Soundview Cinemas Inc. v. Great American Insurance Group et al., Index No. 605985/2020 (Sup. Ct., Nassau Cty February 10, 2021).
For nearly a year, Covid-19 Business Interruption lawsuits have been at the forefront of the insurance industry. Insurers, businesses, and their counsel have closely watched as courts across the country considered whether business interruption claims due to government-mandated closures are covered by property insurance. Now, New York State Court has finally weighed in, ruling that such claims are entirely outside the coverage grant – even where a property policy does not contain a virus exclusion.
Soundview Cinemas (“Soundview”), the plaintiff, operates a movie theater in Port Washington, New York. Soundview purchased a property insurance policy containing business interruption coverage, extra expense coverage, and civil authority coverage from the defendant insurer. The policy was obtained through a broker, Five Star. On March 7, 2020, the Governor of New York issued Executive Order 202, declaring a disaster emergency for the entire state of New York. On March 16, 2020, numerous businesses, including Soundview, were closed for business pursuant to the Executive Order.
Soundview submitted a claim to the defendant seeking lost business income due to the government-mandated shutdown of the movie theater. The defendant denied the claim, and in June 2020, Soundview sued its insurer and its broker, alleging that the insurer breached the insurance contract and that the broker failed to procure sufficient coverage. Defendant moved for dismissal pre-discovery, pursuant to CPLR 3211(a), based on the plain terms of the insurance policy.
Defendant argued that it did not breach its contract because the policy does not provide coverage for the closure of Soundview’s theater. Plaintiff did not allege direct physical damage to any property, and only pled that it was forced to close due to the Executive Order that closed non-essential businesses to slow the community spread of Covid-19. As such, defendant argued, Business Income coverage had not been triggered in the first instance.
The defendant further contended that the Civil Authority coverage was not triggered because Soundview was not prohibited from accessing its property, and that if access was prohibited, it was not due to direct physical loss to the property. Finally, defendant argued that the virus exclusion clearly and unambiguously barred coverage.
In opposition, Soundview contended that the virus exclusion only amended certain portions of the policy. Soundview conceded the virus exclusion applied to the Business Income And Extra Expense Coverage Form. Attempting to escape the virus exclusion, Plaintiff argued that the exclusion did not amend the Declarations, the Equipment Breakdown coverage, or the Civil Authority coverage. Soundview offered no argument to support its contention that there was direct physical loss.
In New York insurance coverage disputes, “the court first looks to the language of the policy and construes the policy in a manner that gives fair meaning to the language contained in the contract and leaves no provision without force and effect.” The Court began its analysis by emphasizing that “Federal courts in New York and throughout the country have almost uniformly held that loss of use of premises due to Covid-19 related government orders does not trigger business income coverage based on physical loss to property.” Michael Cetta, Inc. v. Admiral Indem. Co., 2020 U.S Dist. LEXIS 233419, — F. Supp. 3d —, 2020 WL 7321405, at 8 (S.D.N.Y. Dec. 11, 2020) (collecting cases). See also 10012 Holdings, Inc. v. Sentinel Ins. Co., Ltd., — F. Supp. 3d —, 2020 WL 7360252, at 2 (S.D.N.Y. Dec. 15, 2020) (collecting cases).
Relying substantially upon those two federal court decisions, the Supreme Court of New York, Nassau County dismissed the breach of contract claim against the insurer, saying:
While the Court is sympathetic to the economic consequences resulting from the closure of Plaintiffs’ movie theater, the Court concurs with the majority view that loss of use of the Premises due to COVID-19 related government orders does not constitute “direct physical loss of or damage to the property” that would trigger Business Income coverage under the Policy.
The Court ruled that the Extra Expense coverage was not triggered because it required a showing that Business Income coverage applies. Civil Authority was not triggered because access to the premises was not prohibited due to damage to the property. Accordingly, the complaint was dismissed as against the insurer with prejudice. Notably, because the plaintiff failed to show the claim fell within coverage, the Court did not even reach the party’s arguments on the virus exclusion.
The insurance broker was also dismissed from the suit. Soundview failed to show that it made a specific request to its broker for virus coverage or for pandemic-related shutdowns. Moreover, Soundview did not even allege what business income policy existed that would have afforded coverage for a business interruption claim arising from something other than a direct physical loss of, or damage to, property.
In futuro: The Soundview decision follows long-standing New York insurance law that economic loss does not qualify as property damage. The decision establishes that property insurers who denied Covid-19 business interruption claims in New York were correct in their interpretation of the insurance policy. We can expect to see this decision referenced in the near future as New York State judges rule on similar lawsuits. Going forward, property insurers can and should cite this decision to support a coverage denial, as well as arguments that discovery is not necessary. Most significantly, the decision is particularly helpful for property insurers whose policies do not include a virus exclusion because it makes clear that economic loss unrelated to any demonstrable physical alteration to the property is not covered by property insurance.
As for agent and broker liability, the decision provides a roadmap of persuasive arguments to rebut claims of agent or broker liability, particularly as there was no insurance product providing business income coverage in the absence of property damage. New York State Court’s first decision on Covid-19 business interruption claims is a clear victory for insurers and insurance brokers.