Storied Musso & Frank's Survived the Spanish Flu Pandemic, Now It's Filing Suit to Survive COVID-19

The owner of Musso & Frank Grill, an iconic L.A. restaurant, filed a federal lawsuit Tuesday against its insurance company, alleging breach of contract and bad faith for not covering its loss of income due to the COVID-19 pandemic.

In the 243-page lawsuit filed in the U.S. District Court of the Central District of California, attorneys for Musso & Frank Grill allege that Mitsui Sumitomo Insurance USA, Inc., in New York, failed to handle the restaurant's insurance claim for business interruption losses in a manner consistent with the standards of good faith and fair dealing.


The restaurant, which is represented by Michael J. Bidart, managing partner of Shernoff Bidart Echeverria LLP, said its original claim for lost business income was submitted promptly after having to suspend operations because of L.A. Mayor Eric Garcetti's order on March 15 prohibiting restaurants from serving food on their premises or bars from serving alcohol. They are now demanding a jury trial.

Known for hearty foods, like its chicken pot pies, and martinis, Musso & Frank's has been visited by Charlie Chaplin who was known to enjoy broiled lamb kidney or duck when in season, as well as Bing Crosby, Steve McQueen, Charles Bukowski and Quentin Tarantino, who featured it in his film "Once Upon a Time in Hollywood."

The storied restaurant, which has been a favorite of tourists, celebrities and filmmakers, is an L.A. staple that celebrated 100 years on Hollywood Boulevard in September and received the first-ever Walk of Fame star given to a restaurant. But despite it first opening its doors in 1919 amid the Spanish flu pandemic, which infected roughly 1/3 of the world population, Musso & Frank Grill has found COVID-19 particularly challenging, as it's been forced to temporarily close its doors.

It's one of many L.A. businesses that has faced hard decisions and tough outlooks because of the economic shockwaves wrought by the novel coronavirus. From layoffs at Sweetgreen and Bird, to pivoting to produce masks or run COVID-19 tests, businesses have had to find ways to survive and reinvent themselves. But for old school ventures like restaurants, if that fails amid a natural disaster, insurance is supposed to kick in.

The restaurant accused its insurer of failing to adequately consider or investigate claims, and that it has done so to other policyholders to earn "illicit profits" at their expense. A spokesperson for Mitsui Sumitomo said Wednesday morning that the company does not comment on pending litigation.

Restaurants like Musso & Frank's, which counted on so-called business disruption insurance to offset their losses ended up facing up to a previously esoteric exception that regulators put in place in 2006 after the SARS outbreak, which excludes coverage for "loss or damage" due to "virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease."

The lawsuit notes that Musso & Frank's insurance policy also includes a specific "exclusion of loss due to virus or bacteria" which matches such language.

"Our position, not withstanding the virus exclusion, is that the government order is the predominate reason for the loss," Bidart said. "It's not solely due to the virus. When you compare the relative weight of the perils, the closing down order is what really caused the shutdown. In California law, the simple point is you cannot properly deny a claim without doing an analysis of whether or not the non-excluded peril of government action is the predominate cause."

Mark Echeverria, the owner and COO of the company said in a statement that there is no evidence that the restaurant's employees or customers were exposed to or had contracted COVID-19 at the time of closure.

"A situation such as this is EXACTLY WHY businesses carry business insurance interruption policies!" he said.

Musso & Frank's is one of a slew of examples of the impact the roughly monthlong lockdown has had. In the U.S., restaurant customer transactions dropped 43% in the first full week of April (the week ending April 12) compared to a year ago, worsening from the 41% seen the week prior, according to the NPD Group's data.

The newly-formed Independent Restaurant Coalition was created by a group of chefs to save local restaurants being hard-hit by COVID-19. The coalition is pushing for multiple tweaks to federal stimulus, including ensuring that business interruption insurance covers the novel coronavirus.

Courtesy of the Independent restaurant Coalition

Meanwhile, the National Retail Federation and 16 other business organizations, including the National Restaurant Association, sent a letter to Congress on Tuesday, urging swift passage of legislation that would create a federal program to help businesses get insurance coverage for future pandemics. The program would be modeled on terrorism insurance established after 9/11.

"When businesses couldn't obtain coverage for acts of terrorism after 9/11, Congress stepped in," said David French, the NRF's senior vice president for government relations, in a statement. "It's time for Washington to do the same for pandemics. Retailers and other businesses across the country have seen unprecedented losses related to COVID-19 that weren't covered under most current insurance policies and won't be covered if there's a second wave of the virus next winter."

French said passage of the Pandemic Risk Insurance Act of 2020, would enable businesses to "rebuild confidence" and "provide a mechanism for immediate and predictable economic recovery" if the U.S. faces another pandemic.

In the letter, the organizations endorse the new bill, which Rep. Carolyn Maloney, D-NY, a senior member of the House Finance Services Committee, plans to introduce soon. There is a similar bill planned by Rep. William Lacy Clay, D-Mo., who is chair of the Housing, Community Development and Insurance Subcommittee.

The bill was developed with input from the NRF and is backed by the Rep. Maxine Waters, D-Calif, who chairs the U.S. House Committee on Financial Services. It would require insurance companies offer policies covering pandemics but would create a federal backstop program to reimburse insurers when claims related to a pandemic or epidemic exceed $250 billion nationwide. Coverage would also be required for large gatherings, including sporting events, concerts and conventions that are canceled. The program would not apply to the current pandemic and would be capped at $500 billion.

"Congress must take swift action and begin contemplating a solution to provide all businesses protection against future pandemic risk," the letter states. "This approach would serve as a cornerstone to a proactive and prospective approach to managing the risk of a widespread and catastrophic pandemic or epidemic in the future."

In a statement, David A. Sampson, president and CEO of the American Property Casualty Insurance Association, said "pandemic outbreaks are uninsured because they are uninsurable."

APCIA, the primary national trade association for home, auto, and business insurers, estimates that continuity losses for small businesses are roughly 43 to 72 times the monthly commercial property insurance premiums, which includes coverage for losses resulting from fire, wind, hail and water leaks. It said that closure losses for small businesses with 100 or fewer employees has increased to as much as $431 billion per month, dwarfing annual premiums for all commercial property risks in key insurance lines of $71 billion per year.

Sampson said any effort to retroactively mandate insurance coverage for viruses by voiding such exclusions "would immediately subject insurers to claim payment liability that threatens solvency and the ability to make good on the actual promises made in existing insurance policies."

*Updated at 10:23 a.m. PT to add the insurance company's comment.

**Updated 11:18 a.m. PT to include Musso & Frank Grill owner's comment.

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