John Gore Organization, Inc. v. Federal Insurance Company

Background

The John Gore Organization, Inc. sued Federal Insurance Company for breach of contract and declaratory relief. Gore alleged that Federal’s business-interruption policy covered losses connected to the COVID-19 pandemic and government orders that closed or restricted theater operations. Federal had denied Gore’s claim.

The policy’s Business Income and Extra Expense provision covered losses caused by an actual or potential impairment of operations resulting from “direct physical loss or damage” to property. Its Civil Authority provision covered losses caused by a civil authority’s prohibition of access to Gore’s premises or dependent business premises, when that prohibition resulted from direct physical loss or damage to nearby property. The policy did not define “direct physical loss or damage,” and the opinion states that it contained no virus exclusion.

Gore alleged that COVID-19 was present at or near some premises and venues, that the virus could attach to surfaces, and that government orders caused theater performances to be canceled. Federal argued that these allegations did not establish the physical loss or damage, or the prohibited access, required by the policy. Federal also argued that Gore’s request for a declaration was duplicative of its breach-of-contract claim.

Report and recommendation and objections

The assigned magistrate judge recommended granting Federal’s motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legally plausible claim. The recommendation concluded that COVID-19-related loss of use and shutdowns did not constitute direct physical loss or damage under the policy. It also concluded that Gore had not adequately alleged coverage under the Civil Authority provision because access was limited rather than prohibited and because the orders were not shown to have resulted from physical loss or damage to property. The recommendation further treated the declaratory-judgment claim as duplicative and recommended allowing amendment.

Gore objected. It argued that the magistrate judge had misapplied New York case law, improperly treated factual issues as resolved against Gore, and failed to give sufficient weight to the presence of COVID-19 on the property, statements in some government orders, and the policy’s lack of a virus exclusion. Gore also argued that the government orders prohibited access for the properties’ intended uses even though employees could enter the premises.

Court’s analysis

The court applied New York law and considered the Second Circuit’s decision in 10012 Holdings, Inc. v. Sentinel Insurance Co., Ltd. The court explained that controlling New York-law precedent requires actual physical loss of or physical damage to insured property; the phrase does not extend to mere loss of use without physical damage. The court held that allegations about the presence of COVID-19, without allegations that the buildings or property were damaged to the point of repair, replacement, or total loss, were insufficient under that standard.

The court also rejected Gore’s reliance on remediation measures such as hand-sanitizing stations, plexiglass shields, COVID-related signs, enhanced heating and ventilation systems, health screening, and contact tracing. It agreed that these measures were intended to protect people rather than replace or repair damaged property. The absence of a virus exclusion did not create coverage where the policy’s coverage requirements were not met.

Regarding Civil Authority coverage, the court found no error in concluding that the policy was not triggered. Gore did not dispute that individual employees could access the premises and dependent venues during the relevant period, so the court held that access was not prohibited for purposes of the provision. The court also held that Gore’s allegations did not plausibly show that the shutdown orders were the direct result of physical loss or damage to property; the orders instead responded to the pandemic and the danger it posed to people.

Disposition

The court overruled Gore’s objections and adopted the recommendation. It dismissed Gore’s breach-of-contract claim because the alleged losses were not covered under either the Business Income or Civil Authority provision. It dismissed the declaratory-judgment claim for the same reasons because Gore did not have a viable substantive coverage claim.

The court granted leave to amend under the applicable liberal amendment standard. It stated that amendment appeared unlikely to succeed, particularly because Gore likely could not demonstrate direct physical loss or damage, but allowed Gore to submit a motion for leave to file an amended complaint by April 11, 2022. The proposed amended complaint had to be consistent with the reasoning of the order.