HNRK Coverage Corner

On December 15, 2020, Judge Schofield of the SDNY issued a decision in 10012 Holdings, Inc. v. Sentinel Ins. Co. Ltd., Case No. 10-cv-4471(LGS), dismissing an art gallery’s claim for business interruption coverage arising from the suspension of business operations due to the government-ordered closure of non-essential businesses during the COVID-19 pandemic.

As discussed in my article, “A Guide to Insurance Coverage for Business Losses Arising from the COVID-19 Pandemic”, which appeared in the  Summer 2020 edition of NYLitigator, business interruption insurance typically appears as an add-on to commercial property insurance policies.  This coverage is designed to make the insured whole for lost income and additional expenses incurred during a period when business operations are interrupted because of a covered cause of loss. 

The policy at issue in 10012 Holdings employed standard language providing coverage for loss of business income resulting from (1) a “direct physical loss of or physical damage to” the insured’s property, or (2) “an order of civil authority” prohibiting access to the property because of a “risk of direct physical loss” to “property in the immediate area” of the insured’s premises. The insurer denied coverage, arguing that the “physical loss” or “physical damage” element requires some kind of physical damage to the insured’s property, which was not alleged in the complaint.  Judge Schofield agreed, and granted the insurer’s motion to dismiss, explaining:

New York courts interpreting substantially identical language -- “loss of, damage to, or destruction of property or facilities” -- have found it “limited to losses involving physical damage to the insured’s property.” Roundabout Theatre Co. v. Cont’l Cas. Co.,751 N.Y.S.2d 4, 8 (1st Dep’t 2002). In so holding, courts have declined to interpret such language to include “loss of use” of the property under New York law.  Nothing 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. Plaintiff claims the Policy is ambiguous because it covers both “loss of” and “damage to” Covered Property. Plaintiff argues that “loss” and “damage” cannot mean the same thing, as New York law requires contracts to be interpreted to give each term effect. While that principle is true, the term “loss” is unambiguous in this case in light of New York law which interprets such language as not including the “loss of use” alleged by the Complaint.

Notably, some courts in other jurisdictions have taken a broader interpretation of this coverage than Judge Schofield.  For example, in a case previously covered on this blog, a judge in North Carolina granted summary judgment to the insured on a COVID-19 business interruption claim, holding that  “the phrase ‘direct physical loss’ includes the loss of use or access to covered property even where that property has not been structurally altered.”  A federal judge in Missouri denied a motion to dismiss on similar grounds (see our post on the decision here).  Earlier this month, another federal judge in the Eastern District of Virginia denied an insurer’s motion to dismiss a COVID-19 business interruption claim, holding that despite that lack of structural damage at the insured’s premises, “it is plausible that Plaintiff experienced a direct physical loss when the property was deemed uninhabitable, inaccessible, and dangerous to use by the Executive Orders because of its high risk for spreading COVID-19, an invisible but highly lethal virus.” Elegant Massage, LLC v. State Farm Mut. Auto. Ins. Co., Case No. 2:20-cv-00265-RAJ-LRL (E.D. Va. Dec. 9, 2020).  And the first trial of a COVID-19 business interruption claim commenced last week in New Orleans. The takeaway is that the law in this area is still evolving.  Insureds seeking business interruption coverage for COVID-19 losses should not take an insurer’s reflexive “no” for an answer without understanding their rights under the policy and the applicable law.