Servedio v. Travelers Casualty Insurance Company of America

Background

James Servedio brought a declaratory-judgment action against Travelers Casualty Insurance Company of America. He sought a ruling that his business-income losses during the COVID-19 pandemic were covered by an all-risk insurance policy that included business-interruption coverage. The opinion states that Servedio owned a live-event sound and stage business in New York.

The policy covered business-income losses and extra expenses during a suspension of operations caused by “direct physical loss of or damage to” insured property resulting from a covered cause of loss. It also contained provisions concerning damage to dependent property and losses caused when a civil authority prohibited access to the insured premises because of physical loss or damage at other nearby properties.

The policy defined covered causes of loss as risks of direct physical loss unless limited or excluded. It also included an endorsement titled “Exclusion of Loss Due to Virus or Bacteria.” That provision stated that the insurer would not pay for loss or damage caused by or resulting from any virus, bacterium, or other microorganism capable of inducing physical distress, illness, or disease. The exclusion expressly applied to all coverage, including business-income coverage and coverage for actions by civil authorities.

In March 2020, New York’s governor declared a state of emergency and issued a stay-at-home order requiring nonessential workers to remain home. Servedio alleged that the order prevented his business from operating. He submitted an informal insurance claim and was told that coverage would be futile because he had not suffered physical damage to his property and because of the virus exclusion.

Motion to dismiss and arguments

Travelers moved under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim. The court accepted the complaint’s nonconclusory factual allegations as true for purposes of the motion and drew reasonable inferences in Servedio’s favor.

Applying New York law, the court explained that clear insurance-policy language must be enforced as written. The policyholder initially bears the burden of showing that the policy covers the loss. If coverage is shown, the insurer must establish that an exclusion is stated clearly, admits no reasonable alternative interpretation, and applies to the particular loss.

Servedio argued that a reasonable policyholder would not understand the exclusion to cover a worldwide pandemic or government orders issued in response to one because the exclusion did not expressly use the word “pandemic.” He also argued that the exclusion should apply only to damage directly caused by the virus, not to losses caused by civil-authority orders intended to control the virus. He separately relied on an insurance-industry circular and argued against applying the exclusion to the alleged losses.

Court’s analysis

The court assumed, without deciding, that the complaint plausibly alleged that the virus causing COVID-19 could cause physical loss of or damage to relevant property. Even with that assumption, the court held that the virus exclusion independently barred the alleged losses.

The court found the exclusion unambiguous. It covered losses resulting from “any virus” capable of inducing physical distress, illness, or disease, and it imposed no limitation based on the geographic scale of the outbreak or the type of governmental response. Because Servedio alleged that COVID-19 was capable of causing disease and caused the damage and losses at issue, the court held that the exclusion applied.

The court also held that the exclusion covered losses connected to New York’s stay-at-home order. The court reasoned that a reasonable businessperson would understand an exclusion for losses “caused by or resulting from any virus” to extend to immediate efforts to mitigate a viral outbreak. The court therefore rejected the argument that the civil-authority order was a separate cause that took the losses outside the exclusion.

Because the exclusion was unambiguous, the court did not consider outside evidence offered to contradict its meaning. The court also declined to apply regulatory estoppel, a doctrine that can prevent a party from taking a position inconsistent with an earlier administrative position, because the clear policy language and the rule against using outside evidence to contradict that language controlled.

Ruling and disposition

The court concluded that COVID-19 and the governmental orders issued in response to the pandemic were not covered causes of loss under the policy. It held that the Second Amended Complaint failed to state a claim for coverage and granted Travelers’ motion to dismiss the Second Amended Complaint in its entirety. The clerk was directed to enter judgment and close the case.