New York Commercial Division Finds No Insurance Coverage for Damages Bases on Business Closure Order Issued by State Government

Nassau County Commercial Division Judge Timothy Driscoll recently found that a movie theater did not have insurance coverage for business losses, based on a COVID-19 closure order.  Nor did it have a cause of action against its broker for failing to obtain adequate insurance. The opinion in Soundview Cinemas, Inc. v. Great American Insurance Group can be found here.

In mid-March 2020, Plaintiff Soundview Cinema was closed pursuant to the Governor’s COVID-19 executive order. It has remained closed. Soundview initiated suit for business losses against its broker, insurers, and the insurers’ managing general agent.

The insurance policy had two relevant coverage provisions:

[1.]  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 Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss[.]

[2.]  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, caused by or resulting from any Covered Cause of Loss, provided that both of the following apply:

(a) access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described location is within that area but is not more than five miles from the damaged property; and

the action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.

The policy also includes a “New York — Exclusion of Loss Due to Virus or Bacteria,” providing:

  1. The exclusion set forth in paragraph B applies to all coverage under all forms and endorsements that comprise this Coverage Part, including but not limited to forms or endorsements that cover property damage to buildings or personal property and forms or endorsements that cover business income, extra expense or action of civil authority.
  2. We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease[.]

Judge Driscoll dismissed the claims against the insurers. He states:

Plaintiff’s claim against the Great American Defendants for breach of the Policy is dismissed. While the Court is sympathetic to the economic consequences resulting from the closure of Plaintiff’s 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. … Extra Expense coverage is also inapplicable, as it requires a showing that Business Income coverage applies, and is defined as expenses incurred during the period of restoration that the insured would not have incurred “if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.” … Finally, Civil Authority coverage is not triggered because access to the Premises was not prohibited due to direct physical loss of or damage to neighboring property.

Judge Driscoll also dismissed the claims against the cinema’s own broker, stating:

Plaintiff does not allege that it made any inquiries about specific insurance coverage that might apply to these unprecedented times, and certainly does not allege that it inquired about coverage for pandemic-related government closures. [Soundview’s principal’s] vague assertion that he asked if Soundview was sufficiently insured for known and unknown business risks does not suffice to allege that a specific request was made to the Insurance Brokers for coverage that was not provided in the Policy. And even assuming, arguendo, that [his] long-term friendship with [the broker] gave rise to a special relationship, Plaintiff has not plausibly alleged that the Insurance Brokers breached their duty by failing to direct Plaintiff to obtain additional coverage. Indeed, Plaintiff does not allege that any such insurance coverage for pandemic-related government closures existed prior to March 2020.

Finally, Judge Driscoll dismissed claims against the managing general agent and insurers based on the broker’s conduct, “in the absence of underlying negligence and/or a failure to properly procure insurance by the Insurance Brokers.”

The case is Soundview Cinemas, Inc. v. Great American Insurance Group, Great American Insurance Company of New York, Jimcor Agency, Inc. Five Star Coverage Corp. and Wilkinson & Krause, Supreme Court Nassau County, No. 605985-20 (Feb. 8, 2021) (Driscoll, J.)

Posted by Lee Applebaum