Second Circuit holds no coverage for business interruption losses related to covid-19
The Second Circuit has now joined the Fifth, Sixth, Seventh, Eighth, Ninth, Tenth and Eleventh Circuits in arguing that no insurance coverage exists for business interruption losses caused by the Covid-19 pandemic. and associated government orders. In 10012 Holdings Inc. c. Sentinel Insurance Co.Ltd., no. 21-80-cv, slip. Op. (2d Cir. Dec. 27, 2021), the New York Insured Fine Art Gallery and Dealer sought coverage under three provisions of its insurance policy for losses and additional expenses incurred when ‘it has suspended operations in line with government restrictions on non-essential businesses during the Covid-19 pandemic. When the insurer denied coverage, the insured sued for breach of contract and declaratory judgment. The United States District Court for the Southern District of New York dismissed the claims with prejudice and the insured appealed to the United States Court of Appeals for the Second Circuit.
On appeal, the insured argued that he was entitled to coverage under the additional business income and expense provisions of his policy because the policy’s use of the term “direct physical loss”, which appeared in both provisions and which the policy did not define, included circumstances where the insured was simply deprived of access to his business assets. However, the court observed that all New York courts applying New York law have firmly rejected the argument that business closures due to New York State executive orders constitute physical loss. or property damage. The court therefore held that under New York law, the terms “direct physical loss” and “physical damage” in the additional business income and expense provisions do not extend to mere loss. use of premises, when there has been no physical damage to these premises; rather, these terms require actual physical loss or damage to the insured’s property. Because the insured only alleged that he lost access to his property as a result of Covid-19 and government shutdown orders, not that he suspended operations due to physical damage to his property, the court held that the insured could recover neither. additional business income or expense provisions.
The court also held that the insured was not entitled to cover under the civil authority provision of the police. First, the court observed that this provision required a “covered cause of loss”, which was conditional on the demonstration that the orders of the civil authorities resulted from a risk of direct physical loss of property in the vicinity of the gallery. The executive orders at issue, on the other hand, were the result of the Covid-19 pandemic and the harm it has caused to human beings, not the risk of physical damage to property. The court affirmed that the closure of a gallery due to possible human infection does not constitute a “risk of direct physical loss”. Second, even assuming that Covid-19 itself posed a “risk of direct physical loss”, coverage under the civil authority provision required that decrees prohibiting access to the insured’s premises be motivated by the risk of damage to neighboring premises. However, the Insured’s Complaint does not plausibly allege that the potential presence of Covid-19 in neighboring properties directly resulted in the Insured’s property being closed; rather, he alleged that the closure was a direct result of the risk of Covid-19 on the insured’s property. The court therefore concluded that the insured could not recover under the provision of the civil authority of the police either.
With 10012 Assets, the Second Circuit has now joined seven other federal appeals courts in ruling that business losses resulting from Covid-19 and related shutdown orders do not constitute direct physical loss or property damage and, therefore, do not trigger commercial property policy coverage.