10012 Holdings, Inc. v. Hartford Fire Insurance Company

Background

10012 Holdings, Inc. d/b/a Guy Hepner operates an art gallery and dealership in New York City. In 2019, it obtained a business property insurance policy from Sentinel Insurance Company, Ltd. The policy included coverage for business interruption, extra expenses, and certain losses caused by orders of a civil authority.

Beginning in March 2020, the plaintiff suspended operations in response to orders from the Governor of New York and the Mayor of New York City restricting operations of non-essential businesses during the COVID-19 pandemic. The plaintiff alleged that it suffered business losses and incurred expenses as a result. It sought reimbursement under the policy, but Sentinel refused. The plaintiff asserted breach-of-contract and declaratory-relief claims.

Sentinel moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim.

Business Interruption Coverage

The policy covered business income lost because operations were necessarily suspended due to “direct physical loss of or physical damage to property.” Applying New York contract-interpretation principles, the court concluded that this language required physical harm to the insured property. New York decisions cited by the court did not treat loss of use caused by government-ordered closures as “direct physical loss” or physical damage.

The court held that the complaint did not plausibly allege that COVID-19 or the resulting government orders physically damaged the plaintiff’s property. The court rejected the plaintiff’s arguments that the policy was ambiguous, that coverage for “Covered Property” extended to lost business generally, and that the policy’s all-risk structure required coverage. The policy’s plain language did not cover business losses resulting from the civil orders without direct physical loss or physical damage.

Extra Expense Coverage

The policy’s extra-expense coverage applied to expenses incurred during a restoration period following direct physical loss or physical damage to covered property. Because the complaint did not allege a direct physical loss, the court held that it failed to state a claim for extra-expense coverage.

Civil Authority Coverage

The civil-authority provision covered business-income losses when access to the plaintiff’s premises was prohibited by a civil-authority order as the direct result of a covered cause of loss to property in the immediate area.

The court found that the complaint did not plausibly allege this required direct connection. It was plausible that the risk of COVID-19 on neighboring properties led authorities to restrict access to those properties, but the complaint alleged that the plaintiff’s premises were closed because of the risk of COVID-19 on the plaintiff’s own premises. It therefore did not allege that the closure of the plaintiff’s premises directly resulted from a covered condition on neighboring property.

The court also noted, although it said this was not necessary to its decision, that the policy excluded coverage for pollutants and for costs associated with responding to bacteria or viruses. Reading the policy as a whole, the court concluded that the civil-authority provision addressed closures caused by dangerous conditions on neighboring property, not the presence or risk of harmful substances on the insured’s own property.

Leave to Amend and Disposition

The plaintiff requested permission to amend its complaint. The court denied that request because the policy did not provide coverage for the loss alleged. Judge Lorna G. Schofield granted Sentinel’s motion to dismiss with prejudice, directed the Clerk of Court to close the motion at Docket Number 19 and the case, and entered the opinion and order on December 15, 2020.