A Pasadena hotel has filed a class-action lawsuit against an insurer for failing to cover a claim related to COVID-19 and its resulting shutdowns.
Hotel Constance Pasadena sued Zurich North America, and Zurich American Insurance Company in the U.S. District Court for the Northern District of Illinois alleging breach of contract.
“What the case essentially boils down to is this larger question of how no shutdown orders from COVID are going to be squared with preexisting contracts and insurance policies because, in this case, a hotel had to shut down operation because of government closure orders related to COVID,” said Timothy Snowball.
Located at 928 East Colorado Boulevard in Pasadena, Hotel Constance Pasadena is seeking a declaratory judgment.
“The hotel not only shut down but they had a mass exodus of reservations with people canceling their reservations,” Snowball said. “For all intents and purposes, they were shut down for business for an extended period because of government and post-COVID shutdown orders. They have a pretty high bar insurance contract with their insurer that they contend should cover this kind of loss.”
The plaintiffs allege that their policy provides coverage for direct physical loss of or damage to covered property caused by or resulting from any covered cause of loss.
“The Policy does not define “direct physical loss of or damage to,” wrote plaintiffs’ attorney Gary Lynch in the May 12 complaint. “Plaintiff’s loss of use, loss of access, and loss of functionality of its Covered Properties when the Mandated Shutdown Rules made it unlawful for Plaintiff to fully access, use, and operate their business at the Covered Properties, constitutes a 'Covered Cause of Loss' under the Policy.”
Snowball foresees the court wrestling with the definition of ‘direct physical loss of or damage to.’
“What is damage according to this clause,” he said. “In terms of a contract, what matters is the intent and understanding of the two parties. So, what did they understand these clauses to mean at the time in which they entered into this agreement?”
A broader policy question, Snowball added, is how courts should balance the interests.
“On the one hand, the contract may be plainly interpreted to cover this kind of loss and, on the other hand, how could the parties have possibly foreseen a global pandemic in which this business would be arbitrarily shut down for a six-month period and not allowed to operate? How could they have foreseen that as being something implicated by this insurance contract?”
Zurich is claiming that it doesn’t interpret the phrase to encompass this kind of loss.
“There's also a second argument that the insurer makes, which is even if the policy did cover this kind of loss, there's a virus exclusion and the insurer contends it is an exclusion to these kinds of claims,” Snowball said. “The plaintiffs and defendants go back and forth on that.”
The danger, according to Snowball, is that if Zurich pays one claim, there would be no limitations on other claims.
“If the defendants were to cover the plaintiff’s damages, there is no rational limit to the damage that has been caused by COVID,” he said. “What's to stop claims for damages from lost wages, damages for mental stress and the list goes on and on. From a basic standing of preservation, it makes sense for the insurer to draw a line in the sand and to allow the court to determine exactly what the extent of their legal obligations are.”