Stetson Real Estate LLC v. Sentinel Insurance Company, Ltd.

Background

Stetson Real Estate LLC sued Sentinel Insurance Company, Ltd. for breach of an insurance contract. Stetson sought coverage for losses connected to the COVID-19 pandemic under a policy covering business-income loss, extra expenses, dependent properties, and certain losses caused by orders of civil authorities. Sentinel denied the claim, stating that COVID-19 had not caused physical damage at Stetson’s office or dependent properties and that the government orders were not issued because of property damage.

Stetson alleged that the pandemic halted property visits and sales activity, caused business losses and extra expenses, and led to COVID-19-causing agents being present on surfaces at its office and at properties in the New Rochelle area. The policy period ran from July 6, 2019, through July 6, 2020. Stetson filed the action in New York state court, and Sentinel removed it to federal court. Stetson later filed an amended complaint.

Motion and legal standard

Sentinel filed a motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). The court applied the same standard used for a motion to dismiss for failure to state a claim under Rule 12(b)(6). At this stage, the court treated the complaint’s factual allegations as true and considered whether they plausibly showed that Stetson was entitled to insurance coverage.

Business-income, extra-expense, and dependent-property coverage

The relevant policy provisions required direct physical loss of or physical damage to property. The business-income provision required a suspension of operations caused by that type of loss or damage at the insured premises. The extra-expense provision likewise required expenses resulting from direct physical loss or physical damage. The dependent-property provision required direct physical loss or physical damage at the dependent property.

Stetson argued that the physical presence of COVID-19-causing agents, including alleged contamination of surfaces, qualified as direct physical loss or physical damage. The court rejected that argument. It explained that loss of use caused by the pandemic did not qualify as physical loss or damage under the policy. It also found that Stetson had not alleged that the virus penetrated the property, made it uninhabitable, or caused a persistent physical alteration. The court therefore held that Stetson could not recover under the business-income, extra-expense, or dependent-property provisions.

Civil-authority coverage

The civil-authority provision covered business-income loss when access to the insured premises was specifically prohibited by a civil-authority order issued as the direct result of a covered cause of loss to property in the immediate area. The policy defined a covered cause of loss as the risk of direct physical loss, subject to other policy limitations.

Stetson acknowledged that the civil-authority orders did not cause its business interruption but argued that the orders extended the interruption by preventing access to its premises and restricting in-person visits to listings. The court held that the allegations did not establish the required direct physical loss or damage to nearby property. Allegations that properties in the New Rochelle containment zone suffered loss or were closed to prevent further loss were insufficient to trigger civil-authority coverage.

Disposition

The court granted Sentinel’s motion for judgment on the pleadings. It dismissed Stetson’s amended complaint with prejudice and directed the Clerk of Court to terminate the motion and close the case. Judge Kenneth M. Karas entered the order on July 5, 2022.