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The Ugly Legal Battle Over Restaurant Insurance Has Begun

As restaurant owners struggle to get government aid for their coronavirus-related losses, they face a separate battle with the insurance industry

New York Exteriors And Landmarks - 2020
Outside Jean-Georges at the Trump International Hotel and Tower
Photo by RBL/Bauer-Griffin/GC Images

It took a group of chefs with names that Donald Trump would recognize — Thomas Keller, Jean-Georges Vongerichten, Daniel Boulud, and Wolfgang Puck — and about five days of scheduling to arrange a call with the president to discuss the devastating effects of COVID-19 on independent restaurants. As representatives of a trillion-dollar industry facing an estimated $225 billion in losses, the chefs told Trump that restaurant operators need a larger stake in the economic stimulus — and help convincing insurance companies to pay out business interruption claims, which have so far been denied.

“[Trump] was very open and attentive, and had some good comments,” says Jean-Georges Vongerichten, who laid off 4,000 workers and temporarily closed 36 restaurants, including two in one of Trump’s Manhattan buildings. “But what will happen now, we don’t know.”

While many restaurant owners focus their efforts on securing government assistance for their businesses, some see their existing insurance coverage as a potential, and equally crucial, lifeboat. But because business-interruption insurance typically covers losses related to physical damage, such as from fire or flood, insurance companies have argued that they’re not liable for losses related to the coronavirus.

That’s an infuriating stance for the roughly one-third of small-business owners who have been making steady payments for business-interruption insurance this whole time. “We pay so much insurance, we think it should be able to kick in,” says Vongerichten, who estimates he paid around $25 million in business-interruption insurance over the last 10 years in New York City alone.

To better make their case that COVID-19 closures do, in fact, merit coverage under existing contracts, the chefs on the call with Trump have formed an advocacy organization called the Business Interruption Group. “We were closed because of government obligation, and also because the virus is staying on surfaces, which is a damage to the property,” says Daniel Boulud, who recently closed 16 restaurants and laid off 810 employees.

Although the Business Interruption Group was formed by chefs with notable names and relatively large restaurant groups, its members say their effort isn’t just about protecting well-known industry players; ideally, they could set a precedent that helps all small businesses. “Our well-known chefs are our best advocates, but this is an everyman’s game,” says Jeff Katz, general manager and partner of the Manhattan restaurant Crown Shy, and another member of the Business Interruption Group. “You wanna put Michael Jordan up on the podium when you’re talking about something he can help you with.”

Pressure from the executive and legislative branches — or even a tweet from the president — might help motivate the insurance industry to pay out claims. But the real battle is bound for the courts, and it’s there that John Houghtaling II, a media-savvy, New Orleans-based lawyer who secured hundreds of millions for policyholders in the wake of Hurricane Katrina and Hurricane Sandy, is leading the charge for the Business Interruption Group.

“The argument that the coronavirus doesn’t create a dangerous property condition is a lie,” Houghtaling says. “The insurance industry has a PR campaign which misrepresents the policies and what they owe, and they gaslight everyone.”

On March 20, Houghtaling filed his first suit, seeking a declaration of coverage for coronavirus-incurred losses at the French Quarter seafood restaurant Oceana Grill. “[The] deadly virus physically infects and stays on the surface of objects of materials [called ‘fomites’] for up to twenty-eight days, particularly in humid areas below eighty-four degrees,” the complaint argued. According to the World Health Organization, it’s uncertain how long COVID-19 can persist on surfaces; similar viruses can last for a few hours or up to several days in certain conditions. The case would likely require expert testimony. The insurance company named in the complaint, Lloyd’s of London, declined to comment on the lawsuit.

A week later, Houghtaling filed suit against the Hartford Fire Insurance Co. on behalf of Thomas Keller’s Napa Valley restaurants the French Laundry and Bouchon Bistro, seeking another declaratory judgment to establish that coverage is warranted. Hartford declined to comment on the lawsuit.

It’s a strategic start: Unlike many business-interruption insurance policies, which contain virus-exclusion clauses widely implemented after the outbreak of SARS, Oceana Grill and the French Laundry don’t have virus exclusions. In fact, the French Laundry’s contract contains virus inclusion, for which the restaurant paid a premium.

But Steven Badger, a Dallas-based attorney for Zelle LLP who represents major insurance companies, is skeptical of arguments about physical damage from COVID-19. “The insurance policies will be interpreted and applied according to their terms — that’s what always happens when you have disputes as to coverage,” Badger says. “What cannot happen and should not happen is the expectation that insurance companies should pay claims that aren’t covered simply because we’re in a crisis situation.”

Some insurance policies also contain civil-authority order provisions, which cover claims when businesses are closed by government order. A third lawsuit, brought this week by a New Jersey attorney on behalf of Restaurant Nicholas in Monmouth County against Liberty Mutual insurance, cites Gov. Chris Murphy’s order to close nonessential businesses in the state. A fourth suit, also citing civil-authority coverage, was filed yesterday on behalf of a sports bar called Proper 21 in Washington, D.C.. Many more business-interruption suits are likely to follow.

“If the civil authority mentions that the virus creates property damage by sticking on surfaces, that triggers business-interruption coverage for certain restaurants,” Houghtaling told Eater in a March interview. Based on that interpretation of the law, Houghtaling has even encouraged elected officials to call attention to property conditions when making public statements.

Insurance money isn’t the only lifeline available to restaurants, but it’s among the most viable. Restaurateurs can also seek Small Business Administration disaster grants of $10,000, and forgivable Paycheck Protection Program (PPP) Loans, a $350 billion program created as part of the $2 trillion coronavirus stimulus, known as the CARES Act.

PPP loans let businesses with fewer than 500 employees seek government-guaranteed loans from banks and local lenders. The loans are capped at $10 million, or 2.5 times a business’s average monthly payroll. To get loan forgiveness, 75 percent of PPP loans need to go toward payroll — restaurants that don’t fully rehire their staffers by the end of June will have their loan forgiveness reduced. Complicating matters, a flood of loan applications and delayed guidance to banks means actually getting PPP loans is difficult.

“The Payroll Protection Program is a great step for us,” says Katz of Crown Shy. “But the truth is, it’s an eight-week program, and my gut tells me we’re not eight weeks away from reopening.” Katz wants funds that can go beyond payroll, and toward fixed costs like rent, utilities, and supplies, so that he can reopen his restaurant and rehire his 140 workers.

In a letter to Congress, the Independent Restaurant Coalition — a group that represent nearly 5,000 chefs and restaurant owners, led by well-known figures like Tom Colicchio — demanded improvements to the PPP program. The coalition also asked congress to compel insurance companies to pay business interruption claims

State politicians have introduced a wave of legislation to mandate the same. Bills in Ohio, Massachusetts, New Jersey, New York, and Pennsylvania would require insurers to pay business-interruption claims related to COVID-19. But many experts are skeptical of a legislative approach to the issue. “Insurance companies will likely challenge those bills, arguing that it violates the U.S. Constitution because it rewrites insurance policies,” says Alan Lyons, chair of insurance and reinsurance at Herrick Feinstein LLP. Even advocates like Houghtaling are against bills that meddle with existing contracts. “I don’t believe it’s constitutional, nor do I believe it’s fair,” Houghtaling says.

A declaratory judgment, as in the French Laundry and Oceana Grill cases, could arrive in mere months. But realistically, litigation could take years, Lyons predicts. “It could depend on scientific evidence as to whether the virus was actually present in a particular building, and [whether] it can remain on certain surfaces for a certain part of time,” he says. “Dealing with expert witnesses will take longer, and there could be appeals.”

Based on his experience with insurance companies during Katrina and Sandy, Houghtaling isn’t holding his breath for results. “The [insurance] tactic is always the same,” he says. “Deny everything you owe, slow the payments, don’t pay the emergency funds you owe, and then, because there’s such carnage, the industry goes with their lobbyists, with their advocacy groups, and with the senators, and they say [to the government] we need disaster relief funds.”

Something like that has already begun. According to data from ratings firm A.M. Best Co., the insurance industry as a whole has $18.4 billion in net reserves for future payouts. But insurance trade groups like the American Property Casualty Insurance Association (APCIA) say they don’t have the funds to pay out all claims from a pandemic at once. “Pandemic outbreaks are uninsured because they are uninsurable,” says APCIA president David A. Sampson. If insurance is forced to pay claims by legislation, for example, their reinsurers might not cover them.

Some policyholders, like the restaurateur Wolfgang Puck, want insurers to pay restaurants first, then seek their own bailout from the government. “If [insurers] would just pay for business interruption, life would be so simple, and then the government can help the insurance companies with the money,” Puck says.

But Steve Badger doesn’t like that idea. “You’re transferring the bailout from one industry to another,” he says. “Why not use government funds immediately to put them in the hands where they’re needed?”

The APCIA supports the creation of a COVID-19 fund for small businesses, which it likened to the September 11th Victim Compensation Fund. But that’s no comfort to Houghtaling, who says he’s seen this play out before with Sandy and Katrina funds. “It’s not just about the pot of the money, it’s the mechanism for distributing money,” he says. Federal funds have fewer safeguards for policyholders, and could quickly evaporate.

“I’ve seen firsthand what happens to people in an area when the insurance company denies the figurative life preserver that they’ve got,” Houghtaling says. “I’ve seen them drowned. And now it’s everybody, and we don’t have much time.”

So far, the most tangible outcome of the Business Interruption Group’s call with Trump has been his expressed support for their final request — unrelated to insurance — regarding business tax deductions for meals and entertainment. “At the end of the conversation, [Trump] was asking us, is there anything else you wish to ask us about?” recalls Boulud. “It was Sunday and he had a little more time for himself and seemed to be in no rush, so I popped the question at the end about the business deduction.”

Trump’s 2017 Tax Cuts and Jobs Act, which slashed corporate tax rates, also cut how businesses could deduct entertainment expenses, which could potentially include dining. Restoring the deduction could boost restaurant businesses, once workers return to corporate spending accounts, Boulud suggested. Trump liked the idea, mentioning it on TV and even tweeting about it. But, according to the IRS, the 2017 Act only cut deductions for entertainment, not meals, which can still be deducted if they aren’t considered “lavish or extravagant.”

No matter. “Congress must pass the old, and very strongly proven, deductibility by businesses on restaurants and entertainment,” Trump tweeted. “This will bring restaurants, and everything related, back — and stronger than ever. Move quickly, they will all be saved!”

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