The landscape of business-interruption claims litigation continues to develop. While the number of pending claims continues to rise, a recent, preliminary decision from a NY federal court was decided in favor of an insurance company and against an insured who sought compensation for a business-interruption loss.
In Social Life Magazine, Inc. v. Sentinel Insurance Company Limited, an insured brought suit in federal court (the Southern District of New York), seeking coverage for nearly $200,000 after the monthly magazine publication company suspended operations pursuant to Governor Cuomo’s executive order requiring a 100-percent reduction in nonessential workforce.
Although the insured argued its business required specialized equipment that was industrial in nature and, thus, could not have been accomplished remotely, the insurance company denied the business-interruption claim, reasoning COVID-19 did not cause any direct physical loss or damage to the company’s property. The insured primarily pointed to the policy’s coverage for losses caused by mold and spores and lack of any concomitant exclusion for losses occasioned by virus infestation, arguing COVID-19 is a biological contaminant with a specific life cycle that includes replication and, thus, should be covered under the policy.
The insurer rebutted that the circumstances at hand were distinguishable because New York’s case law requires actual physical loss or damage at the insured premises and not simply a loss of accessibility. To this end, the insurer argued the loss they claimed was occasioned by executive orders from Governor Cuomo that were motivated by the imperative to limit community spread during the COVID-19 pandemic—not physical damage.
Although the case involved a preliminary motion for temporary relief and the court has not issued a final decision regarding the merits of the insured’s claim, at oral argument on the motion, the court ultimately denied the insured’s requested relief. The court agreed with the insurer that no direct physical loss or damage results where property remains accessible and people can occupy the premises. The court further agreed with the insurer that any losses were the result of civil orders of authority. In concluding the hearing, the court sympathized with the sentiments shared by both small and large business owners who were forced to close as a result of the pandemic. The insured’s motion for temporary relief was denied, but they will have the opportunity to seek the full relief requested in the lawsuit.
As insureds and insurers alike navigate the early stages of COVID-19 litigation, the court’s decision in Social Life Magazine, Inc. may be a sign that insureds could face an uphill battle in overcoming the threshold “physical loss or damage” inquiry. That said, some policyholders are arguing that other policy forms and endorsements (which are not triggered by the “direct physical loss” requirement) compel a finding of coverage.
Barclay Damon’s Insurance Coverage Practice Area attorneys will continue to monitor COVID-19 insurance litigation and provide updates in future alerts.
If you have any questions regarding the content of this alert, please contact Steven Mach, associate, at smach@barclaydamon.com or another member of the firm’s Insurance Coverage & Regulation Practice Area.
We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.