Sharde Harvey DDS PLLC v. The Hartford Financial Services Group Inc.

Background

Sharde Harvey DDS PLLC, a dental practice located in New York City, held a Sentinel insurance policy covering its dental offices from December 16, 2019, through December 16, 2020. The dispute concerned the policy’s Business Income, Extra Expense, and Civil Authority provisions.

The Business Income provision covered actual lost business income caused by the necessary suspension of operations during a restoration period, but only when the suspension resulted from direct physical loss of or physical damage to property at the scheduled premises. The Extra Expense provision similarly required direct physical loss or physical damage. The Civil Authority provision covered lost business income when a civil authority specifically prohibited access to the scheduled premises because of a covered loss to property in the immediate area.

During the COVID-19 pandemic, New York emergency orders restricted dental operations. Sharde Harvey alleged that patients contracted the coronavirus, confirming the virus’s presence at its offices, and that it stopped regular operations on March 20, 2020. It continued providing limited emergency services but did not provide preventive dental care. Sharde Harvey submitted a claim for business losses, which Sentinel rejected, citing the lack of direct physical damage to the property.

Procedural History

Sharde Harvey filed the action on April 29, 2020, and later filed a third amended complaint. It sought declaratory relief concerning whether the policy covered its pandemic-related losses and whether Sentinel’s denial of coverage violated public policy. Sentinel moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

The court referred the motion to Magistrate Judge Robert Lehrburger. He issued a report and recommendation recommending that the motion be granted and the complaint be dismissed, with no further amendment permitted. Sharde Harvey objected. While the objections were pending, the Second Circuit decided a case involving identical Sentinel policy provisions and similar losses from COVID-19 and New York’s emergency orders.

Analysis

The court held that the Second Circuit’s decision controlled the interpretation of the policy. Under that decision and New York law, “direct physical loss” and “physical damage” require actual physical loss of or damage to the insured property; they do not include mere loss of use when there is no physical damage.

For the Business Income provision, the court rejected Sharde Harvey’s argument that an “all-risk” policy differed materially from the policy interpreted in earlier cases. It also rejected the argument that the complaint’s conclusory statement that the virus caused “property damage” plausibly alleged physical damage. The court stated that the mere presence of COVID-19 did not cause physical damage within the meaning of the policy.

The court applied the same reasoning to the Extra Expense provision because that provision also required direct physical loss or physical damage. Sharde Harvey therefore could not obtain coverage under that provision based on the alleged pandemic-related loss of use and expenses.

The court also upheld dismissal of the Civil Authority theory. It found that the emergency orders were prompted by the danger COVID-19 posed to people, not by a risk of physical damage to property. The complaint also did not allege that the orders were prompted by a risk to property in the immediate area. In addition, the orders limited access rather than specifically prohibiting access: Sharde Harvey acknowledged that it could enter its offices to provide emergency dental services.

Declaratory Relief and Disposition

Because the relevant policy provisions did not cover the alleged losses, the court denied the requested declarations concerning coverage. It also rejected the request for a declaration that Sentinel’s denial violated public policy, noting that Sharde Harvey had not presented an argument supporting that theory and that Sentinel had followed the policy’s terms.

The court found that further amendment would be futile because Sharde Harvey had already amended three times and had not plausibly alleged physical loss of or physical damage to its property. Judge Gardephe overruled the objections, adopted the report and recommendation in its entirety, accepted the recommendation to grant Sentinel’s motion to dismiss, denied leave to amend, and directed the Clerk to terminate the motion and close the case.