INDEPENDENCE RESTAURANT GROUP, LLC v. CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, 513 F.Supp.3d 525

Independence Restaurant Group (IRG) operates Independence Beer Garden in Philadelphia and alleges it was forced to cease or curtail operations by COVID-19 and related government orders.
IRG purchased an all-risk property policy from Certain Underwriters at Lloyd’s, London (Lloyd’s) providing coverage for “direct physical loss of or damage to” covered property, Business Income, and Civil Authority Coverage; the policy also contains microorganism and pollution exclusions elsewhere.
IRG claimed virus contamination risk and loss of use prevented normal operation, submitted a claim (Mar. 31, 2020), and sued for declaratory relief after Lloyd’s denied coverage.
Lloyd’s moved to dismiss IRG’s amended complaint under Rule 12(b)(6); the court applied Pennsylvania contract law and federal pleading standards.
The court held that “direct physical loss of or damage to” requires a physical condition of the premises that renders it unusable or nearly so (physical alteration, contamination eliminating functionality, or imminent threat that does the same), and that mere loss of use from government orders or disinfectable contamination is insufficient.
Court dismissed IRG’s declaratory-judgment claim with prejudice as to IRG (without prejudice as to the putative class) and denied leave to amend as futile.

Issue	IRG's Argument	Lloyd's Argument	Held
Whether IRG alleged “direct physical loss of or damage to” property to trigger Business Income coverage	Virus presence and government closure caused loss of use/functionality; “direct physical loss” includes loss of use	“Direct physical loss” requires physical alteration, destruction, or contamination that makes property unusable or nearly so; mere loss of use is insufficient	Court: must be tied to a physical condition of the premises that nearly eliminates functionality or makes it uninhabitable; IRG’s allegations insufficient
Whether Civil Authority Coverage applies (order prohibited access due to damage to other property)	Government orders prohibited access to IRG’s premises to stop virus spread; orders were issued because nearby property was damaged/contaminated	Orders did not prohibit access to premises (takeout/pickup allowed) and plaintiff did not allege direct physical loss to other property	Court: Civil Authority coverage not triggered because access was not prohibited for the required reason and no plausible allegation of physical loss to other property
Whether to grant leave to amend	(Requested) leave to cure pleading deficits	Opposed; argued amendment would be futile	Court: Denied leave to amend as futile — IRG cannot plead facts that would bring its claim within policy coverage

Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002) (for unseen contaminants, “physical loss or damage” requires contamination that nearly eliminates property’s function or renders it useless/uninhabitable)
Motorists Mut. Ins. Co. v. Hardinger, [citation="131 F. App'x 823"] (3d Cir. 2005) (Third Circuit panel applying Port Authority standard under Pennsylvania law)
401 Fourth St. v. Inv’rs Ins. Co., 879 A.2d 166 (Pa. 2005) (clear, unambiguous policy language must be enforced as written)
Kvaerner Metals Div. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006) (ambiguities construed against insurer)
Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading must include factual content permitting reasonable inference of liability)
State Farm Cas. Co. v. Estate of Mehlman, 598 F.3d 105 (3d Cir. 2009) (insured bears prima facie burden to show claim falls within policy’s grant of coverage)
Koppers Co. v. Aetna Cas. & Sur. Co., 98 F.3d 1440 (3d Cir. 1996) (insurer bears burden of proving applicability of exclusions)
Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., 17 F. Supp. 3d 323 (S.D.N.Y. 2014) ("repair/rebuild/replace" language implies requirement of physical damage rather than mere loss of use)