There is no question that the COVID-19 restrictions imposed by local and state governments have had an unintentional but devastating effect on businesses both large, medium and especially small. Restaurants, movie theaters, live entertainment, sports. gyms, salons and many other businesses have closed because of the lack of business. While many of these businesses purchased insurance with coverages for business income and extra expense, the lack of direct physical loss of or damage to property has meant that these policies, for the most part, do not cover the loss of business caused by the government shut-down orders.
Some policyholders have turned to their insurance brokers and have argued that the lack of insurance coverage is the broker’s fault for failing to procure insurance policies that would have covered the losses arising from the COVID-19 government shutdowns. A recent case in New York shows that blaming the broker is just as likely to fail as blaming the insurance company.
In Soundview Cinemas Inc. v. Great American Insurance Group, No. 605985/2020 (N.Y. Sup. Ct. Nassau Cty Feb. 16, 2021), a movie theater brought an action against its insurer and its brokers seeking coverage and damages for losses incurred because of government orders shutting down movie theatres and the like in the wake of the pandemic. The commercial insurance policy issued to the theater had business income and extra expense and civil authority coverage grants, which required direct physical loss of or damage to property. The policy also had a virus or bacteria exclusion.
In granting the defendants’ motions to dismiss, including the insurance brokers’ motions, the court found that the policyholder did not allege that it made any inquiries about specific insurance coverage that might have applied to something like COVID-19 or government shutdown orders because of a pandemic. The court stated that the policyholder had
not plausibly alleged that the Insurance Brokers breached their duty by failing to direct Plaintiff to obtain additional coverage. Indeed, Plaintiff does not allege that any such insurance coverage for pandemic-related insurance closures existed prior to March 2020.
In dismissing the coverage portion of the action against the insurance company, the court ruled
While the Court is sympathetic to the economic consequences resulting from the closure of Plaintiff’s movie theater, the Court concurs with the majority view that loss of use of the Premises due to COVID-19 related government orders does not constitute “direct physical loss of or damage to the property” that would trigger Business Income coverage under the policy. . . . Extra Expense coverage is also inapplicable, as it requires a showing that Business Income coverage applies, and is defined as expenses incurred during the period of restoration that the insured would not have incurred “if there had been no direct physical loss of or damage to property caused by or resulting from a Covered Cause of Loss.” . . . Finally, Civil Authority coverage is not triggered because access to the Premises was not prohibited due to direct physical loss of or damage to neighboring property.
As the court noted, it followed the majority view across the country, in both state and federal courts, that direct physical loss of or damage to property means actual physical damage and that loss of use is not a direct physical loss. The court did not need to address the virus exclusion. But the decision also highlights that unless there is a true special relationship between the insured and the broker, and that the insured specifically inquired about coverage for loss of use arising out of a pandemic situation, insurance brokers will not be held responsible for the lack of insurance coverage.