Mario Badescu Skin Care, Inc. v. Sentinel Insurance Company, Limited

Background

Mario Badescu Skin Care, Inc. brought a breach-of-contract action against Sentinel Insurance Company. Mario Badescu operated a Manhattan salon providing personal-care services. It alleged that the COVID-19 pandemic, employee infections, and government orders caused it to suspend or reduce operations and suffer losses of at least $2,992,256.38.

Sentinel had issued a policy covering the salon through July 27, 2020. The policy’s Business Income, Extra Expense, and Business Income from Dependent Properties provisions required direct physical loss of or direct physical damage to property. Its Civil Authority provision covered business-income losses when a civil-authority order specifically prohibited access to the premises because of a covered physical-loss risk to property in the immediate area. The policy did not contain a virus exclusion.

Motion and governing law

Sentinel moved to dismiss the amended complaint under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim. The court exercised diversity jurisdiction and applied New York law. Under New York law, the policyholder bears the initial burden of showing that the insurance contract covers the claimed loss, and unambiguous policy language must be enforced as written.

Business Income, Extra Expense, and Dependent-Property Coverage

The Court held that Mario Badescu did not plausibly allege the direct physical loss or physical damage required by these provisions. It explained that the policy language refers to a negative change in the tangible condition of property, not merely the inability to use otherwise unaltered property.

The Court rejected Mario Badescu’s argument that “physical loss” included loss of use. It relied on New York authority holding that similar language requires physical damage to the insured property. The Court also rejected the argument that the presence of COVID-19 itself supplied the required physical damage. Even accepting the alleged presence of the virus on the premises, the Court stated that COVID-19 is short-lived, can be eliminated through routine cleaning and disinfection, and does not alter the property itself. The Court distinguished contaminants that persist and damage a building.

The absence of a virus exclusion did not create coverage. The Court explained that an exclusion can remove coverage but cannot create coverage through a negative inference. Because Mario Badescu had not shown that the policy initially covered its losses, the Court did not need to address exclusions.

Civil Authority Coverage

The Court also held that Mario Badescu did not plausibly plead coverage under the Civil Authority provision. That provision required both an order specifically prohibiting access to the salon and a direct connection between the order and a risk of physical loss to property in the immediate area.

As to the first requirement, the Court found that the alleged orders restricted access by members of the public and reduced the in-person workforce but did not completely prohibit access to the premises. As to the second, the Court found that the orders were aimed at limiting the spread of COVID-19 and the risk of harm to people, rather than responding to physical harm to other property in the surrounding area. The Court concluded that the alleged orders therefore did not trigger Civil Authority coverage.

Disposition

Judge Analisa Torres granted Sentinel’s motion to dismiss. The Court dismissed the amended complaint with prejudice, finding that Mario Badescu had already amended once and that further amendment would be futile. The Clerk was directed to terminate pending motions, vacate conferences, and close the case.