The United States District Court for the Southern District of New York issued three decisions in 2020 related to business interruption coverage and whether same applies to losses reportedly sustained due to COVID-19. All three decisions relied heavily on the reasoning in Roundabout Theatre Co. v. Cont’l Cas. Co., 751 N.Y.S.2d 4, 8 (1st Dep’t 2002), as well as the application of the Roundabout reasoning in Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., 17 F. Supp. 3d 323, 331 (S.D.N.Y. 2014).
Social Life Magazine, Inc. v. Sentinel Insurance Company Limited
The Hon. Valerie E. Caproni’s questions during oral argument in the case of Social Life Magazine, Inc. v. Sentinel Insurance Company Limited, which took place on May 14, 2020, appeared to be a sign of things to come in the jurisdiction. The hearing addressed the plaintiff’s motion for preliminary injunction and the Court ordered the defendant to show cause, “why an order pursuant to Fed. R. Civ. Proc. 65 should not be made, (1) compelling defendant to pay plaintiff $197,000 and (2) granting such other relief as the court deems equitable and just.” Applying New York law, the Court rejected the contention that plaintiff sustained physical damage as a result of COVID-19. The plaintiff posited that the virus existed everywhere thus causing damage, and that plaintiff sustained covered loss of use. The Court distinguished between loss of use of property due to mold damage and loss of “use [of] your premises because there is a virus that is running amuck in the community” and rejected plaintiff’s attempted to draw similarities between the virus and other substances for which loss of use may be recognized noting that “[the virus[ damages lungs. It doesn’t damage printing presses” and “[t]hat damages you. It doesn’t damage the property.” Plaintiff attempted to draw comparisons to Legionella bacteria, which contaminates water and pipes in a building resulting in shut down of the building and causing loss of use damages. The Court, again, distinguished the example from the COVID-19 virus noting that “[t]he virus is not specifically in your property that is causing damage. It is everywhere. The Legionnaire example is very different. Because it’s not like Legionnaire is running rampant throughout the city, and therefore your office building can get closed. It is that the Legionnaire bacteria is in the building causing – that building to be shut down.” Defendant’s counsel pointed out that the insured property was not unusable or uninhabitable due to the virus, which is the case in circumstances such as mold, E. coli, ammonia, or other substances leading to loss of use claims to which plaintiff drew corollary. In fact, the Governor’s orders “explicitly allow [plaintiff] to go to the property and get his mail or do routine business functions. The only rule is that he has to stay six feet apart from other people.” The Court then refocused the hearing on what, if any, evidence plaintiff had to establish that the virus was actually located in the insured premises noting that evidence that the principal of the insured business testing positive was not evidence that he was positive because of exposure at the insured property.
Ultimately, the Court denied the motion for preliminary injunction finding that plaintiff failed to demonstrate success on the merits:
I feel bad for your client. I feel bad for every small business that is having difficulties during this period of time. But New York law is clear that this kind of business interruption needs some damage to the property to prohibit you from going. You get an A for effort, you get a gold star for creativity, but this is just not what’s covered under these insurance policies.
Michael Cetta, Inc. d/b/a Sparks Steak House v. Admiral Indemnity Company
Almost seven months later, on December 11, 2020, the Hon. John P. Cronan of the Southern District of New York issued an order granting dismissal with prejudice in Michael Cetta, Inc. d/b/a Sparks Steak House v. Admiral Indemnity Company. The Court held that an insured’s inability to fully use its restaurant is insufficient to establish the “direct physical loss of or damage to property” requirement of the business income coverage provision in the policy. Turning to the dictionary definitions of the words, the Court determined that the “‘requirement that the loss be ‘physical,’ given the ordinary definition of that term, is widely held to exclude [from property insurance] alleged losses that are intangible or incorporeal.’ 10A Couch on Ins. § 148:46 (3d ed. 2005).” The Court also determined that the phrase “direct physical loss of or damage to” connotes “a negative alteration in the tangible condition of property,” and “losing the ability to use otherwise unaltered or existing property simply does not change the physical condition or presence of that property and therefore cannot be classified as a form of ‘direct physical loss’ or ‘damage.’”
The Court also looked to the policy as a whole to support the conclusion that the loss of use claimed by plaintiff was not covered – it would render the “period of restoration” end date meaningless as the alleged loss of use caused by the COVID-19 virus does not require physical repair or rebuilding to end the alleged business suspension sustained by plaintiff, and there is no need to open a new permanent location in the absence of anything physically wrong with plaintiff’s current business property. The Court also noted that nearly every court to address the issue of whether business income coverage extends to loss of use of a premises due to governmental closure had concluded that coverage is not triggered because there has been no physical loss to property.
Court rejected plaintiff’s interpretation of the relevant caselaw, as well as plaintiff’s attempt to extend the definition of “property damage” contained in the Commercial General Liability section of the policy to the business income coverage contained in the Commercial Property section of the policy. The Court also rejected plaintiff’s attempt to establish “physical loss” by demonstrating the structure was uninhabitable or unusable, because “these cases involve situations in which a plaintiff claimed that some harmful or unwanted substance entered its premises and made it impossible to use. They are therefore distinguishable because [plaintiff] makes clear that COVID-19 was never found on its premises and that it has no reason to think the virus contaminated or damaged anything at the restaurant, let alone made it uninhabitable.” The Court distinguished cases involving asbestos, toxic gases released by Chinese drywall, and other similar substance because, unlike those cases, nothing has contaminated plaintiff’s restaurant rendering it inaccessible.
Court summarily dismissed plaintiff’s claims for extra expense coverage holding that such coverage only applies if business income coverage applies and, for the foregoing reasons, it does not. The Court found that the extra expense coverage claims also failed because the coverage requires plaintiff to suffer a “physical loss or damage to property” and, for the foregoing reasons, plaintiff did not. The Court also rejected plaintiff’s contention that civil authority coverage applies. In so holding, the Court noted that plaintiff merely alluded to the closure orders to establish that other businesses aside from the insured property were affected and “[w]ithout specific allegations that a neighboring property suffered ‘damage to property,’ the Complaint fails to state a claim that is plausible on its face as to [plaintiff’s] entitlement of civil authority coverage.” The Complaint also failed to allege that plaintiff was denied access to the business property or the area immediately surrounding the damaged neighboring property. Although the closure orders limited patrons from entering the property, nothing in the orders prohibited plaintiff’s principals, or employees from accessing the property, and the order did not extend to take-out orders and deliveries. Accordingly, the Court dismissed the Complaint in its entirety with prejudice finding that allowing leave to amend would be futile.
10012 Holdings, Inc. d/b/a Guy Hepner v. Sentinal Insurance Company, LTD
Four days later, on December 15, 2020, the Hon. Lorna G. Schofield similarly dismissed the Complaint in 10012 Holdings, Inc. d/b/a Guy Hepner v. Sentinal Insurance Company, LTD. with prejudice. In addition to Roundabout Theatre Co. and Newman Myers Kreines Gross Harris, P.C., the Court referred to the transcript from the Order to Show Cause Hearing in Soc. Life Magazine, Inc. in reaching the conclusion that New York law limits loss of, damage to, or destruction of property or other facilities to “physical damage to the insured’s property” and does not extend to “loss of use.” The Court concluded that “[n]othing in the Complaint plausibly supports an inference that COVID-19 and the resulting Civil Orders physically damaged Plaintiff’s property, regardless of how the public health response to the virus may have affected business conditions for Plaintiff. The Complaint does not state a claim for ‘loss’ of the insured property.” The Court rejected plaintiff’s attempt to broaden the definition of Covered Property to include much more than buildings, structures, fixtures and the like, noting that the plain language of the policy defines Covered Property as “[p]roperty you own that is used in your business” and plaintiff failed to provide any explanation how that definition encompasses business loss due to the Civil Orders limiting customer access to Plaintiff’s business.” Rather, the Court found that the plain language of the policy limited covered property to plaintiff’s own use(s) in its business, “which must suffer some direct physical harm under controlling state law.” The Court also rejected plaintiff’s attempt to manipulate the phrase “risks of direct physical loss” in the Coverage section, and the nature of an all-risk to extend to plaintiff’s losses.
Similar to the Michael Cetta, Inc. d/b/a Sparks Steak House decision, the Court summarily dismissed the claims for extra expense coverage noting that it also required “direct physical loss or physical damage to” the covered property, which was not alleged in this case. The Court also dismissed the claims for civil authority coverage finding that plaintiff did not allege that the closure of neighboring properties due to COVID-19 directly resulted in closure of plaintiff’s own premises. The Court also briefly noted the application of the Pollutant and Bacteria or Virus Exclusions would exclude from coverage the claims asserted by plaintiff. The Court dismissed the Complaint in its entirety with prejudice, and also denied plaintiff’s request for leave to amend the Complaint finding that the policy does not provide coverage for the loss sustained by plaintiff.
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