But Does the Policy Provide Coverage?
The COVID pandemic and the resulting Executive Orders limited business activity– and triggered a tsunami of so-called insurance “coverage” disputes in which the insured claims and the carrier disclaims coverage for losses and expenses incurred as a result of the downtown in commercial activity. But, as a recent case illustrates, coverage under any number of theories may be expressly or impliedly barred by the language of a policy—which requires the Court to meticulously navigate a plethora of carefully defined terms that may give meaning to other defined terms.
Island Gastroenterology Consultants, PC, and Island Endoscopy Center, LLC obtained two separate, but materially identical, business owners’ insurance policies from the General Casualty Company of Wisconsin from September 1, 2019 to September 1, 2020. The policies covered “direct physical loss of or damage to the Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.” The premises described in the Declarations were the medical offices located at 1111 Montauk Highway and 1175 Montauk Highway, West Islip, New York. “Covered Property” included “Buildings,” “meaning the buildings and structures at the premises described in the Declarations,” and “Business Personal Property located in or on the buildings at the described premises.” “Covered Causes of Loss” were defined as “[r]isks of direct physical loss” unless excluded or limited.
The policies provided additional coverage for losses of Business Income “due to the necessary suspension of . . . ‘operations’ during the ‘period of restoration’ if the suspension was “caused by direct physical loss of or damage to property at the described premises.” “Operations” was defined as “business activities occurring at the described premises.” “Period of restoration” was defined as the period beginning “after the time of direct physical loss or damage” and ending “when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality” or “when business is resumed at a new permanent location.” The policies also provided for the payment of necessary Extra Expenses during the “period of restoration” that would not have been incurred “if there had been no direct physical loss or damage to the property at the described premises.” The policies further provided for the payment of Business Income and Extra Expenses “caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises.”
Both policies contained endorsements entitled “New York — Exclusion of Loss due to Virus or Bacteria,” which provided “We will not pay for loss or damage caused by or resulting from any virus, bacterium or another micro-organism that induces or is capable of inducing physical distress, illness or disease.” The virus exclusion explicitly applied to “forms or endorsements that cover property damage to building or personal property and forms or endorsements that cover business income, extra expense or action of civil authority.”
In March 2020, then Governor Cuomo of New York issued a series of Executive Orders to deal with the COVID-19 pandemic. They included an order restricting large gatherings, directing all non-essential workers to stay at home, and canceling all elective surgeries and procedures statewide. As a result, the insureds’ medical offices were closed from March 23, 2020, until they could re-open on May 26, 2020. During that time, they could not perform all but a small number of emergency medical procedures, resulting in a substantial loss of business income and additional expenses.
The insureds did not file a claim with the carrier to recover their business-income losses and other expenses under the policies. Instead, they filed suit seeking a judgment declaring that those losses and expenses were covered under the policies and that any future losses and expenses incurred due to civil-authority closures would be covered. The carrier moved to dismiss the complaint on the grounds that the insureds did not allege any direct physical loss of or damage to their medical offices, that purely economic loss was not covered by the policies, and that the policies expressly excluded coverage for any loss or damage caused by a virus. In opposition, the insureds contended that physical loss did not require structural damage, that lost operations or the inability to use the premises was sufficient, that the virus exclusion did not apply, and that they had adequately alleged coverage under the civil-authority provision.
In determining an insurance-coverage dispute, the Court first looked to the language of the policy. When the provisions of a policy are unambiguous, they must be given their plain and ordinary meaning, and courts are to enforce them as written. Courts may not make or vary the contract of insurance to accomplish their notions of abstract justice or moral obligation.
New York courts interpreting language that was substantially identical to the language in the insurance policies here found that coverage was limited to losses involving physical damage to the insured’s property. They declined to interpret such language to include “loss of use” of the property under New York law. New York courts had also found that the loss of use of premises due to COVID-19 related government orders did not trigger business-income coverage based on the physical loss to property.
Here, the insurance policies required “direct physical loss of or damage to property.” “Covered Property” was defined as “Buildings,” “meaning the buildings and structures at the premises described in the Declarations,” and “Covered Causes of Loss” were defined as “[r]isks of direct physical loss.” The additional coverage for losses of Business Income due to a suspension of operations during a “period of restoration’” only applied if the suspension was “caused by direct physical loss of or damage to property at the described premises.” And the coverage for Extra Expenses during a “period of restoration” did not apply “if there [was] no direct physical loss or damage to the property at the described premises.” The ‘insureds’ interpretation of those and other provisions of the policies had been rejected by New York courts. The cases to the contrary upon which the insureds relied were out-of-state cases that appeared to represent a minority view. Accordingly, the Court declined to follow them.
The Court found that the ‘insureds’ allegations were insufficient as a matter of law to allege coverage under the business-income provisions of the policies. And their allegations were insufficient as a matter of law to allege coverage under the extra-expense provisions of the policies, which applied only if the business-income coverage applied and required “direct physical loss of or damage to property.”
The insureds’ allegations were also insufficient as a matter of law to allege coverage under the civil-authority provisions of the policies. Access to the premises was not prohibited due to direct physical loss of or damage to neighboring property, And the Governor’s executive orders did not prohibit all surgeries and procedures, only all elective surgeries and procedures. The insureds alleged that they performed a de minmis number of emergency procedures between March 23, 2020, and May 26, 2020, when the executive orders were in effect. They, therefore, had access to the premises.
Finally, the insureds’ claimed losses fell squarely within the policies’ virus exclusion.