Gammon and Associates Inc. v. National Fire Insurance Company of Hartford

Background

Gammon and Associates Inc. operates a marketing and advertising agency with offices in New York and California. National Fire Insurance Company of Hartford issued Gammon a policy covering the period from November 10, 2019, to November 10, 2020. The policy included Business Income, Extra Expense, and Civil Authority provisions.

After government officials issued COVID-19-related emergency and closure orders, Gammon alleged that it closed its offices on March 17, 2020, and suffered lost business income and additional expenses. The opinion states that Gammon did not allege that COVID-19 was present in its offices or among its employees. Gammon sought declaratory relief under 28 U.S.C. § 2201(a), asking the court to determine that the policy covered its losses.

National Fire 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. The parties agreed that New York substantive law governed the policy’s interpretation, although the court stated that the result would be the same under California law.

Business Income and Extra Expense Coverage

The policy covered business-income losses caused by the necessary suspension of operations when the suspension resulted from direct physical loss of or damage to property at the described premises. It similarly covered certain extra expenses resulting from that required physical loss or damage.

The court rejected Gammon’s argument that COVID-19 intruded on its offices and caused direct physical loss or damage. It found that Gammon’s assumption that COVID-19 must have been present because the offices were in high-density buildings was speculation, not a sufficient factual allegation. The court also considered Gammon’s alternative position that coverage should apply even without COVID-19 being present in the offices.

Interpreting the policy under New York law, the court held that the phrase direct physical loss of or damage to property requires actual physical harm to the property. It does not include loss of use when the property remains physically unharmed. The court therefore held that Gammon’s inability to use its offices because of the pandemic did not trigger Business Income or Extra Expense coverage.

Civil Authority Coverage

The Civil Authority provision required a covered cause of loss to cause direct physical loss of or damage to property other than Gammon’s premises, followed by civil-authority action that prohibited access to Gammon’s premises.

The court held that Gammon did not adequately allege this required chain of events. Gammon referred generally to damage to other businesses and argued that the government orders were issued because of coronavirus-related property damage. But the court found those allegations too vague and concluded that the orders were issued because of the risk of harm to people, not because surrounding properties had suffered physical damage. The court also rejected Gammon’s argument that an order making office use illegal necessarily prohibited access in the way required by the policy. The court concluded that the alleged losses were not covered by the Civil Authority provision.

Other Requests and Disposition

Because the policy did not provide coverage for the alleged losses, the court denied Gammon’s request for leave to amend the complaint, finding amendment would be futile. The court also denied Gammon’s request for discovery concerning alleged factual issues. The court did not address the parties’ arguments about policy exclusions because it found that Gammon had not established an initial entitlement to coverage.

The court granted National Fire’s motion to dismiss and directed the Clerk of Court to close the motion. Judge George B. Daniels issued the memorandum decision and order on August 31, 2021.