By Shawn Rice

Law360 (April 23, 2021, 8:51 PM EDT) -- Two New York federal judges shut down business interruption suits Friday against insurers for losses from the COVID-19 pandemic and related government orders, adding to a pile of decisions against policyholders in the Empire State.

U.S. District Judge Geoffrey W. Crawford and U.S. District Judge Lorna G. Schofield each followed similar lines of authority in New York in a pair of rulings shutting down business owners' claims that their losses should be covered by insurance, finding that the provision calling for "direct physical loss or damage" in the policies requires physical damage and that the presence of the coronavirus and government orders don't cause physical loss.

The rulings in the two unrelated cases saw a pair of businesses, a martial arts studio and a deli, join a litany of policyholders in New York that have already lost to insurance companies in similar suits filed by a casino owner, a dental practice and a catering company.

In one notable exception, real estate holder Thor Equities dodged insurer Factory Mutual Insurance Co.'s bid for judgment on the pleadings earlier this spring when U.S. District Judge Analisa Nadine Torres found ambiguity in the insurer's contamination exclusion.

But in most of the rulings issued in the business interruption disputes thus far, federal judges in the Empire State have ruled for the insurers.

Peter Halprin of Pasich LLP, who represents policyholders, told Law360 on Friday there haven't been many state court rulings in New York, but federal courts "have ruled many times."

These federal courts in New York "have developed a bit of a federal common law by largely relying on each other for authority without looking to state courts," Halprin said.

John Ewell of Gerber Ciano Kelly Brady LLP, who represents insurers and policyholders, told Law360 on Friday that New York federal courts are understanding the physical loss issue and this bodes well for insurers — even for those without a virus exclusion.

"Before these rulings, businesses and policyholders thought they had a chance of securing coverage where policies do not have a virus exclusion," Ewell said. "The argument being, 'If it's not excluded, it's expressly included.' It is now clear that argument fails because of one word: 'physical.'"

Michael Savett of Clark & Fox, who represents insurers, told Law360 on Friday that the current landscape has been favoring insurers in New York courts as well as in federal courts around the country.

"Unless the Second Circuit or the Appellate Division goes against the grain of the many trial court decisions rejecting the COVID business interruption claims, it's unlikely that policyholders in New York will see relief," Savett said.

In the one of the rulings Friday, Judge Crawford tossed Kim-Chee LLC and Yup Chagi Inc.'s suit against Philadelphia Indemnity Insurance Co. for pandemic-related losses to their New York martial arts and fitness studio, Master Gorino's Pil-Sung Tae Kwon-Do, which the business owners alleged were caused by government-imposed occupancy limits.

Without allegations that "the virus persists within insured premises in the manner of gasoline or other contaminants, the reduction in business activity mandated by the state shutdown orders is best described as an instance of widespread economic loss due to restrictions on human activities," the judge said.

Judge Crawford also found coronavirus particles didn't physically alter the martial arts studio's property triggering coverage.

But Christopher M. Berloth of Duke Holzman Photiadis & Gresens LLP, counsel for Kim-Chee and Yup Chagi, told Law360 on Friday that his clients were disappointed with the ruling and will appeal to the Second Circuit.

"At the end of the day, we continue to set forth that policyholders should get the benefit of the bargain which they entered — in other words, the insurance carriers should provide coverage for these claims," Berloth said. "If they wanted to exclude COVID-related losses, they could have done so."

In the other Friday ruling, Judge Schofield ruled that Rye Ridge Corp. and Haromar Inc. couldn't force The Cincinnati Insurance Co. to compensate them for their business interruption losses at Rye Ridge Delis, located in both New York and Connecticut.

"The key word in the policies is 'physical,' which in this context is unambiguous. The complaint makes conclusory allegations that plaintiffs' properties experienced physical loss and/or physical damage from the presence of COVID-19," Judge Schofield said, finding no such alleged facts by the deli owners.

These deli restaurants also couldn't tap into civil authority coverage for their losses, according to Judge Schofield. Subsequent government orders allowed the owners to open for take-out and delivery and permitted some restaurants to serve customers outdoors under limited restrictions, the judge said.

Representatives for Cincinnati told Law360 on Friday that the insurer recognizes the challenges facing small businesses and continues to offer support for families and businesses in its agents' communities.

"We appreciate the court hearing our case and agree with its decision that the coronavirus does not constitute a direct physical loss — a prerequisite for coverage — because it does not physically alter the property," the insurer's representative said.

Rye Ridge and Haromar are represented by Robert J. Nelson, Fabrice N. Vincent, Jacob H. Polin, David Stellings and Gabriel Panek of Lieff Cabraser Heimann & Bernstein LLP and Alexandra L. Foote of Law Office of Alexandra L. Foote PC.

Kim-Chee and Yup Chagi are represented by Christopher M. Berloth and Thomas D. Lyons of Duke Holzman Photiadis & Gresens LLP.

Cincinnati is represented by Edward Fogarty Jr. of Litchfield Cavo LLP.

Philadelphia Indemnity is represented by Sharon Angelino of Goldberg Segalla LLP.

The cases are Rye Ridge Corp. et al. v. The Cincinnati Insurance Co., case number 1:20-cv-07132, in the U.S. District Court for the Southern District of New York, and Kim-Chee LLC et al. v. Philadelphia Indemnity Insurance Co. et al., case number 1:20-cv-01136, in the U.S. District Court for the Western District of New York.

--Additional reporting by Melissa Angell and Daphne Zhang. Editing by Abbie Sarfo.

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