In-N-Out raises new theories in business disruption lawsuit

In-N-Out Burger has sued its insurance carrier for a second time, raising several new theories about why it is entitled to coverage for physical damage caused by COVID-19.

The new related case was filed after defendant Zurich American Insurance opposed allowing In-N-Out to amend its original lawsuit filed last year. In-N-Out v. Zurich, 8:20-CV-01000 (C.D. Cal., filed May 29, 2020).

Zurich argued California courts have repeatedly recognized that policyholders could not reasonably allege COVID-19 caused direct physical losses, thus amendment would be futile. Zurich cited several cases that insurance companies have won in the last year, including Pappy's Barbershops v. Farmers Group In., 3:20-CV-907 (C.D. Cal., filed May 24, 2020); Roundin3rd Sports Bar LLC v. Hartford, 2:20-CV-05159 (C.D. Cal., filed Jan. 14, 2021); and Kevin Barry Fine Art Assocs v. Sentinel Ins. Co, 20-CV-4783 (N.D. Cal., filed Jan. 13, 2021).

The latest lawsuit against Zurich involves the same denial of coverage under virtually identical insurance policies issued in successive years which In-N-Out contends do not exclude virus loss. In-N-Out v. Zurich, 8:21-CV-406 (C.D. Cal., filed March 4, 2021).

But In-N-Out now argues the company opened eight new locations since the pandemic, all of which did not exist under the previous year's policy. The virus does in fact constitute physical intrusion and damage, In-N-Out argued, as hundreds of its employees in more than 360 of its locations got infected with COVID-19 on the premises, not to mention the sharp uptick in cases in the latter half of 2020 due to new, more contagious strains of the virus.

"The presence of the virus and individuals infected with the novel coronavirus and COVID-19 create a distinct, demonstrable, physical alteration to In-N-Out's covered properties," wrote Robert L. Wallan, partner at Pillsbury Winthrop Shaw & Pittman. "This presence has, at all times during the pandemic, been a physical intrusion that compromises the physical integrity of In-N-Out's properties. This direct physical loss has made the covered properties uninhabitable, inaccessible and dangerous to use for their intended purpose."

Representatives for Zurich could not be reached for comment Friday.

In-N-Out bought the Zurich Edge "All Risk" commercial property policy for 2019-2021 and

2020-2021. The policy limit is $250 million per occurrence and also covers government-issued shutdowns of dining rooms, decontamination and more. It was marketed to customers in 2008 as offering broader coverage and greater flexibility. In December 2019, Zurich sought to modify its policy language.

"Buried in the edits and without reference to the significance of the change, Zurich's filing sought to add back an exclusion for virus, which it sought to take effect in July 2020," Wallan wrote. "Recognizing that the endorsement adding back coverage for virus, pathogen and other losses applies to cover all losses in all 50 states regardless of location in 2020, but after the In-N-Out 2020/2021 policy was issued, Zurich further amended the endorsement to limit its application to one state only."

Zurich maintained coverage is not available to In-N-Out's new stores, expanded infection among its locations or the new variants damaging property.

In-N-Out says that airborne particles remain trapped inside a room and suspended in the air for several days, as well as on physical surfaces that can serve as a vehicle for transmission that can't be fixed by simply wiping or disinfecting or spraying into the air. The Center for Disease Control and Prevention recommended physical modifications to facilities such as installing barriers and indoor ventilation systems, In-N-Out said.

"These and other remedial measures must be implemented, at high cost and extra expense, to reduce the amount of the novel coronavirus present in the space and make property safe for its intended use," Wallan wrote. "These extreme measures demonstrate that the novel coronavirus and COVID-19 cause direct physical loss of, or damage to interior spaces."

William Shernoff of Shernoff Bidart Echeverria LLP, who is not involved in the In-N-Out actions, called the chain's latest attempt to raise new theories "very creative," as it has "very detailed points to workers getting the virus and what they had to do to accommodate the new virus with physical changes made to its properties."

Shernoff, who represents policyholders, said the new lawsuit is one of the first this year that raises new theories because very few businesses so far alleged their employees contracted COVID-19 on site and that that caused them to lose business. At the end of the day, In-N-Out has to prove they lost business due to the virus itself, Shernoff said, adding, if it weren't for government restrictions, restaurants likely would have remained open.

"These are theories viable enough to test in court," Shernoff said. "Carriers say you have to prove physical loss or damage, but In-N-Out says they now can, because they had to implement these new physical measures. As far as I know, no court so far has given a decision on that theory."

Andrea S. Warren of Sheppard Mullin, who defends carriers, said In-N-Out won't prevail, noting that even if a court were to find some direct physical damage to or loss of property, most policies would bar coverage for any costs or damages caused by a virus.

"It will always come down to: Did a covered peril cause a physical, tangible alteration of property at that specific business or permanent dispossession of property at that business?" said Warren, who is not involved in either In-N-Out case.

Courts across the nation, including several in California, continue to hold that government mandates preventing full use of property did not rise to physical damage or permanent dispossession, Warren said.

"Even to the extent a virus was present within a structure, it could quickly be removed with simple, standard sanitation procedures," Warren contended. "Courts have consistently held that something that requires mere cleaning is not considered direct physical damage to or loss of property. Tables and glasses get dirty in the ordinary course of business with a wide variety of benign and malignant microbes, and they are routinely wiped or washed for that very reason. It is not reasonable to equate this with physical loss of or damage to property."