⚠ NEW YORK COVID-19 #BUSINESSINTERRUPTION CASE UPDATE ⚠

The "score" in New York on COVID-19 #businessinterruption coverage lawsuits, where "direct physical loss" or "direct physical damage" was at issue, now stands at 23-0 for insurers (18 federal, 5 state).

Since my last update, here are the four recent decisions: 

• Office Solution Group, LLC v. National Fire Ins. Co. of Hartford, No. 20-cv-04736-GHW (S.D.N.Y. June 11, 2021)

Manhattan-based policyholder in the business of office project management and furniture installation, sued its commercial property insurer for business income and civil authority coverage for losses allegedly stemming from its March 2020 forced closure during COVID-19.  The policy's business interruption coverages required “direct physical loss of or damage to property” and the policy included a “Microbe Exclusion” that included viruses. 

In GRANTING the insurer's motion to dismiss the complaint, with prejudice, the court ruled:

Critically, Plaintiff’s argument also fails to consider the extensive case law that has developed in New York on this exact issue over the past year, which provides that loss of use caused by the COVID-19 pandemic is not physical damage. Unfortunately, Plaintiff is only one of numerous businesses that suffered immense income loss after shutting its doors during the pandemic. Many of those other businesses have brought materially identical actions in New York seeking business impact coverage from their insurance providers. New York courts have consistently maintained that “direct physical loss of or damage” language requires physical damage to invoke coverage, and that loss of use due to the pandemic does not constitute physical damage when the covered property was physically unharmed by the virus. * * *

As in the many analogous cases that have been brought in New York courts over the past year, the Court concludes here that the plain meaning of “direct physical loss or damage” unambiguously requires physical damage to the covered property to invoke coverage and that loss of usage does not rise to the level of physical damage. Plaintiff has failed to allege such loss or damage occurred, given that Plaintiff’s office remained physically intact and unharmed throughout its closure, other than having its doors closed to the public. Accordingly, Plaintiff is not entitled to coverage under the Business Property Coverage terms of the Policy. * * *

The language of the Policy is unambiguous and bars Plaintiff from coverage. The Business Property Coverage terms of the Policy cover direct physical damage or loss, and the Civil Authority Coverage terms of the Policy cover losses when civil authorities prohibit entrance onto the covered property due to direct physical damage to neighboring properties. Plaintiff has failed to allege that either of those occurred, and instead only alleges loss of use and limited access to the covered property due to the threat of COVID-19. Furthermore, Plaintiff is not entitled to coverage because the Policy’s Microbe Exclusion explicitly excludes coverage for damages caused by "any virus," which includes the COVID-19 virus. 

• Buffalo Xerographix, Inc. v. Sentinel Ins. Co., No. 20-cv-00520-GWC (W.D.N.Y. June 16, 2021)

Plaintiffs, an office equipment supplier and a dental practice, sued their commercial property insurers for business interruption coverage for losses allegedly stemming from their March 2020 forced closure during COVID-19.  The policies' business interruption coverages required “direct physical loss of or damage to property”, but did not contain a virus exclusion.

In GRANTING the insurers' motion for judgment on the pleadings (post-answer motion to dismiss), the court ruled:

Plaintiffs' policies provide coverage for business interruptions caused by "direct physical loss or damage" to their insured premises or due to orders of a civil authority issued in response to  direct physical loss or damage" to nearby property that restricted Plaintiffs' access to their premises. Plaintiffs argue that they suffered covered losses because the presence of the coronavirus at or  near the insured premises constitutes "direct physical loss of or physical damage."

To make this argument, Plaintiffs point to the existence of the so-called "Virus Exclusion" and the "Virus Limitation": standard fmm endorsements developed by the ISO that exclude or limit an insured's otherwise available coverage when the conditions of the endorsement are met. * * * Plaintiffs argue that this omission constitutes an "express acknowledgement by [Defendants] that a virus is capable of causing 'direct physical loss of or damage to' property." (Doc. 78 at 18.)  from this assertion, Plaintiffs jump to the conclusion that the presence of the coronavirus constitutes direct physical loss or damage.

However, Plaintiffs' reliance on the Virus Exclusion and Virus Limitation is misplaced. Regardless of whether a virus could cause direct physical loss of or damage to property, Plaintiffs do not plausibly allege that the coronavirus caused direct physical loss or damage to their premises or property in the vicinity of their premises. The Virus Exclusion and Virus Limitation operate by limiting or excluding coverage that would otherwise be available under an insured's policy; that is, they limit rather than expand coverage. Consequently, the endorsement becomes relevant only if an insured experiences an otherwise "covered loss." In that case, the Virus Exclusion or the Virus Limitation would limit the insured's recovery for the otherwise covered loss. In Plaintiffs' case, however, the omission of the Virus Exclusion and the Virus Limitation from Plaintiffs' policies is irrelevant because Plaintiffs have not plausibly alleged that they suffered "direct physical loss or damage" to their property.

Many courts applying New York law, including this one, have already concluded that business closures due to the presence of the coronavirus or due to New York State executive orders do not constitute "direct physical loss of or damage to" property. See Kim-Chee LLC v. Phil. Indem. Ins. Co., No. 1:20-cv-1136, 2021 WL 1600831, at *5 (W.D.N.Y. April 23, 2021); id. at *3 ( citing cases applying New York law). Relying on longstanding New York precedent, these courts have ruled that the phrase "direct physical loss or damage" is unambiguous and requires physical alteration of property. Kim-Chee, 2021 WL 1600831, at *4 (applying Roundabout Theatre Co., 751 N.Y.S.2d at 8).

The presence of the coronavirus does not physically alter property in a permanent manner. In this respect, the virus is different from other physical or chemical contaminants that have been found to cause "direct physical loss or damage" to property. Id. at *5 (citing gasoline seepage, lead contamination, exposed asbestos, pervasive odor, and chemical or bacterial contamination as examples of"[c]ontamination of a structure that seriously impairs or destroys its function," thereby "qualify[ing] as direct physical loss"). Instead, the coronavirus poses a temporary health hazard to the occupants of a building, whose threat to human health dissipates with the passage of time. Many courts, including this one, have determined that merely temporary contamination does not qualify as "direct physical loss or damage." Id. (citing dust from road construction, mold or bacteria that could be eliminated by cleaning, and the controlled presence of asbestos as examples of such "short-lived contamination). * * *

In this case, the alleged presence of the coronavirus has not caused a permanent change to Plaintiffs' properties or decreased the value and function of those properties. Instead, New York State executive orders issued in response to the coronavirus temporarily deprived Plaintiffs of the ability to use their properties for their intended purpose. Because Plaintiffs have not plausibly alleged that the presence of the coronavirus caused "direct physical loss of or damage to" their insured premises or nearby property, Plaintiffs cannot state a claim for breach of contract under either their business interruption coverage or civil authority coverage. Insuring Defendants are therefore entitled to judgment on the pleadings on Plaintiffs' breach of contract claim.

The court also granted judgment on the pleadings dismissing plaintiffs' New York General Business Law § 349 cause of action, holding that that plaintiffs cannot "establish that they  suffered injury as a result of' the defendants' conduct-as required to state a claim under N.Y. Gen. Bus. Law§ 349-because they did not plausibly allege "direct physical loss of or damage to" their insured property.

•  THill 13014, LLC v. Finger Lakes Fire & Cas. Co., No. 800744-2021 (Sup. Ct., Erie Co., June 17, 2021) 

Plaintiffs, self-storage facilities, sued their commercial property insurer for business interruption coverage for losses allegedly stemming from their March 2020 forced closure during COVID-19.  The policies' business interruption coverages required “direct physical loss" of property, but did not contain a virus exclusion.

In GRANTING the insurer's motion to dismiss plaintiffs' complaint, the New York State Supreme Court, Erie County, held:

The Court agrees with Defendant that there are no facts, only conclusions, to support Plaintiffs' claims. As such, the Court finds that Plaintiffs have failed to meet their burden and that dismissal is required. The complaint is void of any evidence to support the bald conclusion that the coronavirus caused an actual covered loss (physical or otherwise) under the subject policies. * * * Here, the subject policy language is specific, clear, and unambiguous. The insurance company covers losses "directly resulting from interruption of your business operations because of a business property loss insured under this policy." Mura Affirmation at ¶ 13. "Physical loss" and "business property'' are not ambiguous terms. Those are the terms included in the Policy and the Court will not now, as noted above, "rewrite the contract or impose additional terms which the parties failed to insert." Supra.

The court also dismissed the complaint’s New York General Business Law § 349 deceptive acts and practices cause of action, holding that “[t]he case before this Court likewise stems from a private dispute outside the ambit of §349 of the General Business Law.” 

• Broadway 104, LLC v. XL Insurance Amer., No. 20-cv-03813-PKC (S.D.N.Y. Jun. 23, 2021)

Plaintiff, a Manhattan restaurant, sued its commercial property insurer for business interruption coverage for losses allegedly stemming from its March 2020 forced closure during COVID-19.  The policy's business interruption coverages required “direct physical loss of or damage to  property" and did contain a virus exclusion.

In GRANTING the insurer's motion to dismiss with prejudice; the court held:

The Complaint does not allege that the Café suffered a ‘direct physical loss’ of property that would provide for business interruption coverage under the Policy….The Complaint does not plausibly allege the Café suffered a loss covered under the Civil Authority Provision….The Court concludes that the Virus Exclusion is unambiguous and excludes the coverage sought by the Café.

For an updated listing of all 23 New York COVID-19 #businessinterruption cases decided to date, click the image below.  

 

COVID-19 Business Interruption Coverage Cases Decided Under New York Law -- 18-0 for Insurers

June 6, 2021 ~~ To date, 18 courts (14 federal/4 state) applying New York law have issued decisions on motions in COVID-19 business interruption coverage cases.  Click the image below for a list of those cases.  Each case name is hyperlinked to its decision.  

18-0 for insurers.  

Still waiting for the court's decision of my client's motion to dismiss the THILL 13014, LLC et al. v. Finger Lakes Fire & Casualty Company Erie County Supreme Court case.   

The Key to Winning COVID-19 Business Interruption Lawsuits?

I was interviewed last Friday and quoted this morning in Jim Sams' article for the Claims Journal, entitled "The Key to Winning COVID Business-Interruption Claims: Say the Virus is Present".

Sandwiched between two policyholder attorneys, I made some points and said some words on the subject of the developing and refined strategies of policyholder attorneys to keep their clients' COVID-19 business interruption lawsuits from being dismissed on pre-answer dispositive motions.  

I said when I posted that article to LinkedIn that I'm still trying to get my head around policyholder attorney Chip Merlin's "absurd" argument. 

Absurd for policyholder attorneys to allege presence of the virus, or for insurer's to require that policyholders prove it? Listen for yourself and please tell me if you understand Chip's argument.

Then be sure to read my comment to the Claims Journal article.  

What do you think?  Is alleging presence of the virus on property "the key"?  I know of some federal judges who don't think so. 

COVID-19 Business Interruption Analytics -- Metrics for Six Dozen Litigation Rulings (To Date)

 It was in mid-April that I got the call.  I was being drafted to a team of attorneys from over a dozen jurisdictions to defend one of my insurer clients in what was expected to be an incoming tsunami of COVID-19 business interruption lawsuits.  For a seasoned insurance coverage attorney like me, this was my most recent call-up to The Bigs.  The Show.  The reason I spent all those formative coverage attorney years parsing sentences and hunting for the elusive Oxford comma.   

Now seven months and three, fully briefed, pre-answer motions to dismiss (actually four--moved twice in one case) later, I could tell you everything you never wanted to know about the meaning of DPLOODT (direct physical loss of or damage to) property, "loss" and "damage", "of" and "to", and whether a virus is alive or dead or neither and why it might matter to a policyholder's business interruption claim.

But not in this post.  Instead, I'll skip to and share with you the "scorecard" of sorts I've developed for cataloging and tracking the 72 COVID-19 business interruption ("BI" to the cool, commercial property kids) court rulings to date:

Now, if you had been following me all along on LinkedIn, you would already have these metrics.  I've lost count how many times since April I've used the #businessinterrution and #covidBIlitigation hashtags on my LinkedIn posts (but you can count them if you want, in no particular and discernable order, by clicking here).  

I know you're wondering how I keep all these stats or metrics, right?  Easy (not really).  Thank Microsoft and the sortability (not a real word) of the excellent Excel spreadsheet.  Et voilà:

The image above clicks to its PDF source, but for the real spreadsheet geeks who know what insights custom sorting can reveal, I offer you the sortable Excel spreadsheet, itself.  All case rulings are clickable through to PDF documents residing in my Dropbox folder.  If you want updated versions of the rulings metrics and spreadsheet, follow me on LinkedIn and watch for my weekly postings.  

Please feel free to share the rulings metrics, sortable spreadsheet and Dropbox folder link with whomever might find them interesting and useful.  

And stay safe and well, everyone.  

*** COVID-19 BI LITIGATION RULINGS BY THE NUMBERS *** (through Oct. 29, 2020)

I have seen a "scorecard that, together with the cases that I and others on LinkedIn have reported, tallies the COVID-19 business interruption rulings to date as 35-13 in favor of insurers. 

>>  The FEDERAL/STATE COURT SPLT split is 33-15. 

>> The FEDERAL COURT SCORE is 29-4 for insurers. 3 of the 4 rulings favoring policyholders are from the same judge. 

>> The STATE COURT SCORE is 9-6 in favor of policyholders. 2 of the 6 rulings favoring insurers are from the same judge. 

>> Of the 13 TOTAL DECISIONS FAVORING POLICYHOLDERS, only 4 are from federal court and 9 are from state court. 3 of the 4 federal court ruling favoring policyholders are from the same judge. 

>> 28 DIFFERENT FEDERAL JUDGES have ruled on motions -- 26 in favor of insurers and 2 in favor of policyholders. 

>> 14 DIFFERENT STATE COURT JUDGES have ruled on motions – 5 in favor of insurers and 9 in favor of policyholders. 

>> The AVERAGE LENGTH of the STATE COURT rulings FAVORING POLICYHOLDERS is 1.88 pages. 

>> The AVERAGE LENGTH of ALL FEDERAL COURT rulings is 11.37 pages.

What's it all about, Alfie?

The Jenner Complaint

It's been dubbed "the Jenner complaint" and, last I knew, has been filed in Illinois and New York state courts. It's an evolved or mutated variant of predecessor COVID-19 BI policyholder complaints, embedding a table of contents, photos, floor plans and seating charts in its hundreds of pages in support of these policyholders' core argument that impairment or loss of function or functionality equals direct physical loss or damage.

Interested persons can follow the New York state court action's docket by clicking here.

#businessinterruptioninsurance #COVID19businessinterruptionlitigation

DC Court Grants Summary Judgment to Commercial Property Insurer on COVID-19 Business Interruption Claim

* * * SPECIAL ALERT * * *

This afternoon the Superior Court of the District of Columbia granted summary judgment to Erie Insurance Exchange, dismissing plaintiffs' complaint for COVID-19-related business income/ interruption losses.

The court concluded: 

With both dictionary definitions and the weight of case law supporting Defendant’s interpretation of the term "direct physical loss," Plaintiffs’ additional arguments are unconvincing. First, Plaintiffs argue that because the insurance contract has specific exclusions for "loss of use" under some coverage lines but not for Income Protection coverage, the Court should infer that the Income Protection coverage covers losses such as Plaintiffs’. Plaintiffs' Motion at 13-14. But as already discussed, even if “loss of use” was covered, Plaintiffs would still have to show that the loss of use was a "direct physical loss” similar to those in the cases discussed supra at 5-7. And for the reasons explained in this order, there was no “direct physical loss” to Plaintiffs.  Second, Plaintiffs argue that, unlike some similar insurance policies, their policies do not include a specific exclusion for pandemic-related losses. Id. at 19-20. But again, even in the absence of such an exclusion, Plaintiffs would still be required to show a 'direct physical loss.' Because they cannot do so, the Court grants summary judgment to Defendant.

The case is Rose's 1, LLC et al. v. Erie Insurance Exchange and you can read the court's decision and order by clicking here. 

Consequential Damages

COMMERCIAL PROPERTY -- BUSINESS INCOME LOSS COVERAGE -- CONSEQUENTIAL DAMAGES

Bi-Economy Market, Inc. v. Harleysville Ins. Co. of NY
10 N.Y.3d 187 (Ct. Apps. decided 2/19/2008)

Extracontractual damages aren't what they used to be.

On February 19, 2008, the New York Court of Appeals decided a pair of first-party property insurance cases that some have since touted as portending expanding vistas of "bad faith" litigation against insurers in New York.

In Bi-Economy Market, Inc. v. Harleysville Ins. Co. of NY, the 5-2 majority reversed the lower courts' dismissal of the insured's claim for consequential damages allegedly due to the insurer's delay in paying policy benefits. Relying on pre-existing but mostly non-insurance case law, the Court of Appeals held that

in light of the nature and purpose of the insurance contract at issue, as well as Bi-Economy's allegations that Harleysville breached its duty to act in good faith, we hold that Bi-Economy's claim for consequential damages including the demise of its business, was reasonably foreseeable and contemplated by the parties, and thus cannot be dismissed on summary judgment.

To the majority, "the very purpose of business interruption coverage would have made Harleysville aware that if it breached its obligations under the contract to investigate in good faith and pay covered claims it would have to respond in damages to Bi-Economy for the loss of its business as a result of the breach." The Court rejected the insurer's argument that the policy's "consequential loss" exclusion applied to negate coverage for the insured's alleged consequential damages.

In his dissent, Judge Smith opined that the majority's ruling effectively and erroneously re-labels punitive damages as consequential damages, and a "bad faith" failure to pay a claim as a "breach of the covenant of good faith and fair dealing." Judge Smith warned:

The majority's bad policy choice is more important than the flaws in its reasoning. This attempt to punish unscrupulous insurers will undoubtedly lead to the punishment of many honest ones. Under today's opinions, juries will decide whether claims should have been paid more promptly, or in larger amounts; whether an insurer who failed to pay a claim did so to put pressure on the insured, or from legitimate motives, or from simple inefficiency; and whether, and to what extent, the insurer's slowness and stinginess had consequences harmful to the insured. All these very difficult, often nearly unanswerable, questions will be put to jurors who will usually know little of the realities of either the insured's or the insurer's business. The jurors will no doubt do their best, but it is not hard to predict where their sympathies will lie.

The result of the uncertainty and error that the majority's opinions will generate can only be an increase in insurance premiums. That is the real "consequential damage" flowing from today's holdings.

In the companion case of Panasia Estates, Inc. v. Hudson Ins. Co., the same 5-2 majority affirmed the lower courts' denial of the insurer's motion for partial summary judgment dismissing the plaintiff's claims for consequential damages. Relying on its decision in the Bi-Economy Market case, the majority noted that "consequential damages resulting from a breach of the covenant of good faith and fair dealing may be asserted in an insurance contract context, so long as the damages were 'within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting[.]'" Unlike in the Bi-Economy Market case, however, the Panasia Estates water damage claim was denied in its entirety due to the asserted applicability of one or more policy exclusions. In remanding the case back to Supreme Court, however, the Court of Appeals observed that the lower courts "failed to consider whether the specific damages sought by Panasia were foreseeable damages as the result of Hudson's breach", suggesting that there was not enough information in the record before the Court of Appeals to determine whether the consequential damages Panasia was alleging to have suffered were within the contemplation of the parties when the particular insurance policy at issue incepted.

Some commentators, including this one, believe that the Bi-Economy ruling allowing claims for consequential damages to proceed to triers-of-fact must be limited to insurance claims under commercial property policies that afford business interruption or business income loss coverage. However, Judge Smith's dissent in Bi-Economy pointed out that the Panasia Estates case involved no business interruption coverage.

Numerous signals in Bi-Economy -- including the majority's explicit reference to "the very purpose of business interruption coverage" -- would seem to indicate that its holding will support consequential damage claims only under commercial property insurance policies that afford business interruption or business income loss coverage. In his opinion for the majority, Judge Piggot explained that in "determin[ing] whether consequential damages were reasonably contemplated by the parties [and thus recoverable in a subsequent breach of contract action], courts must look to 'the nature, purpose and particular circumstances of the contract known by the parties[.]'" Having recognized that the nature and purpose of business interruption coverage in a commercial property insurance policy contemplates and is to protect against the loss of business, it is somewhat understandable that the majority concluded that Bi-Economy's claim for the "complete demise of its business" was within the contemplation of the parties at the time the insurance policy incepted.

It remains to be seen whether the Bi-Economy Market and Panasia Estates rulings will be extended to losses and claims arising under other than commercial property insurance policies. In my office we have already seen insureds' counsel seek to assert consequential damage claims in: (1) a late notice declaratory judgment action; (2) no-fault benefits recovery suits; and (3) a homeowners' policy first-party breach of contract suit. If and when we obtain or learn of written decisions addressing the scope of Bi-Economy Market and Panasia Estates, we will re-publish them here.

Meanwhile, to avoid the potential sting of consequential damages -- which by their nature are extracontractual -- in all first-party losses insurers should:

1. ask and document whether and, if so, the insured is taking steps to mitigate the loss and return as quickly as possible to pre-loss status;
2. use advance payment on condition of reservation of rights forms in offering and making advance payments; and
3. pay what you believe you owe, as soon as you determine such amount is owed, and regardless of whether there is yet an agreement or settlement on numbers in place with the insured.

Coverage Counsel has learned that Harleysville has filed a motion to reargue this case to the Court of Appeals. It won't be until late May or early June that we'll know the outcome of that motion.