The Southern District of New York, Eastern District of New York and District of Massachusetts issued decisions dismissing insureds’ suits seeking business interruption coverage related to COVID-19 in a flurry of activity in the region on March 5, 6 and 9, 2021.
Southern District of New York
The Southern District of New York has now issued the fifth decision in favor of the carrier dismissing the insured’s claim for business interruption coverage related to COVID-19. See Food for Thought Caterers Corp. v. Sentinel Ins. Co., LTD., 1:20-cv-03418-JGK (S.D.N.Y. Mar. 6, 2021). The first decision was issued by the SDNY on the record at a hearing to show cause in May 2020 in Social Life Magazine, Inc. v. Sentinel Ins. Co., LTD., 1:20-cv-03311-VEC (S.D.N.Y. May 14, 2020). Favorable decisions subsequently followed in December in Michael Cetta, Inc. d/b/a Sparks Steak House v. Admiral Indem. Co., 1:20-cv-04612-JPC (S.D.N.Y. Dec. 11, 2020) and 10012 Holdings, Inc. d/b/a Guy Hepner v. Sentinal Ins. Co., LTD, 1:20-cv-04471-LGS (S.D.N.Y Dec. 15, 2020) , and in January in Redenburg v. Midvale Indem. Co., 1:20-cv-05818-PAE (S.D.N.Y. Jan. 27, 2021). Further details regarding the substance of those decisions can be found in previous articles issued by this office.
Similar to the first four decisions issued by the Southern District, the Food for Thought decision relied on the decision in Roundabout Theatre Co. v. Cont’l Cas. Co., 751 N.Y.S.2d 4, 8 (App. Div. 2002) in which the Appellate Division of the New York State Supreme Court interpreted policy language substantially similar to that in the policy requiring “direct physical loss of or damage to property” and found that “loss of” does not include “loss of use” of the insured premises. Food for Thought Caterers Corp. v. Sentinel Ins. Co., LTD., 1:20-cv-03418-JGK, *8-9 (S.D.N.Y. Mar. 6, 2021). The Court also relied upon the decisions in Michael Cetta and 10012 Holdings, supra, as well as other New York precedent, and the myriad courts nationwide that have held that a complaint that “only alleges loss of use of the insured property fails to satisfy the requirement for physical damage or loss.” Id., at *10. The Court rejected the insured’s argument that the Court should not follow Roundabout Theatre noting that the policy only covers losses sustained during the “period of restoration”, which ends when the insured property “should be repaired, rebuilt or replaced,” which is inconsistent with a finding of coverage for off-site damage that resulted in loss of use of the insured property. Id., at *12. The Court also rejected the insured’s attempts to speculate as to the presence of COVID-19 at the insured property and noted that, even if COVID-19 were present, the presence of COVID-19 at the property is insufficient to support a finding of physical damage to the insured property because the virus damages people not property. Id., at * 14-15. Accordingly, the Court held that Food for Thought failed to plead sufficient facts to establish it sustained a covered loss as defined by the policy. Id., at *10.
The Court dismissed the Civil Authority coverage claims because the insured failed to allege that the orders at issue specifically prohibited access to the insured property. Id., at *16. The Court also found that the insured failed to sufficiently allege that an order prohibiting access to the property was caused by risks of direct physical loss because “[i]n the case of COVID-19 civil orders, in contrast, ‘both premises are restricted for the same reason: to limit the risk of spreading the Covid-19 virus. This simply does not implicate Civil Authority coverage.’” Id., at *17-18. The Court found that insured also failed to sufficiently allege that property in the surrounding area was damaged. Id., at 18.
Eastern District of New York
The Eastern District of New York issued its first decision related to COVID-19 business interruption coverage, and it joined the majority of courts across the United States finding that the insured failed to state a claim and granting dismissal in favor of the carrier. See DeMoura, M.D., d/b/a New York Spine Institute, Inc. v. Continuental Cas. Co., 2:20-cv-02912-NGG-SIL (E.D.N.Y. Mar. 5, 2021). In an effort to establish “physical loss” or “damage to property” covered by the policy, the insured alleged that the Orders requiring the business to close “resulted in a physical impact on Plaintiff’s business,” and that the COVID-19 virus was or could have been physically present in the business. Id., at *8. Relying on Black’s Law Dictionary definitions of the terms “direct” and “physical,” the Court held that “direct physical loss of or damage to property” requires tangible harm to the property. Id., at *9 (“As contextually relevant, ‘direct’ means ‘[f]ree from extraneous influence; immediate,’ and ‘physical’ means ‘[o]f, re-lating to, or involving material things; pertaining to real, tangible objects.’ Direct; Physical, Black’s Law Dictionary (11th ed. 2019). Taken together, the plain meaning of ‘direct physical loss or dam-age’ includes loss or damage that is ‘immediate,’ ‘real,’ and ‘tangible.’“). The Court reasoned that other portions of the policy supported that conclusion noting that “period of restoration” ends either when the property is “repaired, rebuilt or replaced” or when the business relocates none of which is required in response to the claims made by the insured related to COVID-19. Id. The Court also found the interpretation consistent with Roundabout Theatre, supra. Id., at *10. The Court dismissed the claim for coverage under the Civil Authority provision on the same grounds; the insured failed to adequately allege “direct physical loss of or damage to property” other than the insured property. Id., at *13.
District of Massachusetts
The District of Massachusetts issued two additional decisions in favor of insurance carriers bringing the total number of decisions out of the District to four; all four decisions were in favor of the carrier and resulted in dismissal of the insured’s claims. See Legal Sea Foods, LLC v. Strathmore Ins. Co., 1:20-cv-10850-NMG (D. Mass. Mar. 5, 2021); Kamakura, LLC, et al. v. Greater New York Mut. Ins. Co., 1:20-cv-11350-DFS (D. Mass. Mar. 9, 2021).
The Legal Sea Foods decision involved claims for coverage related to thirty-two locations. See Legal Sea Foods, LLC v. Strathmore Ins. Co., 1:20-cv-10850-NMG (D. Mass. Mar. 5, 2021). The court rejected Legal’s argument that it sufficiently alleged “direct physical loss of or damage to” property, because it alleged in the complaint that COVID-19 was present on its properties and caused physical loss or damage to those properties resulting in the suspension of its operations. Id., at *7. In doing so, the Court pointed to the complaint, which clearly alleged that “‘[t]he Orders caused and are continuing to cause’ the losses for which it claims entitlement to coverage.” Id. Moreover, the Court held that, even if Legal properly alleged the presence of COVID-19 at the properties, same was insufficient to establish the tangible, material loss necessary to establish a “direct physical loss” to property. Id. The Court reasoned that the COVID-19 virus does not impact the structural integrity of property; it harms human beings not property. Id., at *8. The Court rejected the insured’s attempt to create coverage under the policy due to of the absence of a virus exclusion. Id., at *11. The Court also dismissed Legal’s claims for Civil Authority coverage, because the relevant Orders did not prohibit access to the insured property, and the Court distinguished between orders that limit access versus those that prohibit access altogether. Id., at *13-24.
Four days later, the District of Massachusetts dismissed the purported class action complaint filed by Kamakura and Atlantico on behalf of themselves and all others similarly situated for substantially similar reasons. See Kamakura, LLC, et al. v. Greater New York Mut. Ins. Co., 1:20-cv-11350-DFS (D. Mass. Mar. 9, 2021). The Chief Judge, the Hon. F. Dennis Saylor IV, noted his personal reluctance in issuing the decision, but noted that he was bound by the terms of the policy as it was written:
The Court is certainly sympathetic to the hardships faced by restaurant owners as a result of the pandemic. It also notes that the pandemic is the type of occurrence—a widespread disaster for which a small business cannot possibly prepare—where insurance coverage ought to be routinely available. Nonetheless, the Court cannot avoid the language of the policies as written. It therefore joins, albeit with some reluctance, the great majority of courts that has concluded that no insurance coverage is available under these policies for the losses caused by the pandemic. Id., at *1-2.
The Kamakura Court held that terms in the phrase “direct physical loss of or damage to property,” albeit not defined within the policy, taken as a whole clearly “do not provide coverage for financial or other intangible losses.” Id., at *9. The Court noted that the requirement of physical loss of or damage to a tangible object, such as the structure of a building, was required by other Massachusetts courts considering insurance claims related to the COVID-19 pandemic. Id., at *10, citing, Legal Sea Foods, LLC v. Strathmore Ins. Co., 1:20-cv-10850-NMG (D. Mass. Mar. 5, 2021); Sas Int’l, Ltd. v. Gen. Star Indem. Co., 1:20-cv-11864, 2021 U.S. Dist. LEXIS 31093 (D. Mass. Feb. 19, 2021); Verveine Corp. v. Strathmore Ins. Co, No. 2084CV01378 (Mass. Super. Ct. Dec. 21, 2020). The Court reasoned that the presence of the virus was insufficient to trigger coverage because “spread of the coronavirus is of course ‘physical’ in the sense that the virus is a submicroscopic organism, but under the plain language of the policy, it is the loss or damage itself that must be ‘physical.’“ Id., at *12. Rejecting the insureds’ reliance on what the Court felt was inapplicable precedent, the Court reasoned that the loss of use sustained by the insureds “was caused by the government orders; it was not caused by the presence of the coronavirus itself.” Id., at *14. The Court also rejected the insureds’ attempts to create coverage due to the lack of a virus exclusion. Id., at *15. The Court dismissed claims under the Civil Authority provision as well finding that the complaint failed to sufficiently allege that the orders were issued as a result of damage to other property, and that access to the premises was not prohibited due to such damage within one mile of the insured property. Id., at 19-20. The Court also found that the orders were not issued as a result of that damage to the other property or in response to dangerous physical conditions resulting therefrom. Id., at *21. As a result, the complaint failed to allege sufficient facts to support the claim.
1 Both decisions are currently under appeal.
If you have any questions or would like further information about this decision or Business Interruption claims, please contact Attorney Kelly Petter at: 860-247-0644 or firstname.lastname@example.org