More Restaurant Owners ask Courts to Find that COVID-19 Has Caused “Direct Physical Loss” Triggering Business Interruption Coverage


By: Renata Hoddinott and Isis Miranda

Famed chef Thomas Keller’s restaurant groups sued two insurers in Napa County Superior Court last week, seeking a declaration that the policies cover business interruption losses incurred because of a Shelter-at-Home Order. In the lawsuit, two of the Keller group’s Yountville restaurants, The French Laundry, a Michelin three-star winner, and also-acclaimed Bouchon Bistro, seek a determination that Hartford Fire Insurance Company and Trumbull Insurance Company (collectively “Hartford”) are obligated to pay substantial business interruption losses.

Those losses occurred, according to the Complaint, after the Napa Health Officer issued the Shelter-at-Home Order on March 18, 2020, that directed all residents to stay at their homes and all non-essential businesses to halt operations. As a result of the order, the Keller group temporarily shuttered the two restaurants and furloughed more than 300 employees.

During the COVID-19 pandemic, most states have ordered restaurants to close their dining rooms, including in California, Nevada and New York, where Keller operates several restaurants, as well. While some restaurants have shifted their operations to takeout and delivery, many—for logistical or financial considerations—have elected to closed entirely.

While restaurants and businesses of all sizes are experiencing losses, Keller’s may be greater than others as the nine-course tasting menu at The French Laundry is $325 per person with any selection from its extensive wine list not included in that price.  It is not unusual for dinner for two at The French Laundry to cost $1,000. Thus, Keller’s losses will be substantial.

But will they be covered? Property insurance policies typically require “physical loss or damage” to property. When property is destroyed by fire or storm, that threshold requirement is easily met. But here the alleged “physical loss or damage” from a virus is invisible.

California courts generally adhere to the traditional interpretation of the term “physical,” as requiring some tangible aspect perceptible through the senses. In MRI Healthcare Center of Glendale, Inc. v. State Farm General Insurance Co., a California appellate court concluded that the insured had not sustained a “physical loss” because it failed to demonstrate any “distinct, demonstrable [or] physical alteration” of the MRI machine, which failed after it was turned off to allow for repairs to the hospital for rain damage. The court explained: “For there to be a ‘loss’ within the meaning of the policy, some external force must have acted upon the insured property to cause a physical change in the condition of the property, i.e., it must have been ‘damaged’ within the common understanding of that term.”

In so holding, the MRI Healthcare court relied on another California appellate court case, Ward General Insurance Services, Inc. v. Employers Fire Insurance Company (2003), which found that loss of information stored in a database did not constitute “direct physical loss.” The court in Ward General referred to the dictionary definition of the term “physical” before concluding: “Thus, relying on the ordinary and popular sense of the words, we say with confidence that the loss of plaintiff’s database does not qualify as a ‘direct physical loss,’ unless the database has a material existence, formed out of tangible matter, and is perceptible to the sense of touch.”

The requirement that property must be physically altered or changed to constitute property damage may preclude coverage for business owners looking to their property policies to mitigate their losses. Property policies also typically require that the resulting loss of income was caused by the property damage. Therefore, California courts would need to find that the alleged damage to physical property was the predominant cause of the loss of income, rather than, for example, fear of contagion.

Keller alleges that Hartford issued an all-risk policy to his restaurants, providing coverage for losses from direct physical loss or direct physical damage unless the loss is specifically excluded or limited. The Complaint also alleges that Keller’s policy includes additional coverages in the event of business closures by order of Civil Authority and specifically extends coverage to direct physical loss or damage caused by virus.

Like similar complaints filed in the wake of COVID-19, Keller’s Complaint claims the scientific community has largely recognized the virus as a case of real physical loss. It claims that the virus can remain on surfaces of objects or materials for up to 28 days.

The Complaint also invokes the government’s authority, claiming that the Napa County Health Department explicitly states it issued the Order because of evidence of physical damage to property. The Order provides: “This Order is issued based on evidence of increasing occurrence of COVID-19 throughout the Bay Area, increasing likelihood of occurrence of COVID-19 within the County, and the physical damage to property caused by the virus.”

Typical “Civil Authority” policy provisions provide coverage for business interruption losses stemming from a government order that prohibits access to the insured’s premises. They generally require that lack of access result from “physical loss or damage” to property other than the insured’s premises, which itself resulted from a “covered cause of loss.”

Keller alleges that all access to the restaurant properties is denied as a result of the Order. Notably, however, Keller’s lawsuit does not include his other Yountville eatery, the more casual Ad Hoc, which is open for takeout orders per its website.

A court might also need to address whether the Order “prohibits” access to the affected restaurants and whether the Order was issued because of physical damage to property. Although the Order itself provides that it was “issued based on evidence of . . . physical damage to property caused by the virus,” and Keller alleges that the presence of  COVID-19 constitutes property damage by lingering on surfaces for up to 28 days, California precedent may not support a finding that the property has been physically changed or altered.

Keller seeks a judicial determination that: (1) the Order constitutes a prohibition of access to premises by a Civil Authority as defined in the policy; (2) the Order triggers coverage because the policy does not include an exclusion for a viral pandemic and actually extends coverage for loss or damage due to virus; and (3) the policy provides coverage for any current and future civil authority closures of restaurants in Napa County and provides business income coverage due to physical loss or damage from COVID-19.

Keller’s attorney says the suit against Hartford–and other similar challenges filed by business owners–is intended to establish legal precedent that businesses facing mandated coronavirus closures are covered by their business interruption insurance policies. Keller is not the only restauranteur seeking such a determination relating to the COVID-19 pandemic. Earlier this month, one of Keller’s attorneys filed suit on behalf of New Orleans seafood restaurant Oceana Grill seeking a declaration that its policy with Lloyd’s of London covers “direct physical loss” from “the event of the businesses closure by order of Civil Authority.”

The American Property Casualty Insurance Association has issued a broad statement that it believes most insurance policies—including those with business interruption coverage—do not cover losses stemming from viruses such as COVID-19, and that to “retroactively rewrite existing insurance policies” could put the insurance industry at risk.

Those seeking to evaluate coverage in a specific context must, of course, analyze the language of the specific policies, including, but not limited to, coverage provisions regarding crisis management, business interruption and contingent business interruption, and civil authority coverage.

While similar suits for business interruption losses were filed by insureds following the mad cow disease outbreak, the 9/11 terrorist attacks, and the Ebola virus, the widespread reach of COVID-19 indicates that coverage litigation stemming from it will be equally widespread. FMG will continue to report on coverage issues arising from these and future cases that will undoubtedly be filed in the coming days and months.


Scratch Restaurants LLC, which operates Scratch Bar and Sushi Bar Los Angeles, sued Farmers Group in the Los Angeles Superior Court on April 1. The Scratch lawsuit asks the Court to declare whether stay-at-home orders and orders restricting in-person dining, issued by Los Angeles and Santa Barbara authorities, trigger Civil Authority and Business Income coverage under their policy.

Unlike some of the complaints reported on in this and other FMG blog posts, Scratch’s does not allege as fact that coronavirus has caused physical damage. Instead, Scratch asks the Court to declare whether it is entitled to coverage if it “can prove that there has been a physical loss and damage to the property in the immediate area of the insured properties.” It alleges that such a declaration will prevent Scratch “from being left without vital coverage acquired to ensured the survival of [its] businesses.” By implication, if nothing else, Scratch is seeking relief for losses that it cannot (yet) prove to be covered.

Additional Information:

The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues on a regular basis. Topics include the CARES Act, education claims, law enforcement, the real-world impact of business restrictions, and the viruses’ impact on the construction industry. Click here to register.

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients.  Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments.  For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at

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