This was originally published on the SGR Blog.
Almost every commercial enterprise carries, or is covered by, insurance policies intended and expected to cover catastrophic losses. The pandemic certainly has been catastrophic. But, as a recent case illustrates, coverage may depend upon whether or not the virus is found to have caused direct physical loss or damage.
The plaintiff/hoteliers own and/or operate hotels in Onondaga County, two of which were affiliated with Marriott International, Inc. Zurich American Insurance Company, issued insurance to Marriott covering the hotels.
The hoteliers asserted pandemic-related claims against Marriott and International. And also against Zurich for breach of the insurance contract and declaratory judgment that, as additional insureds under two “all-risk” insurance policies issued by Zurich to International, they were entitled to monetary damages for losses caused by the novel coronavirus and governmental orders issued to reduce the virus’s spread in the community.
The hoteliers submitted claims to Zurich for “losses as covered under their policy.” In support of their claims, they alleged that COVID-19 began spreading in New York State in January 2020, and the “virus spreads through droplets and aerosols and can, according to scientists, live on surfaces for up to several days,” And further alleged that this “foreign substance caused damage that threatened the entire economic foundation of their businesses.”
Zurich denied the claims on the grounds that the hoteliers did not “demonstrate the prerequisite to coverage.” Because COVID-19 did not constitute “direct physical loss or damage.”
On March 7, 2020, New York Governor Andrew Cuomo issued an Executive Order declaring a public emergency in New York State due to public health concerns associated with the COVID-19 pandemic. On March 20, 2020, Cuomo issued another Executive Order directing all non-essential businesses to reduce their in-person workforces by 100 percent no later than March 22, 2020. Those closures were extended by subsequent Executive Orders.
On March 14, 2020, Onondaga County Executive J. Ryan McMahon declared a state of emergency due to COVID-19 and ordered all schools closed as of March 20, 2020, and all extracurricular activities canceled. On March 27, 2020, McMahon ordered that all non-essential gatherings of any size for any reason be canceled or postponed. Onondaga County’s state of emergency was extended.
The State and County Executive Orders were intended to mitigate and slow the spread and impact of the coronavirus…
Hotels were declared essential and permitted to remain open. But they were required to alter their business by, for example, closing various customer amenities such as pools and fitness centers. Although authorized to operate, the hoteliers argued: “the travel that sustains the hotels was effectively barred: business travel became for most illegal and the events that brought many visitors to the hotels were canceled because of the virus and government edict.”
It was not until May 15, 2020, pursuant to another Executive Order, that the State authorized certain industries to open on a region-by-region and industry-by-industry basis.
The hoteliers asserted claims against Zurich for breach of contract and declaratory judgment under five separate coverage provisions seeking payment for losses allegedly caused by the limitations on their operations due to COVID-19 and governmental orders issued to restrict the spread and impact of coronavirus.
Relevant provisions of the policies all required “direct physical loss or damage” to trigger coverage.
The hoteliers had the initial burden of showing that their policy covered the loss. Labeling the policy as ‘all-risk’ did not relieve the insureds of their initial burden of demonstrating a covered loss under the terms of the policy.
Zurich argued it was entitled to dismissal of the breach of contract and declaratory judgment causes of action because all of the claims required “direct physical loss or damage,” and the complaint failed to allege any direct physical loss or damage to the hotel properties. Zurich further argued that, even if direct physical loss or damage was alleged, New York courts have held the presence of coronavirus does not constitute direct physical loss or damage. The Court agreed.
Prior to COVID-19, New York courts were interpreting the policy language of “direct physical loss or damage” held that actual physical damage to the insured’s property was necessary to trigger coverage and that a mere loss of use of the property was insufficient.
When presented with claims for monetary losses due to COVID-19 and concomitant government closures, New York state and federal courts construing similar policy language overwhelmingly concluded that actual physical damage to property was required to trigger coverage. Loss of use alone was insufficient.
The hoteliers did not allege any direct physical loss or damage to their hotels. Rather, they alleged that as “the virus reached Onondaga County, the State and County implemented dramatic and unprecedented closure orders, bringing economic activity to nearly a complete halt [causing them to lose] millions of dollars.” While they argued the “virus spreads through droplets and aerosols and can, according to scientists, live on surfaces for up to several days, there was no physical loss of or damage to property when an item or structure merely needed to be cleaned.
For that reason, the complaint failed to state a cause of action under all of the policy provisions asserted. The various government orders were not issued as a result of any physical loss or damage to the hoteliers’ property. The directives were merely intended to mitigate and slow the spread and impact of coronavirus. Moreover, coverage under those provisions failed because the hoteliers did not allege access to their property was impaired.
In short, the complaint failed to plead COVID-19 or the various governmental closure orders caused tangible physical loss or damage to their hotels. Zurich’s motion to dismiss the complaint was granted to the extent the hoteliers asserted coverage under the policies.