In the wake of punishing economic losses caused by Covid-19-related shutdown orders, business owners across New York have turned to their insurers for temporary relief in the form of business interruption coverage. If recent reports are any indication, however, New York businesses will face an uphill battle.
Nevertheless, courts may see litigation if business owners seek coverage under two principles of New York law, which might provide a path to recovery under certain policies.
In short, coverage could be available in New York because:
- an insurable loss of use occurred even without physical damage to the covered property; and/or
- the policy’s civil authority clause extends to closures resulting from a shutdown order.
Loss of Use Limitations
Most business interruption policies limit recovery to losses attributable to some “direct physical loss or damage” to the subject property. See, e.g., Roundabout Theatre Co. v. Cont’l Cas. Co., 302 A.D.2d 1, 3 (1st Dep’t 2002). Under some policies, the definition of “direct physical loss or damage” may preclude coverage for any “loss or damage” other than actual, physical alteration to the property.
In other policies, the language may be expansive enough to include non-physical losses. In Willets Point Contracting Corp. v. Hartford Insurance Group, for example, the New York Court of Appeals recognized that, in some cases, a policy’s definition of “property damage” may be “broad” enough to “provide coverage for loss of use of tangible personal property without physical damage thereto.” 53 N.Y.2d 879, 881 (1981) (emphases added).
To date, however, no New York court has extended business interruption coverage to a loss of use. In fact, the First Department rejected such a claim for coverage in Roundabout, 302 A.D.2d 1, supra.
There the plaintiff sought coverage after the city denied public access to the plaintiff’s business due to a nearby construction accident. However, after reviewing multiple interdependent sections of the policy, the court held that the language “unambiguously provide[d] coverage only where the insured’s property suffer[ed] direct physical damage.”
For the same reason, the U.S. District Court for the Southern District of New York recently denied a preliminary injunction sought in aid of a claim for business interruption coverage. Citing Roundabout, the court reasoned that the plaintiff’s damage resulted from the Governor’s order “to stay home”—not from “any particular damage to [the plaintiff’s] specific property.” See Social Life Magazine Inc., v. Sentinel Insurance Co., Case No. 20-cv-3311, DE 24-1 at 8 (S.D.N.Y. 2020).
Insureds seeking coverage in New York will have to explain why Roundabout does not dispose of their claims. Doing so may prove challenging in many cases.
Still, the Roundabout court’s analysis was limited to whether the policy included loss of use resulting from off-site damage—not loss of use that, as with owners affected by Covid-19, arguably resulted from unsafe conditions at the insured’s own property. Further, the Roundabout court reached its conclusion only after canvassing multiple sections of the policy.
Likewise, in future suits, courts will need to conduct a review tailored to the specific policy terms at issue. Nevertheless, the reasoning in Roundabout and Social Life could pose significant obstacles for insureds going forward.
Civil Authority Coverage
Even if loss of use otherwise qualifies as “physical loss or damage,” some policies may still contain exclusions for damage attributable to viruses.
While those exclusions might extend to the business interruption coverage itself, most policies also contain a related provision known as “civil authority coverage,” which applies in cases where a government order “forbids or prevents access to the insured’s premises.” See Peter E. Kanaris, Analytical Approach to Business Interruption, Extra Expense, and Civil Authority Coverage Issues, 43 Tort Trial & Ins. Prac. L.J. 113, 132–33 (2007).
If a policy’s virus exclusion does not expressly extend to such orders, then the insured could potentially recover under this provision even if the policy otherwise excludes coverage for viruses.
Civil authority coverage may also permit business owners to avoid the definitional issues raised in Roundabout. Unlike traditional business interruption coverage, civil authority coverage often extends not just to the owner’s property, but also to adjacent premises. Even if courts cannot find that a particular business was contaminated with Covid-19, they may still accept that at least some nearby businesses were so contaminated.
In fact, this very assumption arguably forms the basis for the closure order—although the government could not pinpoint specific businesses where the virus was present, it concluded that a critical mass of properties were so affected that a general shutdown order was necessary. Accordingly, Covid-19-related shutdown orders could fall within the ambit of some civil authority provisions.
The decisions in Roundabout and Social Life signal that New York courts may be reluctant to extend business interruption coverage to the current pandemic. And, of course, the viability of any claim will depend on the specific language of each policy.
Still, certain principles of New York law could permit some insureds to argue that: 1) loss of use counts as “physical loss or damage” within the meaning of the policy; and/or 2) civil authority coverage extends to closures resulting from the shutdown, regardless of whether the property suffered physical damage.
Although largely untested in the courts, these two legal theories may be where business owners hit hard by Governor Cuomo’s recent shutdown orders go to seek recovery.
The opinions and views expressed in this article are the opinions of the authors and do not reflect the opinions or views of the Firm or its clients.
Stephen P. Younger is a partner at Patterson Belknap Webb & Tyler LLP who helps lead the firm’s insurance coverage practice. He is a past president of the New York State Bar Association and serves as editor of Bloomberg’s Commercial Division Practice Guide.
Thomas P. Kurland is counsel at the firm and concentrates his practice in the areas of products liability and commercial litigation.
Dakotah Burns is an associate at the firm who handles complex commercial litigation.