italian restaurant joined Jimmy’s, the Red Onion and Pinon’s as established Aspen restaurants that shut their doors last year.