The second district has now joined the fifth, sixth, seventh, eighth, ninth, tenth and eleventh districts in confirming that there is no insurance coverage for business interruption losses caused by the Covid-19 pandemic and associated government orders. in 10012 Holdings Inc. v. Sentinel Insurance Co. Ltd., No. 21-80-cv, slip. dad. (2d Cir. December 27, 2021), New York City’s Fine Art Gallery and Sale has sought coverage under three provisions of its insurance policy for losses and additional expenses it incurred when it suspended operations under government restrictions on non-essential businesses during the Covid-19 pandemic. When the insurance company refused coverage, the insured filed a claim confirming the breach of contract claims and the declaratory judgment. The United States District Court for the Southern District of New York dismissed the claims with bias, and the insured appealed to the United States Court of Appeals for the Second Circuit.
On appeal, the insured argued that he was entitled to coverage under the business income and additional expense provisions of his policy because the policy’s use of the term “direct material loss,” which appeared in both clauses and was not specified in the policy, was the circumstances in which the insured was denied access only to his business property . However, the court noted that all New York courts applying New York law had properly rejected the argument that closing businesses due to New York State executive orders constituted material loss or property damage. Accordingly, the Court held that under New York law, the terms “direct physical loss” and “material damage” in the items of business income and additional expenses did not extend to mere loss of use of the building, since there was no physical damage to these buildings; These terms instead require actual physical loss or damage to the property of the insured. Because the insured only claimed that he lost access to his property as a result of Covid-19 and government shutdown orders, and not that he halted operations due to physical damage to his property, the court held that the insured could not recover under either business income or additional expense provisions.
Similarly, the court decided that the insured is not entitled to coverage under the civil authority clause in the policy. First, the court noted that this provision required a “covered cause of loss,” which was contingent on showing that the civil authority’s orders resulted from the risk of direct physical loss of property in the vicinity of the gallery. By contrast, the executive orders in question were a result of the Covid-19 pandemic and the harm it causes to humans, not the risk of physical damage to property. The court confirmed that closing a showroom due to the possibility of human injury is not considered a “risk of direct material loss”. Second, even assuming that Covid-19 itself represented a “risk of direct material loss,” coverage under the civil authority’s judgment required that executive orders prohibiting access to the insured’s premises were motivated by the risk of damage to adjacent buildings. However, the Insured’s complaint does not reasonably claim that the potential presence of Covid-19 in neighboring properties directly led to the closure of the Insured’s property; Instead, it claimed the shutdown was a direct result of the risk of contracting Covid-19 on the insured’s property. Accordingly, the court concluded that the insured also could not recover under the civil authority clause of the policy.
with 10012 CollectiblesAnd the The Second Circuit has now joined seven other federal appeals courts in ruling that business losses from Covid-19 and related closure orders do not constitute direct material loss or property damage and, therefore, do not result in coverage under commercial property policies.
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