Hudson Valley Bone & Joint Surgeons, LLP v. CNA Financial Corporation

Background

Hudson Valley Bone and Joint Surgeons, LLP brought claims against CNA Financial Corporation and National Fire Insurance Company of Hartford concerning the denial of insurance coverage for losses allegedly caused by government restrictions during the COVID-19 pandemic. Hudson Valley alleged breach of contract and breach of the implied covenant of good faith and fair dealing.

Hudson Valley alleged that it operated at insured premises in Hawthorne and Yonkers, New York, and had an all-risk commercial property policy covering August 1, 2019, through August 1, 2020. The policy covered direct physical loss of or damage to covered property and included provisions for business income, extra expenses, civil-authority losses, and duties to mitigate loss.

Hudson Valley alleged that it closed its Hawthorne location from March 16 to April 13, 2020, and its Yonkers location from March 16 to an unspecified date in May 2020, based on state and local government orders. The parties agreed that Hudson Valley was an essential business and was not required to close during the pandemic. Hudson Valley nevertheless alleged that it experienced losses and expenses and that COVID-19 was present, or posed an imminent risk of being present, at its insured premises. The defendants denied the insurance claim because Hudson Valley had not reported direct physical loss or damage to the premises.

Rule 12(b)(6) Motion

The defendants moved to dismiss the first amended complaint under Rule 12(b)(6), which allows dismissal when a complaint does not plausibly state a legal claim. The court accepted well-pleaded factual allegations as true for purposes of the motion but did not accept unsupported legal conclusions.

Breach of Contract

The court applied New York contract law. It concluded that the policy’s business-income and extra-expense provisions required direct physical loss of or damage to the insured premises.

The court held that Hudson Valley had not plausibly alleged that COVID-19 caused physical harm to either premises. Relying on New York appellate authority and numerous decisions applying New York law, the court concluded that the policy language requires physical damage to the property and does not include a mere loss of use. The court also stated that the presence of coronavirus does not permanently alter property and that a temporary health hazard that can be eliminated through routine cleaning and disinfection does not constitute direct physical loss.

The court therefore held that Hudson Valley had not stated a breach-of-contract claim based on business-income coverage or extra-expense coverage. It also rejected the civil-authority claim because Hudson Valley had not plausibly alleged that government orders were issued because of direct physical loss or damage to property. In addition, Hudson Valley had not pleaded that the orders prohibited access to the insured premises; its allegations instead described a voluntary closure to develop safety procedures and obtain protective and cleaning materials.

The court rejected the claim concerning so-called “Sue and Labor” coverage. It found that the policy contained no separate Sue and Labor provision. Instead, the cited policy section required the insured to take certain steps after loss or damage and did not itself provide independent coverage. Because Hudson Valley had not otherwise plausibly alleged coverage, it had not shown a basis for reimbursement of mitigation expenses.

The court concluded that Hudson Valley had failed to state a claim for breach of contract. The court did not address the parties’ arguments concerning policy exclusions because it found no plausible allegation that coverage existed.

Implied Covenant Claim

The court dismissed the claim for breach of the implied covenant of good faith and fair dealing as duplicative. Under New York law, when that claim is based on the same facts and contractual terms as a breach-of-contract claim, it does not constitute a separate cause of action. The court found that both claims rested on the defendants’ refusal to recognize coverage for Hudson Valley’s pandemic-related lost income.

Leave to Amend and Disposition

Hudson Valley briefly requested permission to file another amended complaint if the motion was granted. The court denied that request. Hudson Valley had already amended its complaint after the defendants’ earlier motion, but the first amended complaint did not cure the identified pleading deficiencies. Hudson Valley also did not identify additional facts or explain how another amendment would cure those deficiencies.

The court granted the motion to dismiss, denied leave to amend, instructed the clerk to terminate the motion, and directed the clerk to close the case.