Elite Union Installations, LLC v. National Fire Insurance Company of Hartford

Background

Elite purchased a CNA Paramount insurance policy from National Fire covering its business property. The policy included business-income coverage, extra-expense coverage, and civil-authority coverage. The business-income and extra-expense provisions required a “direct physical loss of or damage to” property caused by a covered event.

After COVID-19-related New York executive orders limited in-person work and narrowed the category of essential construction work, Elite closed its office and stopped operations. Elite alleged that COVID-19 and the orders made the property uninhabitable, reduced its usable space, prevented employees and clients from occupying it, and required alterations for social distancing. Elite sought declarations that the policy covered its losses and that National Fire could not rely on the policy exclusions.

National Fire moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. National Fire argued that Elite had not alleged direct physical loss or damage, that the civil-authority provision was not triggered, and that the policy’s microbe exclusion barred coverage.

Business-Income and Extra-Expense Coverage

Applying New York contract law, the court concluded that the policy’s requirement of direct physical loss or damage meant actual, tangible harm to the insured property. Loss of use, without a physical change to the property requiring restoration, was not enough. The court relied in part on the policy’s definition of the “period of restoration,” which referred to restoring the property’s physical size, construction, configuration, or material specifications.

The court rejected Elite’s argument that a separate definition of “property damage” covering loss of use should apply. That definition appeared in the policy’s commercial general liability section, not in the business-property section governing the claims at issue. The court also noted that Elite did not allege that COVID-19 was actually present at the covered property. It held that Elite therefore failed to plead direct physical loss or damage under the business-income and extra-expense provisions.

Civil-Authority Coverage

The civil-authority provision required both an order prohibiting access to Elite’s office and a response to direct physical loss of or damage to property within five miles of the office. The court found that Elite failed to adequately allege either requirement.

The New York orders required businesses to reduce their in-person workforce and encouraged telecommuting, but the court found that they did not prohibit access to the premises. The court also found that the orders responded to the COVID-19 emergency rather than to physical damage in the surrounding area. Because Elite had not alleged physical loss to its own property, its assertion that nearby property was damaged in the same way was insufficient as well.

Microbe Exclusion

The court further held that, even if Elite had adequately pleaded coverage, the policy’s microbe exclusion would bar recovery. The policy excluded losses caused directly or indirectly by microbes, and defined microbes to include any virus. The court found that this language unambiguously covered COVID-19-related losses.

The court rejected Elite’s argument that the exclusion was ambiguous because the policy was not specifically drafted for a pandemic. It also rejected the argument that the executive orders, rather than the virus, caused the losses. Because the orders were imposed in response to COVID-19, the court found that the losses were at least indirectly caused by the virus, and the exclusion applied even when another cause contributed to the loss.

Disposition

The court granted National Fire’s motion to dismiss. It dismissed Elite’s complaint with prejudice because amendment would be futile, directed the Clerk of Court to close the motion, and directed the Clerk to close the case. Judge Lewis J. Liman entered the order on September 13, 2021.