The question of whether businesses may be able to recover for COVID-19-related losses under their insurance policies continues to be an important topic for many as the pandemic continues. A federal court in New York recently addressed this topic, adding to a growing body of case law on this issue.
In Michael Cetta, Inc. v. Admiral Indem. Co., a steak house restaurant brought suit against its insurer, arguing that the insurer improperly failed to provide coverage for losses that the restaurant alleged it suffered when it was forced to close due to COVID-19-related governmental orders. The insurer moved to dismiss, arguing that such losses were not covered by the restaurant’s insurance policy.
The restaurant contended that its losses were covered by three business interruption provisions of its insurance policies. First, the insured claimed a right to coverage under a provision in the policy that provided, in relevant part, that the insurer would “pay for the actual loss of Business Income [the insured] sustain[s] due to the necessary ‘suspension’ of . . . ‘operations’” if the suspension is “caused by direct physical loss of or damage to the property.” Second, the insured claimed a right to coverage under the policy’s “extra expense” provision, which “only applies if business income coverage applies” and provides coverage for additional, “necessary expenses . . . that [the insured] would not have incurred if there had been no direct physical loss or damage to property. . . .” Third, the insured asserted that it was entitled to coverage under the policy’s “civil authority coverage” provision, which provided coverage for losses incurred where “action of civil authority . . . prohibit[ed] access to the described premises,” but only if access was prohibited “as a result of . . . damage” to a nearby property and “[t]he action of civil authority is taken in response to dangerous physical conditions resulting from the damage . . . .”
The court agreed with the insurer that none of these provisions provided coverage for the restaurant’s business losses stemming from the government-ordered closure of its business. With respect to the business income provision, the court held that the provision only applied to “physical losses,” meaning “a negative alteration in the tangible condition of property.” The court held that, accordingly, “‘loss of use’ does not constitute a ‘direct physical loss of or damage to’ property” triggering coverage under the business income provision. The court also stated that this conclusion was supported by a number of court decisions from New York and other jurisdictions. The court distinguished the restaurant’s situation from cases where a property was rendered unusable when a “harmful or unwanted substances entered [the] premises” because here, there was no allegation that COVID-19 was ever found on the restaurant’s premises or that the virus contaminated the restaurant such that it “made it uninhabitable.” The court’s opinion thus left open the question of whether the restaurant could have maintained its claim and avoided dismissal if it had been able to allege that COVID-19 had, in fact, “contaminated” the property.
The court then concluded that the “extra expense” provision was not applicable because it only applies if the business income provision applies. Finally, the court held that the “civil authority” provision did not apply because the restaurant did not allege damage to other nearby properties that prevented the restaurant from accessing its own property; the restaurant had only alleged that nearby properties suffered “damage” because they were subject to similar governmental closure orders. The court again suggested that the restaurant might have been able to satisfy the “damage” requirement if it could allege that nearby properties had actually been contaminated with the COVID-19. However, the court held that, even if there had been “damage” to nearby properties, the restaurant had not alleged that it was unable to access its own property as a result of that “damage.” In particular, the court found that the governmental orders did not prevent the restaurant’s employees from accessing the property to make take-out and delivery orders available to customers.
The New York federal court’s decision is consistent with pre-pandemic case law in New York, which we wrote about here, and with decisions in other jurisdictions about insurance coverage for pandemic-related losses, such as the one we wrote about here. The decision also confirms that the specific language of an insurance policy, and the specific facts and circumstances surrounding the insured’s losses, are critical in determining whether an insured can recover for losses sustained as a result of the pandemic.
 ___ F. Supp. 3d ___, 2020 U.S. Dist. LEXIS 233419 (S.D.N.Y. Dec. 11, 2020).