First Watch Restaurants (“First Watch”) owns a popular chain of brunch restaurants throughout Florida and 28 other states. In a lawsuit entitled First Watch Restaurants, Inc. v. Zurich American Insurance Company,[i] First Watch alleged it suffered business interruption losses caused by the COVID-19 pandemic, and its insurer, Zurich American Insurance Company (“Zurich”), wrongfully refused to provide coverage for the losses.
U.S. District Judge Virginia Maria Hernandez Covington presided over the case and issued a familiar decision for those following pandemic-related insurance lawsuits. Judge Covington expressed sympathy for First Watch’s losses but held, “there is simply no coverage for loss of business due to COVID-19 under policies if the policies require ‘direct physical loss of or damage’ to property.”[ii]
First Watch obtained a property insurance policy from Zurich effective March 1, 2020, to March 1, 2021. After First Watch suspended operations in response to the pandemic and various state orders prohibiting restaurants from offering on-site food consumption, First Watch made a claim to Zurich for business interruption losses.[iii] Zurich denied First Watch’s claim on the grounds First Watch had not stated a claim for “direct physical loss or damage” as required under the Zurich policy.[iv] Zurich further advised First Watch the policy’s contamination exclusion would exclude any damages arising from the pandemic.[v]
Following the denial of coverage, First Watch filed suit against Zurich in the United States District Court for the Middle District of Florida.[vi] First Watch alleged breach of contract and declaratory relief causes of action.[vii] In response to the Complaint, Zurich filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)6), alleging the First Watch complaint failed to state a claim upon which relief could be granted.[viii]
Coverage under the Zurich Policy
The Zurich policy provided coverage for an insured’s suspension of business operations subject to the policy provisions and conditions. Business operations coverage was triggered under the policy if a suspension of business operations was due to, “direct physical loss of or damage to Property.”[ix]
The Zurich policy provided additional coverage under a “special coverages” section, which provided coverage if a civil or military order “prohibits access” to the insured location.[x] The special coverages section required the order in question to be a response to direct physical loss of or damage to property.[xi]
Analysis of the Court
Zurich’s main argument in the motion to dismiss was simply that First Watch failed to plead any concrete damages, but instead pled only an inability to use its restaurants due to COVID-19, which is a “purely economic injury.”[xii] In response, First Watch alleged the Zurich policy language was unique and sufficiently ambiguous to require the Court to construe coverage.[xiii] First Watch further alleged it experienced direct physical loss—as required under the policy—“due to inability to operate the restaurants as intended.”[xiv]
The Court held a restaurant’s inability to use its premises due to COVID-19 does not constitute the “direct physical loss” contemplated by first party property insurance policies.[xv] In addition, the Court rejected First Watch’s argument the Zurich policy language was ambiguous, finding Florida courts have examined “virtually identical policies” and have come to the conclusion the policy language requires there be “some physical problem with the covered property” to trigger coverage.[xvi]
The Court also rejected First Watch’s claims for coverage under the policy’s special coverages section. Judge Covington held a mere decrease in business does not constitute a direct physical loss or damage.[xvii] In addition, Judge Covington noted the state orders cited by First Watch did not completely prohibit access to the restaurants—take-out and delivery were still permitted.[xviii] Judge Covington held a civil order which merely restricts, but does not prohibit, access to premises is insufficient to trigger coverage under a civil authority coverage grant like the one in the Zurich policy.[xix] Because First Watch failed to state a claim for coverage under the Zurich policy, the Court did not address the applicability of the contamination exclusion.[xx]
Judge Covington accordingly dismissed First Watch’s complaint with prejudice.[xxi]
Businesses suffering COVID-19 related losses continue to struggle to obtain insurance coverage under first party property policies. In this case, although the Court expressed sympathy for First Watch’s losses, it did not waver from the growing nationwide precedent: overage for COVID-19 business losses requires “direct physical loss of or damage to property.” The Court was not swayed by First Watch’s argument the Zurich policy language was ambiguous, requiring the Court to construe coverage. Rather, the Court sent the clear message that claims for pandemic-related damages under first party property policies will not be considered absent substantiated allegations of direct physical, rather than economic, loss.
[i] No. 8:20-CV-2374-VMC-TGW, 2021 WL 390945, at *1 (M.D. Fla. Feb. 4, 2021)
[ii] Id. at *4.
[iii] Id. at *1.
[iv] Id. at *2.
[ix] Id. at *1.
[xii] Id. at *3.
[xv] Id., citing Rococo Steak, LLC v. Aspen Specialty Ins. Co., No. 8:20-cv-2481-VMC-SPF, 2021 WL 268478, at *4 (M.D. Fla. Jan. 27, 2021).
[xvi] Malaube, LLC v. Greenwich Ins. Co., No. 20-22615-CIV, 2020 WL 5051581, at *7 (S.D. Fla. Aug. 26, 2020).
[xvii] First Watch Restaurants, 2021 WL 390945, at *4.
[xxi] Id. at *5.