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NY District Court Breaks with Other States on COVID-19 Insurance Coverage but Leaves Door Open

July 29, 2021

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<p style="text-align: justify;">New York courts have been stricter on businesses seeking insurance coverage for pandemic related damages, however, there are still possibilities of coverage even if the policy includes contamination or loss of use exclusions, as exemplified in <em><a href="">Thor Equities, LLC v. Factory Mutual Insurance Company</a>.</em></p>
<p style="text-align: justify;">Plaintiff, Thor Equities LLC (“Thor”), a commercial landlord, rents hundreds of properties across the country for business use. Thor purchased an insurance policy from Factory Mutual Insurance Company (“FM”) that provided coverage for property damage and business interruption losses. Due to COVID-19, many of Thor’s tenants were unable to generate revenue and requested abatements or other accommodations, leading Thor to experience significant business interruption.</p>
<p style="text-align: justify;">Broadly, the FM policy includes any insured time element loss arising out of or caused by an event of physical loss or damage. The time element provisions cover losses from the interruption of Thor’s business caused by restriction of access to the property due to an order by an authority or loss caused by physical damage. The policy also contains a “contamination” exclusion and a “loss of market or loss of use” exclusion. The contamination exclusion more specifically excludes coverage for “contamination, and any cost due to contamination including the inability to use or occupy property or any cost of making property safe or suitable for use or occupancy... only physical damage caused by such contamination may be insured....” Thor and FM dispute whether the exclusions bar the claimed losses.</p>
<p style="text-align: justify;">The Southern District Court of New York concluded the language of the contamination exclusion is ambiguous and issues of language should not be decided in the early stages of litigation. Thor argued the exclusion failed to mention any <em>loss </em>due to contamination, but explicitly referenced any <em>cost</em> due to contamination, which indicates the exclusion does not bar coverage. FM contended the exclusion’s mention of inability to use or occupy property unambiguously excludes losses due to contamination of COVID-19. The court found the language can be reasonably debated especially when, in other parts of the policy, the difference between “cost” and “loss” is distinguished. The court, however, refused to label COVID-19 damage as physical, which differs from cases decided in New Jersey and Pennsylvania.</p>
<p style="text-align: justify;">Regarding the loss of use market or loss of use exclusion, the court cited recent New York state court case, <em>Visconti Bus Service, LLC v. Utica National Insurance Group</em>, where that exclusion stated, “We will not pay for loss or damage caused by or resulting from a delay or loss of use or loss of market.” There, as in <em>Thor</em>, a party sought coverage for “loss of use” resulting from a COVID-19 governmental order. The court likened “loss of use” to “loss of functionality,” and found that coverage for such losses was barred by the exclusion.</p>
<p style="text-align: justify;">In New York, government shutdown orders during COVID-19 have been interpreted to cause a loss of use of property, but not the direct physical loss of property. However, even with persuasive precedent, the court also refused to decide whether the market loss of use exclusion encompasses Thor’s alleged losses at an early stage without discovery, as Thor will further be making an argument that the losses may have been caused, not by COVID-19 itself, but by the orders of state and local authorities.</p>
<p style="text-align: justify;">Thanks to Jamie O’Neill for contributing to this post.  Should you have any questions, please contact <a href="">Tom Bracken</a>.</p>
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