10012 Holdings, Inc. v. Sentinel Ins. Co., 21f4th216

Background

10012 Holdings, Inc. (Guy Hepner), a NYC art gallery, suspended in-person operations in March 2020 under New York COVID-19 executive orders and shifted to limited online sales and packing/shipping.
The gallery had a Sentinel commercial property policy (Apr. 1, 2019–Apr. 1, 2020) with Business Income, Extra Expense, and Civil Authority coverages conditioned on “direct physical loss of or physical damage to” insured property or property in the immediate area.
Sentinel denied coverage, reasoning COVID-19 and the shutdown orders caused no physical damage to the premises or neighboring property.
10012 Holdings sued for breach of contract and declaratory relief; the district court (S.D.N.Y.) dismissed with prejudice under Rule 12(b)(6), concluding the policy required physical damage.
On appeal the Second Circuit reviewed de novo under New York law and affirmed, holding the policy language unambiguously requires actual physical loss or physical damage, not mere loss of use caused by public-health closures.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether “direct physical loss of or physical damage to” (Business Income / Extra Expense) covers loss of use from government-ordered closure	The phrase includes deprivation of use / loss of possession caused by shutdown orders (i.e., ‘‘physical loss’’ means loss of access)	The phrase requires an actual physical event or physical damage to the insured property; mere loss of use is not covered	Court held the terms require actual physical loss or physical damage; loss of use from closure is not covered (affirmed)
Whether Civil Authority coverage applies where orders closed businesses for public-health reasons	Civil Authority should pay because access was prohibited by civil authority as a direct result of COVID-19 in the immediate area	Civil Authority requires a Covered Cause of Loss to property in the immediate area (risk of physical loss/damage); orders resulted from human-health risk, not property damage; plaintiff’s closure flowed from risk at its own premises	Held Civil Authority inapplicable: orders addressed human infection risk, not direct risk of physical loss to neighboring property; plaintiff did not plausibly allege such property damage
Whether the court should certify the legal question to the New York Court of Appeals	Certification requested because issue is determinative, recurring, and unsettled at the highest state level	Decline: lower NY courts uniformly interpret the phrase to require physical damage; certification would delay many cases	Court declined certification given uniform lower-court authority and active state-court docket addressing the issue

Key Cases Cited

Roundabout Theatre Co. v. Cont’l Cas. Co., 751 N.Y.S.2d 4 (App. Div. 2002) (business-interruption clause covers only where insured’s property suffers direct physical damage)
10012 Holdings, Inc. v. Sentinel Ins. Co., 507 F. Supp. 3d 482 (S.D.N.Y. 2020) (district court opinion dismissing complaint for failure to allege physical damage)
U.S. Fid. & Guar. Co. v. Annunziata, 67 N.Y.2d 229 (N.Y. 1986) (clear policy language governs; ambiguities construed for insured)
Parks Real Est. Purchasing Grp. v. St. Paul Fire & Marine Ins. Co., 472 F.3d 33 (2d Cir. 2006) (interpretation of insurance contracts under New York law)
Affiliated FM Ins. Co. v. Port Auth. of N.Y. & N.J., 311 F.3d 226 (3d Cir. 2002) (particulates/fumes can cause physical damage that triggers coverage)
Pepsico v. Winterthur Int’l Am. Ins. Co., 806 N.Y.S.2d 709 (App. Div. 2005) (physical impairment of product constituted physical damage)
Great N. Ins. Co. v. Mt. Vernon Fire Ins. Co., 92 N.Y.2d 682 (N.Y. 1999) (separate policy sections protect different interests; terms given distinct effect)