Business Interruption Insurance, COVID-19 and Direct Physical Damage under New York Law

By Damon Vocke and David T. McTaggart

To date, approximately 150 business-interruption insurance coverage lawsuits have been filed in federal courts arising from COVID-19 and related government-ordered restrictions.  In what appears to be the first substantive ruling on the merits in these cases, the Southern District of New York recently ruled against an insured who could not meet its burden to show a likelihood of success in establishing “property damage” due to the novel coronavirus to support its claim for injunctive relief.  See Social Life Magazine, Inc. v. Sentinel Ins. Co., 1:20-cv-03311-VEC (Dkt. 24-1, S.D.N.Y. May 14, 2020).  Judge Caproni expressed sympathy “for every small business that is having difficulties during this period of time,” but concluded that “New York law is clear” in requiring actual property damage to trigger business interruption coverage. Because the insured’s coverage theory rested on a government shutdown in the absence of any property damage, the Court denied its preliminary injunction motion, reasoning “this is just not what’s covered under these insurance policies.”

The insured Social Life Magazine is a Manhattan-based magazine publisher that closed its office on March 17, 2020, out of a concern with the developing novel coronavirus pandemic.  Three days later, Governor Mario Cuomo issued Executive Order 202.8, which required all non-essential New York businesses to reduce their in-person workforce by 100% effective March 22, 2020.  Because the insured was not an essential business, its employees were unable to return to work leaving the insured unable to meet its publication deadlines.  The insured therefore submitted a claim to Sentinel to recover approximately $200,000 in losses that it contended arose from interruptions in its business.

The insured sought coverage under two provisions, a Business Income provision and a Civil Authority provision.  The Business Income provision covered “the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ . . . [provided the suspension was] caused by direct physical loss of or physical damage to property at the ‘scheduled premises’.”  The Civil Authority provision covered “the actual loss of Business Income you sustain when access to your ‘scheduled premises’ is specifically prohibited by order of a civil authority as the direct result of a Covered Cause of Loss to property [i.e., risks of direct physical loss] in the immediate area of your ‘scheduled premises’.”  Sentinel denied coverage because the insured had not presented any proof that the novel coronavirus had caused any physical damage to its property nor that it presented the risk of physical damage to adjacent property.

The insured thereafter filed suit in the Southern District of New York, seeking payment on its policy and alleging a breach of the covenant of good faith and fair dealing.  Promptly after filing the lawsuit, the insured moved for a preliminary injunction, contending that it would suffer irreparable harm absent prompt payment under the policy.

Judge Caproni denied the insured’s motion for injunctive relief at the conclusion of oral argument on the motion.  Referencing the state appellate decision of Roundabout Theatre Co. v. Continental Casualty Co., 302 A.D.2d 1 (1st Dep’t 2002), the Court concluded that “New York law is clear” that the insured “needs some damage to the property” to obtain coverage under either provision the insured invoked.  The Executive Order was aimed at preventing the spread of the novel coronavirus, but the Court remarked that the insured had not established that either the Executive Order or the insured’s decision to close its business resulted from any property damage.  The Court distinguished Legionnaire’s disease – in which the bacteria can physically affect property – from the airborne virus which affects lungs.  The Court further rejected the insured’s anecdotal evidence that 20% of New Yorkers had tested positive for antibodies—slowing the infection rate may have caused the Governor to issue the Executive Order, but it did not damage the insured’s property, and so it could not support a claim.

Although the insured filed a notice of appeal after Judge Caproni denied its motion, it withdrew the appeal and dismissed the case several days later.  As a result, Judge Caproni never issued a written decision memorializing her bench ruling.  Moreover, given the procedural posture, the bench ruling merely found that the insured was unlikely to establish a covered loss so as to support injunctive relief, not that there was no coverage as a matter of law.  Still, while not binding as legal precedent in New York or elsewhere, this initial decision is clearly a “win” for the insurance industry and will, no doubt, be cited to support the proposition that, in the absence of property damage, there should be no coverage for business interruption claims arising out of COVID-19 and Governor Cuomo’s related executive orders.