2 Decisions Reveal Key To Virus Insurance Coverage In NY

By Michael Scanlon and Greg Van Houten
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Law360 (January 8, 2021, 5:54 PM EST) --
Michael Scanlon
Michael Scanlon
Greg Van Houten
Greg Van Houten
In December, two pro-insurer decisions were handed down by the U.S. District Court for the Southern District of New York on the availability of business interruption coverage for COVID-19 losses.[1]

Fortunately for policyholders, the decisions, both of which were rendered on the pleadings, are of limited precedential value.

That is because neither case involved an allegation that the SARS-CoV-2 virus or someone with COVID-19 was actually present on covered property; instead, the policyholders in both cases argued that their loss of use of property — caused by government shutdown orders and not the actual presence of the virus — constituted covered physical loss or damage. 

The court disagreed in both cases, but in doing so signaled that, where there is actual contamination, there is physical loss or damage. Thus, there is hope, and a strong legal basis for coverage, for all those policyholders in New York who are able to allege that the virus or an infected person was actually present on covered property.

And, because New York administered robust testing and contact tracing programs early in the pandemic, many policyholders in New York should be well-situated to make such allegations.

In Michael Cetta Inc. v. Admiral Indemnity Co., the policyholder specifically alleged that the virus was not present at the insured premises.[2] Indeed, the policyholder alleged that the "cause of Plaintiff's ... losses ... were the Closure Orders, not because coronavirus was found in or on Plaintiff's insured property."[3]

The policyholder's rationale for this inartful pleading was fairly obvious — there was a virus exclusion in the subject policy; so, pleading the presence of the virus would have walked the claim straight out of coverage.[4] Given the absence of any allegation that the SARS-CoV-2 virus was on the premises, the court had an easy time granting the insurer's motion to dismiss for lack of "direct physical loss or damage to property."[5]

Indeed, the court held that the policyholder's "inability to fully use its restaurant [does not satisfy] the loss or damage to property prerequisite of the business income coverage provision."[6]

The court went on to distinguish a line of cases cited by the policyholder because they involved situations where a policyholder "claimed that some harmful or unwanted substance entered its premises."[7]

For example, the court noted that the policyholder in Studio 417 Inc. v. Cincinnati Insurance Co. — a pro-policyholder COVID-19 decision — specifically "alleged that COVID-19 attached to and deprived plaintiffs of their property"; thus, in that case, the policyholder "expressly alleged physical contamination."[8]

The court therefore hinted that, in New York, alleging the presence of the virus is the recipe for alleging direct physical loss or damage.

Similarly, in 11012 Holdings Inc. v. Hartford Fire Insurance Co., the policyholder art gallery did not allege that the virus was present at the insured premises.[9] Instead, the policyholder alleged that "[c]ivil authority orders issued by the Governor ... prohibited access to and occupancy of the gallery."[10]

The closest the policyholder came to alleging physical contamination was by alleging, in a rather conclusory fashion, that it "suffered a direct physical loss of and damage to its property as a result of COVID-19."[11]

With those limited allegations, the insurer moved to dismiss, asserting that, among other things, the policyholder had failed to allege that it had suffered "physical loss or damage."[12] The court granted the insurer's motion, aptly noting that "[n]othing in the Complaint plausibly supports an inference that COVID-19 ... physically damaged Plaintiff's property."[13]

The court also noted that "the Complaint does not plausibly allege ... the potential presence of COVID-19."[14] One wonders how the court would have decided the motion had the policyholder alleged that the virus was actually present on covered property.

The Cetta and 11012 Holdings decisions are instructive for New York policyholders insofar as they demonstrate what has not worked. Fortunately, there is a growing body of pro-policyholder law that demonstrates what has worked.

Most of those pro-policyholder decisions have involved allegations that the SARS-CoV-2 virus — often in the form of an individual with COVID-19 — was actually present on covered property.

The gold standard is an allegation showing an "affirmative physical presence of the virus on their premises," as seen in Dino Palmieri Salons Inc. v. State Automobile Mutual Insurance Co. in Ohio's Cuyahoga County Court of Common Pleas.[15]

The most common way to accomplish this will likely involve allegations regarding employees or co-tenants who reported being diagnosed with, or treated for, COVID-19. Businesses should also investigate whether contact tracing has indicated that an infected customer, vendor or other person has visited covered property.

Policyholders can also plead that the virus was assuredly present on coverage-triggering property given the general ubiquity of the virus and large numbers of infected individuals.

For instance, in Blue Springs Dental Care LLC v. Owners Insurance Co., the U.S. District Court for the Western District of Missouri found that a policyholder's allegation that "it is likely customers, employees, and/or other visitors to the insured properties over the recent month were infected with the coronavirus" because of "how COVID-19 is physically transmitted by air and surfaces through droplets, aerosols, and fomites that remain infectious for extended periods of time" was enough to survive a motion to dismiss.[16]

There even is authority for the proposition that all risk policies cover "any loss or damage due to the danger of direct physical loss."[17] Policyholders would thus be wise to watch for and collect statements by politicians, public health officials or medical experts about the omnipresent danger from the SARS-CoV-2 virus and people infected by COVID-19.

Alleging the presence of the virus in New York — especially in New York City — should be just as easy, if not easier, than it was for the policyholders in Palmieri Salons, Blue Springs and Studio 417.

For one, New York, unlike many other jurisdictions, administered a robust contact tracing system. New York also made testing more accessible and available than in many other parts of the country. With robust contact tracing and testing capacity, many businesses were promptly alerted when there was evidence that the virus had entered their covered property.

Moreover, especially in the early spring, the virus was everywhere in New York. Indeed, it is estimated that 22.7% of people in New York City were or had been infected with COVID-19 as of March 29.[18] With such statistics, and given the ubiquity of the virus generally, policyholders in New York should be able plead that the virus was actually present at their premises.

And, as noted above, Cetta and 11012 Holdings really only stand for one proposition — not that there is no coverage in New York for COVID-19 business interruption losses, but that New York courts are inclined to find that, when the virus is present, there is "direct physical loss or damage to property." New York policyholders should take note accordingly.



Michael Scanlon is counsel and Greg Van Houten is an associate at Haynes and Boone LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] See Michael Cetta, Inc. v. Admiral Indem. Co. , No. 20-cv-4612 (S.D.N.Y. Dec. 11, 2020); 11012 Holdings, Inc. v. Hartford Fire Insurance Co. , No. 20-cv-4471 (S.D.N.Y. Dec. 15, 2020).

[2] Pl.'s Compl., No. 20-cv-4612, ¶ 43 (S.D.N.Y. June 16, 2020).

[3] Id

[4] See id.

[5] Opinion and Order, No. 20-cv-4612, (S.D.N.Y. Dec. 11, 2020).

[6] Id. at 10.

[7] Id. at 20.

[8] Id. at 22 (citing Studio 417, Inc. v. Cincinnati Ins. Co. , No. 20-cv-3127 (W.D. Mo. Aug. 12, 2020)).

[9] See Pl.'s Compl., No. 20-cv-4471 (S.D.N.Y. June 11, 2020).

[10] Id. ¶ 9.

[11] Id. ¶ 29

[12] See generally Opinion and Order, 11012 Holdings, Inc. v. Hartford Fire Insurance Co., No. 20-cv-4471, at 5 (S.D.N.Y. Dec. 15, 2020).

[13] Id. at 5.

[14] Id. at 8.

[15] Dino Palmieri Salons, Inc. v. State Auto. Mutual Ins. Co., Case No. 20-cv-932117, Slip Op. at 8 (Ohio Ct. Common Pleas, Cuyahoga Cty. Nov. 17, 2020).

[16] Blue Springs Dental Care, LLC v. Owners Ins. Co. , No. 20-cv-00383, 2020 WL 5637963, at *4 (W.D. Mo. Sept. 21, 2020); see also Studio 417, Inc., 2020 WL 4692385, at *6 (alleging that COVID-19 particles were likely present in the physical space).

[17] Studio 417, Inc., 2020 WL 4692385, at *5 (emphasis in original; bracketing omitted) (citing and quoting authority).

[18] See Eli S. Rosenberg, et al., Cumulative Incidence and Diagnosis of SARS-CoV-2 Infection in New York, Annals of Epidemiology, 48:23-29 (Aug. 2020).

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