The landmark Musso & Frank Grill was founded in Hollywood in 1919, smack in the middle of the Spanish flu pandemic.
“We’ve seen a lot of ups and downs since then,” its chief operating officer, Mark Echeverria, told me, listing the Spanish flu, Prohibition, the Great Depression, World War II and the 2008 recession. From that perspective, the coronavirus crisis that has kept the restaurant shuttered since March 15 is another challenge to be met and defeated.
“We’ll come through this one too,” says John Echeverria, who is Mark’s father and a member of the third generation to run a restaurant that was bought by his wife’s great-grandfather in 1927.
A lot of the firms that do this stuff are being inundated with claims to be reviewed. There’s going to be a large public policy debate.
But this episode has some unique features compared with those historic events. Among them is a dispute with the restaurant’s business insurer over whether its more than month-long (and counting) closure is even caused by the virus.
That question is entwined in the boilerplate language of the restaurant’s business interruption insurance, which seems to exclude coverage of losses due to viruses. But things are not that simple, as is clear from a lawsuit the restaurant filed Tuesday in Los Angeles federal court demanding its insurer cover shutdown losses.
The lawsuit states that the carrier, Mitsui Sumitomo Insurance, didn’t even bother to launch an investigation of the loss — as the restaurant says is required under state law — but rejected its claim outright based on the virus exclusion.
The Musso & Frank case cracks open a window on the quagmire facing state and federal dockets amid the COVID-19 crisis. Like other public and private buildings, courthouses have been largely shut down for personal meetings during the emergency. But judicial systems are still open for filings, and they’re beginning to pile up.
“A lot of the firms that do this stuff are being inundated with claims to be reviewed,” says Michael J. Bidart, a specialist in insurance bad-faith lawsuits who is representing the Echeverrias. “There’s going to be a large public policy debate.”
Like restaurants, bars, bookshops and airlines, insurance companies are likely to put their palms out for government help to weather the tide of business interruption claims. Insurance lobbyists already have warned lawmakers on Capitol Hill that “insurance coverage works by spreading risk, but that model simply cannot account for a situation in which losses are catastrophic and nearly universal.”
Rep. Maxine Waters (D-Los Angeles), chair of the House Committee on Financial Services, has expressed support for a so-called Pandemic Risk Insurance Act, modeled on a measure passed after 9/11, that would create an industry-funded reinsurance pool to cap the exposure of individual carriers to pandemic claims.
The insurance industry already is moving to put a fence around its potential exposure to business interruption claims. The industry’s most immediate concern is talk in Washington about voiding virus exclusions retroactively.
Leaving aside whether such legislation would be vulnerable to a constitutional challenge, insurers assert that it would render much of the property casualty business insolvent.
Closure losses just for businesses with 100 employees or fewer are reaching as much as $431 billion a month, according to the American Property Casualty Insurance Assn. That’s as much as 72 times the monthly premiums collected on commercial property policies, the group says.
“Pandemic outbreaks are uninsured because they are uninsurable,” its chief executive, David Sampson, said in a statement.
The crisis is likely to generate litigation over canceled travel plans, scrapped business deals and purportedly negligent exposure of workers and customers to the virus, among many other grounds.
During a Wall Street conference call Wednesday, Travelers Cos. CEO Alan Schnitzer groused about that prospect.
“The trial bar is already actively soliciting plaintiffs for cases related to the pandemic,” he said. “We should all be concerned that many frivolous lawsuits will be brought and will undermine the nation’s recovery.” He followed by making a pitch for “commonsense tort reform,” which typically amounts to blockading the courthouse door against plaintiffs.
Business interruption claims may well become a leading generator of lawsuits. That’s not surprising, for countless establishments large and small have been shut down by government orders aimed at stemming the spread of the coronavirus. As long as insurers maintain that virus exclusions govern these claims, many are destined to land in court.
As it happens, Travelers is embroiled in what has become a high-profile example of the field: On Monday the company sued Los Angeles litigator Mark Geragos to block his business interruption claims.
Geragos had earlier sued Travelers and Hartford Insurance Co. on behalf of his law firm and restaurants he owns in New York, Los Angeles and Palm Springs that have been closed by government decree. He seeks court declarations that the government orders qualify for coverage under the policies.
“There has not been a nuanced evaluation of the claims” by insurers, Geragos told me. “They’ve just drawn a line in the sand.” Travelers declined to comment specifically on the litigation but did refer me to a letter it issued policyholders in New York at the direction of that state’s insurance regulators.
The letter asserts that its insurance “does not cover loss of income due to market conditions, a slowdown of economic activity or a general fear of contamination” or “coverage for cancellations, suspensions and shutdowns that are implemented to limit the spread of the coronavirus.”
Insurers have been reportedly discouraging pandemic business interruption claims at the source — telling policyholders not to even bother filing them because they’re certain to be denied under the virus exclusion.
Those reports prompted California Insurance Commissioner Ricardo Lara to issue a notice April 14 instructing insurers that they could not reject claims out of hand — every policyholder, he said, is entitled to file a claim, have it investigated and receive a detailed explanation for any denial.
“We’ve been hearing from businesses that they were told, ‘Don’t bother to file a claim because it will be denied,’” Tony Cignarale, deputy commissioner for consumer services and market conduct, told me. “We want to make sure that process is being followed. You can’t just tell your agents and brokers to reject a claim.”
That’s the issue underlying the Musso & Frank lawsuit.
First, a word about the plaintiff. Musso & Frank, which marked its 100th year in 2019, is one of those Los Angeles institutions that, for locals at least, needs no introduction. The Hollywood Boulevard institution earned a place in the Hall of Fame in the most recent edition of The Times’ 101 Best Restaurants in L.A.
“How are the grilled lamb chops, the rib-eyes, the Welsh rarebit?” the entry commented. “Good enough. What’s most important is the existence of the restaurant itself, classy and immutable.”
After opening the grill in 1919, its founder, Frank Toulet, took on Joseph Musso as a partner. They ran it until 1927, when they sold it to Joseph Carissimi and John Mosso. The Mosso family eventually bought out the Carissimis. The Echeverrias are the formers’ descendants.
Over time the restaurant has become identified with both its neighborhood and Hollywood itself; last year its dark wood bar and dining rooms played a part re-creating the movie community of the 1960s as a setting for the film “Once Upon a Time … in Hollywood.”
Los Angeles Mayor Eric Garcetti’s March 15 order banning in-house dining or the serving of alcohol by restaurants within the city limits — and setting a deadline of midnight that night — caught Musso & Frank short.
“It didn’t give us much time to put together any kind of a to-go or take-home business model” as some other restaurants have done to keep commerce flowing, Mark Echeverria says. “We’ve never operated that way. Part of the Musso’s experience is coming into the dining room.”
The restaurant has kept all of its 84 employees on the payroll at 100% of their wages. The restaurant received a Paycheck Protection Program loan funded by last month’s coronavirus stimulus bill, the principal of which will be forgiven to the extent it maintains its payroll.
But losses are mounting. The Echeverrias won’t place a dollar figure on them beyond categorizing them as “well into the six figures thus far,” with no end currently in sight. Moreover, the restaurant had recently been on a roll, with double-digit growth at the start of the year. “People in L.A. have started to rediscover some of these old nostalgic places with true, authentic history, and of course Musso & Frank is one of those,” Echeverria says. “People keep coming back.”
When they turned to their insurer, however, they got a distinct cold shoulder, their lawsuit says. Mitsui, to which they paid an annual premium of about $47,000, at first told them it had assigned their claim to an outside adjuster for investigation.
A week later, however, it said it would handle the claim in-house, and four days later, on April 1, it notified the owners that “COVID-19 is not a covered cause of loss” and cited policy language excluding coverage of any “loss or damage caused by or resulting from any virus, bacterium or other microorganism” that causes illness. Representatives for Mitsui couldn’t be reached for comment.
That may become the crux of the legal dispute. Virus exclusions are a relatively recent addition to property insurance. For the most part, they appeared only after the SARS epidemic of 2002-04, which took nearly 800 lives, mostly in Asia.
The policy provisions, however, don’t quite spell out what’s meant by a “loss due to virus.” Bidart, the restaurant’s lawyer, argues that under California law, it would apply only to cases in which a virus itself was found on the restaurant premises, prompting a shutdown.
“That couldn’t be the case here,” he says, “because no coronavirus was ever there.” The proximate cause of the shutdown was a government order that banned the use of the premises, which Bidart says is covered by the policy.
One can start to discern the outlines of a new category of case law to bedevil lawyers and judges here: Has a virus “caused” a business loss when the government has ordered it closed to keep a virus away from the premises? In coming years, will the name of Musso & Frank be linked not only with Hollywood history but also with legal history?