Federal court rules losses suffered by Patachou restaurant not covered by insurance

The Patachou restaurants in Indianapolis and Carmel will not be able to recoup their financial losses from the COVID-19 shutdown in the spring of 2020 after a federal court found the insurance policy they held only reimbursed for damage to the actual brick and mortar structures.

By March 20, 2020, Patachou had suspended all operations at all of its locations following the state of Indiana’s order prohibiting in-person dining at restaurants because of the public health emergency created by the pandemic. The restaurant was able to reopen three of its locations May 28, 2020, and seven more in June and July of that year. Two locations were permanently closed.

The same day in March it stopped serving customers, Patachou submitted a claim to Citizen Insurance Company of America for insurance coverage to offset the financial losses from the closures.

Under its commercial insurance policy, Citizens agreed to pay Patachou’s lost business income and extra expenses due to a suspension of operations if the suspension was caused by “direct physical loss of or damage to” the business’s property. The “loss or damage” must have been caused by or resulted from a “covered cause of loss.”

Six days later, on March 26, Citizens denied Patachou’s claim, stating that it had determined there was no covered “loss” under the policy because the restaurants did not sustain any “direct physical damage.”

Patachou sued, but the U.S. District Court for the Southern District of Indiana granted the defendant’s motion for summary judgment in Cafe Patachou at Clay Terrace, LLC, et al. v. Citizens Insurance Company of America.

The restaurant maintained it suffered a “direct physical loss of” its property because the shutdown orders forbade it to fully access and use the facilities for more than two months.

Citing a series of federal and out-of-state court decisions, Patachou contends that the phrase “direct physical loss” has been the subject of many interpretations and should be construed as a previous decision held to include property that is “uninhabitable, inaccessible or dangerous to use because of intangible, or non-structural sources.” Indiana’s governmental orders deemed Patachou’s business establishments uninhabitable and inaccessible for in-person dining, which constituted a “direct physical loss.”

Citizens countered the governmental orders issued by Indiana permitted restaurant establishments to continue offering food through carryout, takeout, delivery and drive-thru services. Consequently, if Patachou chose to close its restaurants completely, it did so voluntarily.

Also, Citizens asserted, the clear and unambiguous language of the policy covers Patachou’s property against a direct physical loss or damage. Since the restaurant’s property remained in the same physical condition that it was in prior to any COVID-19-related executive orders, Patachou cannot be deemed to have suffered a covered loss under the policy.

The Southern Indiana District Court agreed with Citizens that Patachou had failed to demonstrate a physical loss warranting coverage under the insurance policy. In addition, the court said other rulings addressing this issue under Indiana law have been unanimous in concluding that economic losses prompted by or resulting from COVID-19 government shutdown and restriction do not constitute a “direct physical loss.”

“The Policy under review here clearly covers a loss to Patachou’s physical property; it does not cover the owners’ reduced use of the property in any particular fashion,” Judge Sarah Evans Barker wrote in her decision. “A policy provision premised on a ‘direct physical loss’ provides coverage when a loss from a physical alteration to the insured property has occurred, not for a reduction in the usefulness of the property or its inability to function in accordance with its intended purposes. Thus, we hold that the ordinary meaning of the Policy’s coverage requirement of ‘direct physical loss of … property’ does not include coverage for business losses alleged to have occurred without any physical alteration to the physical premises or the property located within.”