By Jeff Sistrunk

Law360 (December 16, 2020, 9:26 PM EST) -- A New York federal judge ruled Tuesday that a unit of The Hartford isn't obligated to cover a Manhattan art gallery and dealer's financial losses due to a government-mandated closure amid the COVID-19 pandemic, finding that the gallery's woes didn't result from a "direct physical loss" of its property as required by its policy.

U.S. District Judge Lorna G. Schofield granted Hartford unit Sentinel Insurance Co. Ltd.'s motion to dismiss the suit filed by policyholder 10012 Holdings Inc., which operates the Guy Hepner art gallery in Manhattan's Chelsea neighborhood.

The "business income" provision of Guy Hepner's all-risk property policy with Sentinel covers losses the gallery suffers due to a slowdown or closure of its business caused by the "direct physical loss of or damage to" its property, according to court documents.

Guy Hepner argued that the phrase direct physical loss — which has been heavily debated in many similar COVID-19 coverage disputes around the country — can be reasonably interpreted to include a policyholder's loss of the ability to use a property for its intended purpose. Under this interpretation, the gallery said its temporary forced closure due to COVID-19 stay-at-home orders issued by both New York Gov. Andrew Cuomo and New York City Mayor Bill de Blasio constituted a direct physical loss.

But Judge Schofield was unconvinced, saying several courts applying New York law have construed similarly-worded policy provisions as requiring tangible physical damage to the policyholder's property for business interruption coverage to apply.

"Nothing in the complaint plausibly supports an inference that COVID-19 and the resulting civil orders physically damaged plaintiff's property, regardless of how the public health response to the virus may have affected business conditions for plaintiff," the district judge wrote. "The complaint does not state a claim for 'loss' of the insured property."

Guy Hepner — which has exhibited the work of many prominent artists, including Banksy, Andy Warhol and Jean-Michel Basquiat — sued Sentinel and its parent company in New York federal court in June, after the insurer denied its claim for pandemic-related losses.

Sentinel moved to dismiss the complaint in September, saying the lack of direct physical loss or damage to the gallery's property sinks its claim under the policy's business income section and related "extra expense" provision. The insurer asserted that Guy Hepner also isn't entitled to coverage under its policy's "civil authority" provision, which applies if a government order prohibits access to the gallery in response to loss or damage at another property in the "immediate area."

Sentinel cited a number of New York cases to support its stance, most notably a state Appellate Division panel's 2002 decision in Roundabout Theatre Co. v. Continental Casualty Co . In Roundabout, the appellate panel found that a nonprofit theater was not entitled to business interruption coverage for losses it suffered when New York City denied access to its building because of a nearby construction accident. The panel said the lack of direct physical loss or damage to the theater itself precluded coverage under its policy. 

Judge Schofield agreed that the Roundabout decision and several others that have relied on its reasoning establish that, under the Empire State's law, direct physical loss or damage doesn't encompass a policyholder's loss of use of its property. For that reason, Guy Hepner's claims for coverage under the Sentinel policy's business income and extra expense provisions fail, she held.

Guy Hepner's claim for civil authority coverage fared no better. The district judge said the gallery's complaint didn't allege that the government stay-at-home orders that forced it to temporarily close its doors were issued in response to loss or damage to any neighboring properties.

"Instead, the complaint alleges that plaintiff was forced to close for the same reason as its neighbors — the risk of harm to individuals on its own premises due to the pandemic," Judge Schofield wrote. "Put differently, the complaint does not plausibly allege that the potential presence of COVID-19 in neighboring properties directly resulted in the closure of plaintiff's properties; rather, it alleges that closure was the direct result of the risk of COVID-19 at plaintiff's property."

Tuesday's decision was only the second ruling addressing an insurer's motion to dismiss a COVID-19 coverage suit under New York law, according to a pandemic insurance litigation tracker maintained by the University of Pennsylvania's Carey Law School. On Dec. 11, U.S. District Judge John P. Cronan dismissed Manhattan eatery Sparks Steak House's suit against Admiral Indemnity Co.

In addition, another New York federal judge in May denied a culture magazine's application for a preliminary injunction to compel Sentinel to immediately cover its pandemic-related losses.

As of Wednesday, state and federal courts across the country had issued 100 rulings on motions to dismiss and motions for summary judgment filed in COVID-19 coverage disputes, according to UPenn. Of those decisions, 77 have resulted in the dismissal of policyholders' complaints, while 21 have permitted insureds' claims to proceed to discovery and two have granted policyholders outright wins, UPenn found.

An attorney for Guy Hepner did not immediately respond to a request for comment Wednesday, nor did a Sentinel representative.

Sentinel is represented by Sarah D. Gordon, Charles Michael and Meghan Newcomer of Steptoe & Johnson LLP.

Guy Hepner is represented by John V. Golaszewski, Joseph N. Casas and Dennis Postiglione of The Casas Law Firm PC.

The case is 10012 Holdings Inc. v. Hartford Fire Insurance Co., case number 1:20-cv-04471, in the U.S. District Court for the Southern District of New York.

--Editing by Janice Carter Brown.

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