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Commercial Division Finds Movie Theater Not Entitled to Business Interruption Coverage for COVID-19 Closures

Last summer, we wrote about two principles of New York law that could provide a path to insurance coverage for businesses hit hard by the economic losses resulting from Governor Cuomo’s COVID-19-related shutdown orders.  Although we noted that businesses seeking such coverage would likely face an uphill battle, we proposed that recovery under certain business interruption policies might be available in New York because: 1) an insurable loss of use occurred even without physical damage to the covered property; and/or 2) the policy’s “civil authority” clause extended to closures resulting from Governor Cuomo’s orders.

Recently, in Soundview Cinemas v. Great American Insurance Group, et al., No. 605985/2020 (Sup. Ct. Nassau Cty. Feb. 10, 2021), a Commercial Division court weighed in on these issues for the first time.  Although the Soundview plaintiff raised arguments similar to those mentioned above, the court nevertheless found that the business’s policy unambiguously excluded coverage for losses resulting from the shutdown orders.  While Soundview does not preclude other New York trial courts from reaching the opposite conclusion in the future, the opinion underscores the challenges that businesses hoping to obtain such coverage will likely face going forward.

I. Background

i. The Policy

Plaintiff Soundview Cinemas Inc. (“Soundview”), operated a movie theater on Long Island.  Id. at *2.  In 2013, Soundview used certain affiliated insurance brokers (“the Brokers”) to obtain coverage from Great American Insurance Group (“Great American”).  Id.  The “Business Income” clause of Great American’s insurance policy (the “Policy”) provided, in relevant part:

We will pay for the actual loss of Business Income you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration.’ The ‘suspension’ must be caused by direct physical loss of or damage to property, at locations which are described in the [Policy.]

Id. at *3.  The Policy further included a “Civil Authority” clause, which stated in relevant part:

We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the location described in the Declarations due to direct physical loss of or damage to property, other than at the described location.  Id. at *3–4.

However, the Policy expressly excluded from coverage any “loss or damage caused by or resulting from any virus . . . that induces or is capable of inducing physical distress, illness or disease.”  Id. at *4. This exclusion applied to “all forms or endorsements that cover business income, extra expense, or action of civil authority.”  Id. at *10.

Soundview claimed that, before obtaining this coverage, the Brokers assured Soundview “it had proper coverage and was sufficiently insured for both known and unknown business risks.”  Id. at *6.  After experiencing substantial losses in the wake of Governor Cuomo’s COVID-19 shutdown orders, Soundview sought coverage under the “Business Income” and “Civil Authority” clauses.  After Great American denied coverage, and Soundview brought suit against the Brokers and Great American, among others, in the Commercial Division of Nassau County. Id. at *3.

i. Plaintiff’s Claims

Plaintiff’s suit raised a number of claims sounding in both contract (against Great American) and negligence (against the Brokers). 

As to the contract claims against Great American, Soundview sought to recover under the Policy’s (i) “Business Income” clause because it had suffered a “loss of use” of the movie theater during the period of the shutdown, even though the property suffered no direct physical damage, and (ii) the “Civil Authority” clause because the shutdown orders had “prohibit[ed] access to” the theater during the same period.  See id. at *3, 8.  Soundview argued that the Policy’s virus exclusion did not apply because this clause stated “that the exclusion applie[d] to four coverage forms in the Policy,” but not to its “declaration pages,” which also made reference to coverage for business incomes losses.  Id. at *9.

As to the negligence claims against the Brokers, Soundview alleged that if the Policy’s coverage did not extend to losses resulting from the shutdown orders, then the Brokers were liable for the “failure to properly procure insurance.”  Id. at *3.  Soundview alleged that, before obtaining the Policy, it had asked the Brokers if the Policy provided sufficient coverage “for both known and unknown business risks,” and the Brokers had assured Soundview it would be properly covered.  Id. at *6.  If the Policy did not cover its present losses, Soundview reasoned, then the Brokers had negligently advised Soundview and/or failed to procure adequate insurance.  Id. at *3, 6. 

II. The Court’s Decision

In his February 10 decision, Judge Timothy S. Driscoll of the Commercial Division of the Supreme Court, Nassau County rejected both of Soundview’s claims.

With respect to Soundview’s entitlement to coverage under the “Business Income” clause of the Policy, the court noted that the “Southern District of New York, along with several other courts   . . . have conclusively held that [such] coverage does not exist” because coverage for “direct physical loss [] or damage” extends only to “tangible, physical damage” to the subject property.  Id. at *3, 8 (emphasis added).  Although the Court noted that some “outlier decisions rendered by courts in Missouri and New Jersey” had held “that a loss of use of property constitutes a direct physical loss,” it declined to adopt this reasoning and instead followed what it called “the majority view that loss of use” alone, without corresponding physical damage, was insufficient.  Id. at *8, 14.

In addressing the Policy’s “Civil Authority” clause, the court held that this clause did not apply because, like the “Business Income” clause, it also required a showing of “direct physical loss of or damage to neighboring property.”  Id. at *14.  Soundview had not shown that any nearby properties had suffered direct physical damage, so the court found this clause inapplicable.  Id.  Because the court found that neither clause applied on the face of the Policy’s plain language, it did not reach the question of whether the Policy’s virus exclusion would also bar recovery.

Lastly, with respect to the claim that the Brokers had negligently advised Soundview and/or failed to procure adequate insurance, the Court emphasized that Soundview did “not allege that it made any inquiries about specific insurance coverage that might apply to these unprecedented times.”  Id. at *13.  The Court held that Soundview’s reference to the Brokers’ “vague assertion” that Soundview was adequately covered did “not suffice to allege that a specific request was made to the Brokers for coverage that was not provided in the Policy.”  Id. The court added that, regardless, Soundview had “not allege[d] that any such insurance coverage for pandemic-related government closures existed prior to March 2020.”  Id.  The Court thus dismissed each of Soundview’s claims.

III. Takeaways

Soundview further signals that, going forward, New York courts may be reluctant to extend business interruption coverage to the COVID-19 pandemic.  At the same time, Soundview is not binding on future courts, and the court’s analysis did not grapple with all of the potential bases for seeking business interruption coverage under certain insurance policies. 

For example, as we previously noted, the Court of Appeals recognized in Willets Point Contracting Corp. v. Hartford Insurance Group 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).  And although Soundview assumed that a plaintiff must allege some tangible damage to a specific nearby property in order to obtain civil authority coverage, future plaintiffs could argue that at least some nearby businesses doubtlessly suffered such damage at the height of the pandemic in New York.  In fact, this very assumption arguably formed the principal basis for Governor Cuomo’s shutdown orders—even if the government could not pinpoint individual businesses where the virus was present, it concluded that a critical mass of properties were so affected that a general shutdown order was necessary.

Further, Soundview is only the first of many decisions likely to issue in New York and across the country in the coming months.  In Ohio, for example, a federal district court recently certified to the Ohio Supreme Court the question of whether COVID-19-related business closures “constitute[d] direct physical loss or damage to property” within the meaning of a company’s business interruption policy.  Neuro-Commc'n Servs., Inc. v. Cincinnati Ins. Co., No. 4:20-CV-1275, 2021 WL 274318, at *1 (N.D. Ohio Jan. 19, 2021).  Many other federal and state courts, in New York and elsewhere, will continue to explore these questions in the months ahead. 

It remains to be seen whether a majority view will emerge after the dust settles on these disputes.  Nevertheless, Soundview suggests that some New York courts remain skeptical that standard business interruption policies apply to the current pandemic, and hard-hit New York businesses hoping to recover under these policies may continue to face an uphill battle. 

By Thomas P. Kurland, Dakotah M. Burns and Stephen P. Younger