J. Kleinhaus & Sons, LLC v. Valley Forge Insurance Company

Background

J. Kleinhaus & Sons, LLC, which the opinion describes as a Manhattan diamond dealer, alleged that government orders issued during the COVID-19 pandemic forced it to close its physical location from March 22, 2020, through June 7, 2020. It alleged that it conducted limited business during the closure and suffered reduced income.

Kleinhaus submitted a claim under its commercial insurance policy with Valley Forge Insurance Company. After Valley Forge denied coverage, Kleinhaus sued in New York state court, seeking a declaration requiring reimbursement for lost income and damages for breach of contract. Valley Forge removed the case to federal court and moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not adequately state a legal claim for relief.

Insurance Policy

The policy covered “direct physical loss of or damage to Covered Property” caused by a covered cause of loss. Kleinhaus relied on three provisions: Business Income, Extra Expense, and Civil Authority coverage.

The Business Income provision covered actual lost income caused by the necessary suspension of operations during a period of restoration, but required direct physical loss of or damage to property. The Extra Expense provision similarly required expenses resulting from direct physical loss of or damage to property. The Civil Authority provision required, among other things, that government action prohibit access to Kleinhaus’s premises and result from direct physical loss of or damage to property other than Kleinhaus’s premises.

Court’s Analysis

The parties agreed that New York law governed. Under that law, the policyholder bears the burden of showing that the insurance contract covers the claimed loss. The court interpreted the policy’s unambiguous terms according to their plain and ordinary meaning.

The court concluded that “direct physical loss of or damage to” property requires a negative alteration in the tangible condition of property. The policy’s definition of the “period of restoration”—which referred to property being repaired, rebuilt, or replaced—also supported a requirement of material harm needing a physical fix. The court followed its earlier analysis in a prior related proceeding and the decisions it described as the overwhelming weight of authority.

The court held that Kleinhaus’s alleged loss of use did not qualify as physical loss or damage. The government orders did not harm the tangible condition of Kleinhaus’s property or permanently deprive Kleinhaus of its property. Because Kleinhaus did not allege the required physical harm, its claims under the Business Income and Extra Expense provisions were not covered.

The court separately held that Kleinhaus had not met the requirements for Civil Authority coverage. Kleinhaus had not alleged facts showing that the orders entirely prohibited access to its premises. It also had not alleged facts showing that the orders were issued because COVID-19 caused direct physical loss of or damage to property at other locations, including nearby hospitals.

The court rejected Kleinhaus’s argument that “loss of” property meant loss of use or reduced value without physical alteration. It explained that the policy’s language still required physicality and that, even under Kleinhaus’s proposed interpretation, “loss of” would require permanent dispossession. The temporary orders did not permanently dispossess Kleinhaus of its storefront.

The court also rejected Kleinhaus’s arguments that general statements describing COVID-19 as causing property loss or damage established coverage, and that the policy language was ambiguous. The court found those statements too general and unsupported by specific facts, and concluded that the policy clearly and unambiguously limited coverage to direct physical damage.

Disposition

Judge John P. Cronan granted Valley Forge’s motion to dismiss and dismissed the case with prejudice. The court stated that Kleinhaus had neither suggested how it could correct the defects nor requested permission to amend the complaint. The Clerk of Court was directed to close the case.