Michael Cetta, Inc. v. Admiral Indemnity Company

Background

Michael Cetta, Inc., doing business as Sparks Steak House, filed a putative class action against Admiral Indemnity Company. Sparks alleged that Admiral breached an all-risk commercial property insurance policy by refusing to cover losses caused by New York State and New York City orders that stopped restaurants from serving customers on the premises during the COVID-19 outbreak. The orders allowed takeout and delivery.

Sparks sought declaratory relief and damages for breach of contract under six counts. Counts One and Two concerned business-income coverage; Counts Three and Four concerned civil-authority coverage; and Counts Five and Six concerned extra-expense coverage. Sparks also purported to bring the case for other similarly situated entities.

Policy Provisions

The business-income provision covered actual lost business income caused by a necessary suspension of operations, but only when the suspension was caused by “direct physical loss of or damage to” covered property. Extra-expense coverage applied only if business-income coverage applied and likewise required physical loss or damage.

The civil-authority provision covered business income and extra expenses when a covered cause of loss damaged property other than the insured premises, a civil authority prohibited access to the insured premises, and access to the area immediately surrounding the damaged property was also prohibited, among other requirements.

The policy also contained virus, ordinance-or-law, and act-or-decision exclusions. Because the court found that Sparks had not shown that any coverage provision applied, it did not decide whether those exclusions independently barred coverage.

Court’s Analysis

The court applied New York law. On the business-income claim, it held that “direct physical loss of or damage to” property required an actual, tangible alteration of the property. Sparks alleged that it could not fully use the restaurant because of the closure orders, but it did not allege that the restaurant had been physically damaged, contaminated, or changed. The court therefore rejected Sparks’s argument that loss of use alone satisfied the policy requirement.

The court also relied on the policy’s reference to a “period of restoration,” which contemplated repairing, rebuilding, or replacing damaged property. In the court’s view, that language supported requiring physical harm rather than temporary loss of use. The court distinguished cases involving harmful substances that entered and made premises uninhabitable because Sparks alleged that COVID-19 was not found on or in its property.

Because business-income coverage did not apply, the extra-expense claims also failed. The court additionally explained that Sparks had not alleged the physical damage to nearby property required for civil-authority coverage. Sparks referred generally to other businesses but did not identify a specific damaged neighboring property. The court further found that the closure orders did not completely prohibit access: the restaurant could continue takeout and delivery, and Sparks did not allege that employees, delivery workers, or customers were barred from accessing the address.

Disposition

The court granted Admiral’s Rule 12(b)(6) motion to dismiss. It dismissed Counts One and Two concerning business-income coverage, Counts Five and Six concerning extra-expense coverage, and Counts Three and Four concerning civil-authority coverage. The court did not reach class certification or Sparks’s request concerning future civil-authority orders. Judge John P. Cronan concluded that amendment would be futile and dismissed the case with prejudice. The Clerk was directed to close the case.