It’s been since September that I have blogged about business income and extra expense and civil authority order insurance coverage for COVID-19 closures and the multiple court cases addressing motions to dismiss. That’s because the cases have been coming down by the dozen, mostly, but not always, on the side of the insurance carrier.
In one of the recent cases, another motion to dismiss the complaint granted with prejudice in favor of the insurer, the court’s analysis was extremely thorough and persuasive. But what struck me most was the court’s commentary on the differences chosen by policyholder counsel in articulating the allegations in the complaint. Those differences are obvious and, although I have not done a statistical analysis, it appears those differences often account for the reasons why some courts have not dismissed these COVID-19 cases. What do you think?
In Michael Cetta, Inc. v. Admiral Indemnity Co., No. 20 Civ. 4612 (JPC) (S.D.N.Y. Dec. 11, 2020), a New York federal court dismissed with prejudice the complaint of a restaurant seeking coverage from its insurer because of the COVID-19 shut-down orders issued by the City and State. The link above has the opinion and I commend it to you because it clearly sets out the reasons why, under New York law, there is no coverage for COVID-19 under a property insurance policy’s business income and extra expense, and civil authority order coverages.
The court used interesting analogies to show why “loss of use” is not covered under insurance provisions that only apply to direct physical loss of or damage to covered property. Here are some of the more interesting points:
The idea that “loss of use” does not constitute a “direct physical loss of or damage to”
property resonates in ordinary experience outside the context of insurance coverage. Say, for
example, a teenager broke curfew, and his parents punished him by taking away the keys to his
car. The teen undoubtedly lost the ability to use the car. However, we would not say that there
had been a “direct physical loss of or damage to” the car. The teenager was precluded from driving
it. But the car’s physical condition remained unchanged, and its presence likely remained at the
residence. Similarly, imagine a fisherman visits a public pond each day to cast his line. One
morning he arrived and found that the pond was closed for fishing because a nearby town was hosting its annual swim race. Did the fisherman lose the use of the pond for the day? Yes. He could not enjoy the premises for his intended use (i.e., to fish). But could anyone reasonably conclude there was a “direct physical loss of or damage to” the pond because he could not fish? No. The condition of the pond was not altered physically.
There is a lot more in the opinion on the court’s detailed coverage analysis, but the point I want to make is that the court recognized how allegations may make a difference. In rejecting the restaurant’s argument that a number of cases outside of New York have found that an insured may suffer a physical loss if the structure is unusable or inhabitable even in the absence of physical damage, the court made this finding:
But these cases involve situations in which a plaintiff claimed that some harmful or unwanted substance entered its premises and made it impossible to use. They are therefore distinguishable because [the restaurant] makes clear that COVID-19 was never found on its premises and that it has no reason to think the virus contaminated or damaged anything at the restaurant, let alone made it uninhabitable. Compl. ¶ 43 (explaining that coronavirus was not “found in or on [the restaurant’s] insured property”).
In the few cases that have survived motions to dismiss, the policyholders have alleged that COVID-19 was present in the premises and caused physical damage to the property or has made it impossible to use the premises. The court cites several of these cases and points to the allegations that COVID-19 attached to and deprived plaintiffs of their property, making it unsafe and unusable and allegations that there was physical contamination of the property by COVID-19.
In contrast, the restaurant here, and in many of the other cases, failed to plead allegations that would entitle it to coverage under business income provisions of the property policy. In this case, even if the allegations were present, the existing virus exclusion, which the court did not need to address because of the lack of coverage in the first instance, likely would have caused the court to dismiss the case in any event.
All of this makes sense from a pleading and motion to dismiss perspective. Of course, a plaintiff should not allege that its property has been contaminated by COVID-19 if there is no proof that COVID-19 was in the premises and actually contaminated the property. Moreover, in the cases where those allegations allowed the complaints to survive a motion to dismiss, the plaintiffs will still have to prove that COVID-19 directly caused physical loss of or damage to their property. Not an easy task.