Does COVID-19 Constitute Damage to Property?

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In this newsletter, we discuss Soundview Cinemas v. Great American Insurance Group, et al., No. 605985/2020 (Sup. Ct. Nassau Cty.), which addresses whether the loss of use of property caused by pandemic-related closures constitutes physical loss of or damage to property triggering coverage under business insurance policies. For a copy of the Court’s decision, click here.

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Soundview Cinemas v. Great American Insurance Group, et al.,
Supreme Court of the State of New York, Nassau County, Index No. 605985/2020
Motion Decision Entered February 16, 2021 

Does the loss of use of property caused by pandemic-related closures constitute a physical loss of or damage to property triggering coverage under business insurance policies? In its decision entered on February 16, 2021 granting the defendants’ motion to dismiss in Soundview Cinemas v. Great American Insurance Group, et al., the Supreme Court of New York, Nassau County, Commercial Division, held that it does not. 

Soundview Cinemas Inc. (“Soundview”) operated a movie theater in Port Washington, New York. Soundview held a business income policy issued by defendant Great American Insurance Group (“Great American”), with coverage from April 10, 2019 to April 10, 2020, constituting Soundview’s fifth renewal of a business income policy from Great American. The policy was issued through various insurance brokers affiliated with Great American, i.e., Jimcor Agency, Five Star Coverage Corp., and Wilkinson & Krause, and underwritten by Great American Insurance Company of New York, all of whom were named as co-defendants in the action. 

After Great American denied coverage, Soundview brought claims sounding in breach of contract against Great American and the underwriter, and claims sounding in negligence against the brokers. Soundview filed claims under the policy’s “Business Income” clause because Soundview suffered a “loss of use” of the movie theater during the shutdown, and its “Civil Authority” clause. 

The “Business Income” clause provided, in part: 
We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct physical loss of or damage to property, at locations which are described in the [policy.] 

The “Civil Authority” clause provided, in part: 
We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the location described in the Declarations due to direct physical loss of or damage to property, other than at the described location.  

Although the policy excluded from coverage any “loss or damage caused by or resulting from any virus . . . that induces or is capable of inducing physical distress, illness or disease,” Soundview argued that the policy’s virus exclusion did not apply because the exclusion modified only specific enumerated portions of the policy, excluding the “Business Income” and “Civil Authority” clauses. 

As for its negligence claims against the brokers, Soundview alleged that before obtaining the policy, it asked the brokers whether or not the policy provided sufficient coverage for known and unknown business risks, and the brokers assured Soundview that it would be properly covered. Soundview asserted that if the policy did not cover its losses, then the brokers had negligently failed to procure adequate insurance. 

In granting the motions to dismiss, the Court noted that “Federal courts in New York and throughout the country have almost uniformly held that loss of use of premises due to COVID-19 related government orders does not trigger business income coverage based on physical loss to property.” (Citing Michael Cetta, Inc. v. Admiral Indem. Co., 2020 WL 7321405, at *8 (S.D.N.Y. Dec 11, 2020); Holdings, Inc. v. Sentinel Ins. Co., Ltd., 2020 WL 7360252, at *2 (S.D.N.Y. Dec 15, 2020).) In parenthetically describing these rulings by the Southern District of New York, the Court stated that “New York courts interpreting insurance policy language with respect to ‘loss of, damage to, or destruction of property or facilities’ have limited such language to losses involving physical damage to the property.” 

The Court held that “[w]hile [it] is sympathetic to the economic consequences resulting from the closure of Plaintiff’s movie theater, [it] 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.” The Court also held that “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.” The Court further found that Extra Expense coverage is 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 or damage to property caused by or resulting from a Covered Cause of Loss’.” 

The Court granted the brokers’ motion to dismiss ruling that “Plaintiff does not allege that it made any inquiries about specific insurance coverage that might apply to these unprecedented times, and certainly does not allege that it inquired about coverage for pandemic-related government closures.” The Court held that Soundview’s vague assertion that it asked the brokers whether it was sufficiently insured for known and unknown business risks was insufficient to support an allegation that a specific request was made to the brokers for this specific type of coverage. 

The Court further noted that Soundview does not allege that insurance coverage for pandemic-related government closures existed under the terms of any prior business income policies that Soundview held with Great American.