Rye Ridge Corp. v. The Cincinnati Insurance Company

Background

Rye Ridge Corp. and Haromar, Inc. brought a proposed class action seeking insurance payments for business losses allegedly resulting from COVID-19 and government restrictions during the pandemic. Rye Ridge Corp. owns and operates a restaurant called Rye Ridge Deli in Rye Brook, New York, and Haromar, Inc. owns and operates another restaurant called Rye Ridge Deli in Stamford, Connecticut. They purchased materially identical insurance policies from The Cincinnati Insurance Company covering December 2, 2019, through December 2, 2022.

The policies provided business-income coverage for certain income losses caused by “direct accidental physical loss or accidental physical damage.” They also provided extra-expense coverage after physical loss or damage, civil-authority coverage when damage to other property led a civil authority to prohibit access to the insured property, and ingress-and-egress coverage when physical loss or damage at a neighboring property prevented access. Beginning in March 2020, New York and Connecticut orders restricted restaurant operations, initially allowing only takeout and delivery and later allowing limited outdoor and indoor dining. The plaintiffs alleged that they suffered business losses and that the insurer improperly denied their coverage claims.

Standard for dismissal

The insurer moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court accepted well-pleaded factual allegations as true for purposes of the motion but did not accept legal conclusions presented as facts. A complaint must include enough factual matter to make relief plausible rather than merely possible.

Contract claims

Applying New York contract-interpretation principles, the court held that the policies’ use of the word “physical” was unambiguous. The complaint made conclusory allegations that COVID-19 caused physical loss or damage but pleaded no facts showing that the restaurants’ property, or any other property, suffered physical loss or physical damage. The court stated that the policies did not cover mere loss of use or the business effects of forced closure without physical harm to the premises.

The court rejected the plaintiffs’ arguments that “loss” and “damage” had to mean different things, that COVID-19 posed an imminent threat to the property, and that physical loss did not require a structural change. It concluded that the complaint did not allege the physical harm required for business-income coverage. The absence of a virus exclusion did not change the result because the plaintiffs had not first pleaded that the policies applied.

Because the complaint did not allege a qualifying loss, the court also found that it failed to state claims for extra-expense coverage and ingress-and-egress coverage. The civil-authority claim failed both because the complaint did not allege physical loss or damage to other property and because it did not allege that the government orders prohibited access to the restaurants. The complaint stated that restaurants remained permitted to operate for takeout and delivery and later could offer limited outdoor dining.

Other claims

The plaintiffs also asserted breach of the covenant of good faith and fair dealing, deceptive business practices under New York General Business Law § 349 and related provisions, unfair trade practices under Connecticut General Statutes § 42-110a and related provisions, and declaratory relief. The court held that these claims rested on the alleged improper denial of insurance coverage. Because the complaint did not adequately allege that the plaintiffs were eligible for coverage, the court found that these remaining claims were not well pleaded.

Leave to amend and disposition

The plaintiffs requested permission to amend the complaint. The court assumed that amendment would be futile because the plaintiffs presumably would have pleaded facts showing physical loss or damage if they had been able to do so. Nevertheless, the court allowed them to file a letter seeking permission to replead, along with a proposed amended complaint showing the changes, by May 7, 2021, if they had additional facts that could cure the identified deficiencies.

Judge Lorna G. Schofield granted the defendant’s motion to dismiss. The court denied the plaintiffs’ request for oral argument as moot and directed the clerk to close the motion. The opinion does not state that the dismissal was with or without prejudice.