It goes without saying that many businesses have been devastated by the impact of the shelter-in-place orders imposed after the COVID-19 pandemic began. Yet every judge presiding over a business interruption coverage case must decide the matter based upon guiding legal principles, not the emotional response one has for business owners economically pummeled by these events. In that vein, based upon the policy language at issue and facts alleged in plaintiff’s complaint, the District Court for the Southern District of New York found that business losses arising from the COVID-19 pandemic are not afforded “Business Income” or “Extra Expenses” or “Civil Authority” or “Ingress and Egress” coverage because the losses are not due to “accidental physical loss or accidental physical damage” as required by the policies to trigger coverage.[1] The court explained it “must take care not to make or vary the contract of insurance to accomplish its notions of abstract justice or moral obligation”[2]  and concluded that because plaintiff had not alleged any “physical” loss or damage, defendant’s motion to dismiss plaintiff’s action alleging  breach of contract, breach of the covenant of good faith and fair dealing, deceptive business practices under New York law, unfair trade practices under Connecticut law, and declaratory relief should be dismissed for failure to state a claim.

Based upon the facts alleged and the policy language, the court reasoned that the plain language of the policies at issue required that plaintiff allege “physical” loss or damage for the policy to be triggered.[3] The court concluded that because no facts of “physical” loss or damage had been alleged, “the Policies do not provided coverage, and denial of coverage is not a breach of contract.”[4] For the same reason, the court also rejected plaintiff’s claims for extra expense, civil authority, and ingress or egress coverage, which also required “physical” loss or damage to trigger coverage under the policies.[5] The court explained that “[t]he requirement of physical damage is not satisfied by the mere loss of use.”[6] Specifically, the court noted that “under New York law, ‘loss’ as it is used in the Policies does not mean loss of use; instead there must be some physical damage to the premises.”[7]

Based upon the foregoing, the court rejected as “irrelevant” plaintiff’s claim that coverage should be afforded under the policies at issue because they did not contain a virus exclusion, explaining that a policy exclusion only comes into play if there is coverage under the policy, which the court had determined was not the case because plaintiffs had not alleged “physical” loss or damage.[8] And because plaintiffs failed to establish that they “were eligible for coverage, “the court rejected plaintiff’s claim for the breach of the covenant of good faith and fair dealing, deceptive business practices under New York law and unfair trade practices under Connecticut law for allegedly improperly denying coverage “based upon an inadequate investigation.”[9] However, the court granted plaintiff permission to file an amended complaint, leaving the door open to plaintiff to attempt to plead “physical” damage or loss.[10]

What does this mean for the insured?

The majority of the courts that have faced business interruption claims have found that “physical” loss or damage is required before coverage exists. The significance of this finding is that denial of coverage on this basis is not related to a policy exclusion; rather it is predicated on the scope of the insuring agreement, which provides no coverage absent actual physical damage. This case further instructs that the requirement for “physical” damage or loss cannot be satisfied by alleging only that a shelter-in-place order was issued. Finally, whether the policy at issue has a virus exclusion is irrelevant if the policy requires “physical” damage or loss and no “physical” damage is alleged. However, if a plaintiff were to allege “physical” damage in a manner that survives a motion to dismiss and the policy at issue has no virus exclusion, business interruption coverage could still be available under the court’s reasoning.

What does this mean for insurers?

New York courts have now begun weighing in on business interruption coverage and the court’s reasoning in this case that “physical” loss or damage is required to trigger coverage  is consistent with industry guidance and the history of the policy language at issue. Though the court noted that it “assumes that leave to amend would be futile,” it “nonetheless” granted plaintiff the right to try.[11] We will therefore still have to wait and see whether a plaintiff finds a way to muster up “physical” damage or loss based upon COVID-19.

 

 

 

 

[1] Rye Ridge Corp. v. Cincinnati Ins. Co., 2021 U.S. Dist. LEXIS 78493 at *1-2; 2021 WL 1600475.

[2] 2021 U.S. Dist. LEXIS 78493 at *2.

[3] Id. at *5.

[4] Id. at *5.

[5] Id. at *9.

[6] Id. at *5.

[7] Id. at *5.

[8] Id. at *5.

[9] Id. at *9.

[10] Id. at *9.

[11] Id. at *9.