Jordache Enterprises, Inc. v. Affilated FM Insurance Company

Background

Jordache Enterprises, Inc. and affiliated and subsidiary entities sued Affiliated FM Insurance Company for breach of an insurance contract. The plaintiffs alleged that Affiliated FM improperly denied coverage for losses connected to the COVID-19 pandemic. The plaintiffs included retail, outlet, hotel, and wholesale businesses and alleged losses from reduced sales, required closures, effects on supplied retailers, and tenants’ inability to pay rent. They sought $51,580,820.

The policy insured against “all risks of physical loss or damage” and included business-interruption coverage for losses directly resulting from covered physical loss or damage. It also contained extensions for certain losses involving the actual, not suspected, presence of a communicable disease at an insured location and a governmental restriction on access. Affiliated FM moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that the plaintiffs had not alleged the required physical loss or damage or the actual presence of COVID-19 at an insured location.

The Court’s Analysis

The court applied New York law. It held that government shutdown orders did not cause the physical loss or damage required by the policy. Relying on Second Circuit and New York authority, the court concluded that loss of use caused by shutdown orders is not physical loss or damage where the property itself was not physically damaged.

The court also held that COVID-19 itself did not cause physical loss or damage under the policy. Even if COVID-19 particles had been present at the plaintiffs’ properties, the court concluded that the virus did not physically alter or persistently contaminate the property in a way that met the policy’s requirement.

The court separately considered the two communicable-disease extensions. It accepted that the plaintiffs had a plausible legal theory under those provisions, but found that the complaint did not allege facts showing the actual, not suspected, presence of COVID-19 at any insured location. General allegations that COVID-19 was widespread or present on surfaces and in the air were insufficient. The complaint did not identify a single COVID-19 case at any of the more than one hundred insured locations. The court also declined to consider expert reports submitted with the opposition because they were not part of, incorporated into, or integral to the complaint.

Because the court resolved the case on these grounds, it did not decide whether the policy exclusions cited by Affiliated FM would independently bar coverage.

Disposition

Judge Ronnie Abrams granted Affiliated FM’s motion to dismiss. The court also granted the plaintiffs leave to file an amended complaint concerning their theory of breach based on the communicable-disease extensions, provided they had a good-faith basis for doing so. The amended complaint was due by May 2, 2022. The order stated that failure to amend by that date would result in dismissal of the action with prejudice. The clerk was directed to terminate the pending motions at docket entries 14, 28, and 29.