506 F.Supp.3d 168
S.D.N.Y.2020Background
- Sparks Steak House (NYC) purchased an all-risk commercial property policy from Admiral covering business income, extra expense, and civil-authority losses (policy period June 26, 2019–June 26, 2020).
- Business-income and extra-expense coverage require suspension of operations “caused by direct physical loss of or damage to” insured property; civil-authority coverage requires damage to other property and a civil-authority order prohibiting access to the insured and the area immediately surrounding the damaged property (and within one mile).
- The policy contains a New York virus/bacteria exclusion and other exclusions; Sparks does not allege physical contamination of its premises.
- In March 2020 New York executive orders prohibited on-premises dining but allowed take-out and delivery; Sparks alleged business losses from those closure orders and submitted a claim, which Admiral denied (no physical loss; civil-authority prerequisites unmet; exclusions apply).
- Sparks sued for declaratory relief and breach of contract (business income, extra expense, civil authority) as a putative class action; Admiral moved to dismiss under Rule 12(b)(6).
- Applying New York law, the court dismissed all counts with prejudice because the complaint failed to plead (1) a required “direct physical loss of or damage to” property for business-income/extra-expense coverage and (2) the specific damage and a prohibition of access required for civil-authority coverage; the court did not reach application of exclusions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether shutdowns from COVID-19 closure orders constitute “direct physical loss of or damage to” property for business-income coverage | “Loss of use” of premises due to orders qualifies as physical loss | Policy requires an actual, tangible physical alteration or damage; mere loss of use is economic | Dismissed — loss of use without physical alteration does not meet “direct physical loss or damage” requirement |
| Whether extra-expense coverage applies | Sparks incurred necessary extra expenses because of closures | Extra-expense only applies if business-income coverage is triggered and requires physical loss/damage | Dismissed — fails because business-income coverage not shown; same physical-loss requirement unmet |
| Whether civil-authority coverage is triggered by closure orders | Closure orders that made on-premises patronage illegal trigger civil-authority coverage | Policy requires (a) damage to other property and (b) civil authority prohibiting access to insured and surrounding area; orders here did not allege nearby physical damage or a prohibition of access (take-out/delivery remained) | Dismissed — complaint fails to allege specific nearby property damage or that access was prohibited as required |
| Whether policy exclusions (e.g., virus exclusion) bar coverage | Sparks argued exclusions do not defeat entitlement | Admiral argued virus, law/ordinance, and act/decision exclusions apply | Court declined to reach exclusions because entitlement failed on the merits |
Key Cases Cited
- Roundabout Theater Co. v. Cont’l Cas. Co., 751 N.Y.S.2d 4 (App. Div. 2002) (business-interruption coverage limited to losses involving physical damage to insured property)
- Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., 17 F. Supp. 3d 323 (S.D.N.Y. 2014) ("direct physical loss or damage" requires actual, physical harm to premises)
- Phila. Parking Auth. v. Fed. Ins. Co., 385 F. Supp. 2d 280 (E.D. Pa. 2005) (order grounding flights did not prohibit access; no civil-authority coverage)
- Morgan Stanley Grp. Inc. v. New Eng. Ins. Co., 225 F.3d 270 (2d Cir. 2000) (insured bears burden to show contract covers loss; contract interpretation is matter of law)
- Fed. Ins. Co. v. Am. Home Assurance Co., 639 F.3d 557 (2d Cir. 2011) (interpretation of unambiguous policy language uses plain and ordinary meaning)
- Dean v. Tower Ins. Co. of N.Y., 19 N.Y.3d 704 (N.Y. 2012) (insurance contracts construed according to reasonable expectations and ordinary meaning)
- 54th St. Ltd. P’ships v. Fidelity & Guar. Ins. Co., 763 N.Y.S.2d 243 (App. Div. 2003) (civil-authority coverage requires denial of access to premises)