Second Circuit Courts Finds in Favor of Insurer in Pandemic Loss Suit

On Dec. 27, 2021, the Second Circuit denied a New York art gallery’s attempts to file suit against its business insurance policy issuer, the first such case the appeals court ruled upon.

In keeping with previous rulings throughout the US, the business’ attempt to claim coverage for lost income during the COVID-19 pandemic was denied, as the court found in favor of the insurer.

The gallery owner, 10012 Holdings, Inc. attempted to recoup its business income losses during the gallery’s closure and move to online-only sales. Sentinel Insurance denied coverage based on a lack of physical loss or physical damages—a requirement to trigger their business loss coverage. Specifically, Sentinel indicated that “COVID-19 did not cause property damage at [10012 17 Holdings’] place of business or in the immediate area.”

In an attempt to dispute Sentinel’s claims, 10012 Holdings brought an action against Sentinel claiming breach of contract, and declaratory judgment contending Sentinel is responsible for the company’s loss of business during the pandemic closure. 10012 Holdings claims “that the Policy’s references to ‘physical damage’ or ‘physical loss’ include the loss of use of property as a result of the suspension of business operations.”

10012 Holdings’ argument relied on Sentinel policy’s use of the term “direct physical loss” in laying out the provisions of coverage for Business Income and Extra Expense section of the policy. The term is undefined within the policy, and under New York law, any “ambiguities,” such as terms not clearly defined, should be “resolved in the insured’s favor.” In this case, 10012 Holdings contended the loss of income from a forced closure is a “direct physical loss,” as the business owner was deprived of access to their property—i.e., lost access to their property because of the pandemic-related closures.

However, the three-judge panel of the Second Circuit court denied 10012 Holdings’ claim based on previous New York rulings. The judges stated the loss of use argued by the insured does not qualify as direct physical loss. Rather, the loss must be physical damage to the property or surrounding area, which then precludes the ability to operate the business. As there was no physical damage plausibly alleged by the insurer, Sentinel is not required to cover any loss.

The Second Circuit’s ruling in favor of the insurer marks the seventh federal appeals panel asked to rule on whether insurance policies regarding loss of business during COVID-19-related business closures should provide coverage. Thus far, all federal appeals courts have decided in favor of the insurer for reasons similar to the Second Circuit’s ruling. As pandemic-initiated closures do not show a clear instance of property loss or damage, the insurance coverage does not trigger, and insurers are not required to cover related losses.

The case is 10012 Holdings Inc. v. Sentinel Insurance Co. Ltd., case number 21-80-cv, in the US Court of Appeals for the Second Circuit.

The opinion can be found here.