COVID coverage for business losses? “No,” says the first New York court to address the issue of whether a business interruption policy covers losses due to COVID-19

Farrell Fritz, P.C.
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COVID-19 continues to generate litigation in a variety of contexts in the Commercial Division.  Only two weeks ago did our colleague Madeline Greenblatt author a blog about COVID-19 not excusing commercial rental obligations.  Now, in what appears to be a case of first impression in New York at least, Justice Timothy S. Driscoll ruled in an insurance coverage dispute between a movie theater company and its insurance carriers over losses due to the forced shut down of the theater as a result of COVID restrictions. In so ruling in Soundview Cinemas Inc. v. Great Amer. Ins. Group, the Court followed the lead of a majority of courts across the nation that have decided business interruption coverage cases arising out of the COVID-19 pandemic.

Soundview Cinemas  operated a movie theater in Port Washington, New York.  The business was insured under a commercial general insurance policy issued by Great American Insurance, with limits of $1.15 million for business personal property and $600,000 for business income and extra expense — all defined terms in the policy.  In response to the onset of the COVID-19 pandemic, on March 7, 2020, Governor Andrew Cuomo issued Executive Order No. 202, which declared a disaster emergency for the entirety of New York State. The complaint alleges that the pandemic and ensuing Executive Orders forced its final curtain call: the curtains came down, the box office closed and the theater shuttered its doors.  Demand was made under the policy, to which Great American declined.

The complaint asserted a myriad of claims against the carrier and broker, ranging from negligence to breach of fiduciary duty.  The policy itself contained a “civil authority” clause (covering actual losses of income caused by edict of civil authority prohibiting access to the property), as well as a “virus exclusion” (excluding coverage for damages caused by viruses, bacteria, or microorganism).  The defendants immediately moved to dismiss under CPLR 3211(a)(1) (defense founded upon documentary evidence) and 3211(a)(7)(failure to state a claim).

As to the claims against the insurance brokers, the Court easily found that based upon the pleading, there were no allegations that the insured sought specific coverage that would apply to a pandemic, or that would support a claim that the broker should have procured additional insurance.  In fact, the Court noted that “Plaintiff does not even allege that any such insurance coverage for pandemic-related government closures existed prior to March 2020.”  Turning to the claims against the insurer, the Court concluded that under the “majority view,” loss of use of the property as a result of the Executive Order did not constitute “direct physical loss or damage to the property” to trigger coverage.

The Nassau County Commercial Division now joins the ranks of many courts nationwide that have addressed or are currently addressing claims for business interruption coverage arising out of the COVID-19 pandemic.[1] For instance, a District Court in Missouri held that policyholders adequately stated a claim for physical loss based on COVID-19 closures. In Studio 417 v. The Cincinnati Insurance Co., hair salons and restaurants in Springfield and Kansas City, Missouri, filed claims for losses due to COVID-19 closures under “all-risk” property insurance policies issued by The Cincinnati Insurance Co. Cincinnati denied the claims and the policyholders filed suit in the Western District of Missouri, asserting a right to payment under the policies’ coverages for business income, extra expense, dependent property, civil authority, extended business income, ingress and egress, and sue and labor. In its motion to dismiss, Cincinnati argued that the insureds failed to allege a “physical loss” and that this requirement can only be satisfied through “actual, tangible, permanent, physical alteration of property.” The court disagreed, finding that COVID-19 can constitute a “direct physical loss” to property sufficient to trigger coverage because “loss,” based on its plain and ordinary meaning, encompasses “the act of losing possession” and “deprivation” of property. Further, the court reasoned that the policy language extends coverage for direct physical loss or damage. Rejecting Cincinnati’s argument that both “loss” and “damage” require some form of tangible or physical alteration, the court held that pursuant to the rules of policy construction, “loss” and “damage” must have different meanings based on the use of the disjunctive word “or.” The Missouri court held, “[e]ven absent a physical alteration, a physical loss may occur when the property is uninhabitable or unusable for its intended purpose.”

Another recent decision, issued by a New Jersey district court on February 10, 2021, was not so favorable to the policyholder. In Causeway Automotive, LLC, et al. v Zurich American Insurance Co., plaintiffs sought coverage for losses sustained as a result of COVID-19 under business income and extra expense “caused by action of civil authority” provisions of their policy. Zurich maintained that it properly denied coverage based on a virus exclusion which states the insurer “will not pay for loss or damage caused by or resulting from any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease.” In opposition to Zurich’s motion to dismiss, plaintiff insureds argued the virus exclusion was ambiguous and, therefore, should be interpreted in plaintiffs’ favor. Plaintiffs further argued that because the COVID-19 virus was but one cause in a sequence of events that led to their losses, the virus exclusion does not apply. The court disagreed, finding that plaintiffs’ potential interpretations of the virus exclusion did not render it ambiguous or otherwise unclear. The court was similarly unpersuaded by plaintiffs’ argument that the virus exclusion did not apply because their losses were not caused by COVID-19 but, rather, by the Governor’s Executive Orders requiring closure of certain aspects of Plaintiffs’ business. To determine whether the loss was “caused by” an excluded peril, the New Jersey court employed the efficient proximate cause test. The court found that the Governor’s orders were issued for the sole reason of reducing the spread of the virus that causes COVID-19 and would not have been issued but for the presence of the virus in the State of New Jersey. As a result, the New Jersey court granted the insurer’s motion to dismiss.

As one of the few cases getting past the motion to dismiss stage, on January 14, 2021, Cherokee County District Court Judge Douglas A. Kirkley granted partial summary judgment in favor of the insured on a claim for business interruption losses caused by COVID-19. In Cherokee Nation et al. v. Lexington Insurance Co. et al, plaintiffs argued that under their all-risk policy, a direct physical loss or damage occurs when a covered property is rendered unusable for its intended purpose. Plaintiffs maintained that COVID-19 caused the Nation to shut down covered properties, engage in disinfection efforts, and implement protective measures before reopening. The insurers argued that plaintiffs had not demonstrated a direct physical loss or damage and that contamination, pollution, and other similar exclusions applied. In granting summary judgment, the Oklahoma court found plaintiffs established a “plausible claim for a fortuitous ‘direct physical loss’” under their all-risk tribal property policy.

 

[1] University of Pennsylvania Carey Law School has created a “Covid Coverage Litigation Tacker” which compiles data from business interruption coverage cases across the nation and tracks judicial rulings. While the site’s organizers are transparent about limitations of the available data, the site can be an excellent resource for tracking COVID related insurance cases nationwide.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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