Business closures due to New York State Executive Orders as a result of COVID-19 do not constitute “direct physical loss” or “physical damage” to property under business property insurance policies

New York



Government-Ordered Business Closures Due to COVID-19 Do Not Constitute “Direct Physical Loss” or “Physical Damage” Under Business Insurance Policies Background In 10012 Holdings, Inc. v. Sentinel Insurance Co., No. 21-80 (2d Cir. 2021), the plaintiff art gallery, 10012 Holdings (the “Gallery”), was insured by the defendant, Sentinel Insurance Company, Ltd (“Sentinel”). As a result of government restrictions on non-essential businesses due to COVID-19, the Gallery could no longer sell paintings at its physical location. The Gallery sought coverage under the Sentinel policy for its business income losses and expenses relating to the gallery’s closure (at 2-3).Sentinel denied coverage on the basis that the Gallery did not suffer direct physical loss of or physical damage to its property or property within its vicinity, as the policy required. The Gallery argued that the policy’s references to “physical damage” or “physical loss” include the loss of use of property as a result of the suspension of business operations (at 3). The United States District Court for the Southern District of New York found in favor of Sentinel. Decision The United States Court of Appeals for the Second Circuit affirmed.The Second Circuit noted that the central question was whether the policy provided coverage for the Gallery’s financial losses even though the closure did not result from physical damage to its property or the adjoining property of its neighbors.The Second Circuit, following the holding of the First Department in Roundabout Theatre Co. v. Cont’l Cas. Co., 302 A.D.2d 1, 751 N.Y.S.2d 4 (1st Dep’t 2002), noted that (at 9):Given the plain meaning of the words “direct” and “physical” and the structure of the policy overall, the Appellate Division held that the provision “clearly and unambiguously provides coverage only where the insured’s property suffers direct physical damage.”The Second Circuit stated that (at 9-10):We are unaware of any contrary authority in New York that diverges from the holding in Roundabout Theatre, which state and federal courts in New York have (at either the motion to dismiss stage or on summary judgment) uniformly applied since the start of the COVID-19 pandemic to deny coverage under similar insurance provisions where the insured property itself was not alleged or shown to have suffered direct physical loss or physical damage.The Court also noted that all New York courts applying New York law have soundly rejected the argument that business closures due to New York State Executive Orders constitute physical loss or damage to property (at 11).

April 14, 2022
10012 Holdings, Inc. v. Sentinel Insurance Co., No. 21-80 (2d Cir. 2021)
Federal Courts (2nd Circuit)