As we have previously reported, the vast majority of state and federal courts in the United States addressing the issue of whether business interruption losses caused by the COVID-19 pandemic and related government-mandated closures are covered under first-party property insurance policies have ruled in favor of insurers. The United States Court of Appeals for the Second Circuit recently issued several decisions joining this majority of courts, finding that under New York State law, losses caused by the COVID-19 pandemic do not constitute “direct physical loss” so as to trigger coverage.
In 10012 Holdings, Inc. v. Sentinel Ins. Co., a brick-and-mortar art gallery in New York City sought coverage under its property policy for losses arising out of the March 2020 state-mandated closure of nonessential businesses due to the COVID-19 pandemic. The art gallery alleged that it sustained business income losses and expenses as a result of the pandemic and was entitled to coverage under the business income, extra expense, and other provisions of its policy. The insurer denied coverage on the grounds that the art gallery had not suffered direct physical loss within the meaning of the policy.
The art gallery commenced a lawsuit against the insurer in federal court in New York State, arguing that “physical damage” and “physical loss” under the policy included loss of use of its property. The District Court for the Southern District of New York granted the insurer’s motion to dismiss the art gallery’s claims, finding that the business income and extra expense policy provisions were limited to losses involving physical damage to property, which did not occur.
On appeal, the Second Circuit affirmed. The court held that “direct physical loss” and “physical damage” required actual physical loss of or physical damage to a premises; they do not include the mere loss of use of a premises, as the art gallery contended. The court noted that its decision was consistent with settled New York State precedent.
Following the decision in 10012 Holdings, the Second Circuit recently issued several additional decisions in favor insurers on this subject, including in Kim-Chee LLC v. Philadelphia Indemnity Insurance Company, SA Hospitality Group, LLC et al v. Hartford Fire Insurance Company, and BR Restaurant Corp v. Nationwide Mutual Insurance Co. These cases all involved similar property insurance policies with a “direct physical loss” requirement, and the court’s reasoning thus has been the same as in 10012 Holdings.
There have been over 100 appeals decided across the country in similar COVID-19 business interruption cases. To date, only one court, an intermediate state appellate court in Louisiana, has held that a policyholder is entitled to coverage. That court disagreed with all of the other appellate courts, finding that business income losses and expenses as a result of the COVID-19 pandemic constituted “direct physical loss” under the policy at issue. The decision was made by a five-judge panel that was split 3–2, and the insurer likely will seek a further appeal to the Louisiana Supreme Court.
Barclay Damon’s Insurance Coverage & Regulation Practice Area attorneys will continue to monitor this case and others for further developments.
If you have any questions regarding the content of this alert, please contact Jessica Tariq, associate, at jtariq@barclaydamon.com;Tony Piazza, Insurance Coverage & Regulation Practice Area chair, at apiazza@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.