Businesses that suffered lost income as a result of COVID-19 and related government shutdown orders have faced an uphill battle recovering on property insurance policies.  In New York, the Second Circuit’s December 27, 2021 opinion in 10012 Holdings, Inc. DBA Guy Hepner v. Sentinel Insurance Company, Ltd., Dkt. No. 21-80-cv, 21 F.4th 216 (2d Cir.) is an important part of that legal landscape.  That is because 10012 Holdings held that language covering “physical damage” or “physical loss” commonly found in commercial property policies does not extend to loss of use where there has been no physical damage to the insured premises.  See 10012 Holdings, 21 F.4th at 220-23.

The direction of the law has left insureds to examine their policy language for other theories to claim insurable COVID-related losses.  Looking ahead, if your business is considering purchasing or renewing a commercial property policy, you may consider adding explicit coverage for loss of use due to communicable disease to protect against future losses not involving physical property damage as traditionally conceived.

The St. George Hotel Appeal

On December 20, 2021, just one week before the Second Circuit would issue its 10012 Holdings opinion, Judge Diane Gujarati of the Eastern District of New York seemed to have presaged the Second Circuit’s holding by granting an insurer’s motion to dismiss a policyholder’s COVID coverage suit in St. George Hotel Associates, LLC v. Affiliated FM insurance Company, Dkt. No. 20-cv-5097.  In the St. George Hotel opinion, Judge Gujarati relied on the policy’s requirement of “physical loss or damage,” and held that the plaintiff failed to allege “physical damage as that term is ordinarily understood.”  EDNY Opinion (ECF 42) at 11-12.

In an appeal filed in May, the hotel owner argues that Judge Gujarati erred by failing to recognize the interplay of two separate policy extensions that it argues afford coverage for the hotel’s COVID losses.  See Appeal Br. (ECF 36), Case No. 22-114 (2d Cir.).  While the district court considered the hotel owner’s “Communicable Disease” policy extension, this extension only covered specific locations, the hotel itself not among them.  See EDNY Opinion (ECF 42), Dkt. No. 20-cv-5097 at 11-12; Appeal Br. (ECF 36), Case No. 22-114, at 15-16.  In its appeal, the hotel owner argues that a separate policy extension protecting against losses from damage to nearby “Attraction Properties” (properties that bring business to a covered location) should be read together with the Communicable Disease extension to provide coverage to losses stemming from the shutdown of local colleges that brought student housing business to the hotel.   See Appeal Br. (ECF 36), Case No. 22-114, at 15-17.  At the district court, Judge Gujarati rejected this theory, finding that the Communicable Disease extension is separate from the Attraction Policy extension and does not incorporate it in any way.   EDNY Opinion (ECF 42) at 16.  The Second Circuit will now consider whether this reasoning was in error.

The Campagnola Restaurant Case

Meanwhile, the Second Circuit’s 10012 Holdings decision is already leading to dismissals of virus coverage suits in the district courts.  On May 4, 2022, Judge Ronnie Abrams of the Southern District of New York dismissed a complaint filed by the owners of Campagnola, an Italian restaurant on Manhattan’s Upper East Side, after its insurer denied coverage for losses incurred during the early pandemic shutdown.  See Opinion & Order (ECF 45), Camp 1382 LLC v. Lancer Ins. Co., Dkt. No. 20-cv-3336-RA.  Judge Abrams relied on 10012 Holdings, concluding that coverage was not available under the policy at issue, because it required “direct physical loss” or “physical damage” to the insured property.  See id. at 4-6.

As Rules Solidify, Businesses Adjust

At the legal rules surrounding virus coverage finally solidify in the New York area, it may be that only businesses with pre-pandemic policies uniquely drafted to cover losses not caused by “physical damage” stand to recover COVID losses.  With respect to future policies, businesses may use this lesson to add explicit communicable disease and loss-of-use coverage to their commercial property insurance – perhaps only to find that the next serious loss event was equally unforeseen in retrospect.