By Daphne Zhang

Law360 (May 10, 2021, 3:35 PM EDT) -- An insurance unit of The Hartford urged the Second Circuit on Friday to reject a Manhattan gallery's bid to revive its suit seeking pandemic-related loss coverage, saying small business policyholders should rely on the federal government's help to lift them out of hardship instead of "the rewriting of insurance policies."

Sentinel Insurance Co. said the Guy Hepner art gallery cannot get coverage for its financial losses stemming from the COVID-19 pandemic and government closure orders because it never experienced any property damage as defined by the policy.

"There has been no break-in, no theft, no fire. The windows are intact. The paintings are not damaged. The gallery is not damaged. Nothing has changed physically at all," the carrier said.

Guy Hepner is also not entitled to civil authority coverage because the gallery never lost access to its properties, Sentinel said. Although the gallery was not allowed to sell paintings onsite due to state lockdown orders, it was able do that online and its staff had access to the gallery to pack and ship online purchases, the insurer said.

"Interpreting the policy to mean what it says, consistent with New York law, does not minimize the toll that COVID-19 has had on people and businesses in New York and beyond," the insurer said. "The federal government responded to the challenges of COVID-19 with a series of relief efforts, including relief for small businesses."

The Guy Hepner art gallery, which is located in Manhattan's Chelsea neighborhood, has exhibited the work of many prominent artists, including Banksy, Andy Warhol and Jean-Michel Basquiat. The gallery filed suit last June after its insurer denied its claim for pandemic-related business losses.

Last month, the Manhattan gallery told the Second Circuit that its business interruption insurance is different from a typical property damage policy that may require structural damage to trigger coverage. It argued that its policy was designed to cover the kinds of business income losses it incurred from state-mandated COVID-19 closures.

The gallery said its interpretation that an all-risk business interruption policy covers COVID-19-related losses is a reasonable one, and also asked the court to certify this core policy interpretation issue to the New York Court of Appeals.

Guy Hepner had turned to the Second Circuit after a New York federal judge ruled in December that the carrier isn't obligated to cover the art gallery and dealer's financial losses, finding that the gallery's woes didn't result from a "direct physical loss" of its property as required by its policy.

On Friday, Sentinel said the lower court judge correctly held that the gallery failed to allege that its financial losses stemmed from a covered direct physical loss.

Guy Hepner suspended in-person operations due to government orders to curb the spread of COVID-19 rather than suffering any "direct" and "physical" property damage as required by the policy, Sentinel said, adding that up to 15 New York state and federal courts have held that there is no coverage for COVID-19-related losses in property policies.

"New York courts — including appellate courts ... have found no coverage where businesses have had to suspend or modify operations for reasons not caused by a 'direct physical loss of or physical damage to property,'" the carrier said.

Representatives for the parties could not be immediately reached for comment.

Guy Hepner is represented by John V. Golaszewski of The Casas Law Firm PC.

Sentinel is represented by Jonathan M. Freiman of Wiggin and Dana LLP and Charles Michael of Steptoe & Johnson LLP.

The case is 10012 Holdings Inc. v. Hartford Fire Insurance Co., case number 21-80, in the U.S. Court of Appeals for the Second Circuit.

--Editing by Alyssa Miller.

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