Plaza Athenee Hotel Company Limited v. Continental Casualty Company

Background

Plaza Athenee Hotel Company Limited, doing business as Plaza Athenee Hotel, sued its insurer, Continental Casualty Company, seeking coverage for business losses that it attributed to COVID-19 and related government restrictions. The hotel asserted breach-of-contract and declaratory-relief claims based on three provisions of its property insurance policy: Business Income, Extra Expense, and Civil Authority coverage.

The policy covered business-interruption losses caused by “direct physical loss of or damage to” covered property. Its Civil Authority provision applied when access to the property was prohibited by a government order issued directly because of physical loss or damage to property. The Extra Expense provision covered necessary expenses incurred to continue the business after direct physical loss of or damage to covered property.

Plaza Athenee alleged that its revenue stopped or was substantially restricted during the pandemic. It sought coverage for losses involving hotel-room bookings and its restaurant and bar. The hotel also alleged that COVID-19 in the hotel caused physical damage requiring restoration or cleanup costing more than $100,000. Continental denied coverage, stating that there was no direct physical loss of or damage to the property and that the government orders were not issued because of physical loss or damage to property.

Arguments and analysis

Continental moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally plausible claim. The court said the central question was whether COVID-19 and the related restrictions caused the type of direct physical loss or damage required by the policy.

The court rejected Plaza Athenee’s argument that losing the ability to use the property for its intended purpose was enough. Relying on Second Circuit decisions interpreting substantially similar policies, the court held that “direct physical loss” and “physical damage” require actual physical loss of or damage to insured property, not merely loss of use. The court also noted that, according to Plaza Athenee’s own allegations, the hotel was not required to shut down completely: hotels could remain open, while restaurant and bar operations were limited and room bookings were affected by reduced travel.

The court also rejected the allegation that the virus caused covered physical damage. It stated that it did not have to accept the complaint’s legal conclusion that cleanup costs amounted to covered physical damage. The court further relied on Second Circuit authority rejecting coverage based on a virus’s presence, including where the virus led to substantial cleaning and disinfecting expenses.

The court held that the Civil Authority coverage provision did not apply because the government orders responded to the danger COVID-19 posed to people, not to a risk of physical damage to property. It also held that the absence of a virus exclusion did not create coverage where the alleged losses were outside the policy’s coverage grant.

Ruling and disposition

Judge Mary Kay Vyskocil concluded that Plaza Athenee’s claims were materially the same as claims the Second Circuit had already rejected and that no factual or policy differences justified a different result. The court granted Continental’s motion to dismiss. Because the court had previously warned that Plaza Athenee would not receive another opportunity to amend, it dismissed the First Amended Complaint with prejudice. The Clerk was directed to terminate the motion and close the case.