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Second Circuit Set to Hear Covid Business Interruption Claim

May 21, 2020

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On Friday, May 18, Social Life Magazine filed a brief notice of interlocutory <a href="">appeal</a> of a district court judge’s oral decision denying its application for a preliminary injunction compelling its insurer, Sentinel Insurance Company Limited, to cover its lost revenues stemming from the Covid-19 pandemic.  As a result, the Second Circuit is set to weigh in on what will likely be the first of many pandemic-related business interruption claims brought by small businesses throughout New York that will reach the appellate court.

The factual background and related coverage arguments are at this point familiar, even if they are novel.  Social Life, self-described as the "premier luxury publication for the Hamptons," sued Sentinel in the Southern District of New York after Sentinel denied coverage for Social Life’s business interruption claim caused by the pandemic and ensuing shutdowns.  Sentinel asserted that the virus does not constitute “property damage,” a requirement for coverage in the first instance.  In response, Social Life argued that the virus’s very presence on physical property and the potential for harm constituted the required damage.  Notably, the Sentinel policy at issue did not contain a specific virus exclusion common in many policies.

Nonetheless, on Thursday, May 14, District Judge Valerie Caproni denied Social Life’s application for a preliminary injunction.  During oral argument, Judge Caproni stated that the most on-point case in New York appeared to be a First Department Decision styled <em>Roundabout Theatre Co. v. Continental Cas. Co.</em>, where the Appellate Division held that the insured was not entitled to business interruption coverage because there was no “direct physical loss” to the property as a result of a city street closure order due to a construction accident. 302 A.D.2d 1 (1st Dep’t 2002).  Distinguishing out-of-state cases, Judge Caproni stated that while she “[felt] bad for every small business” impacted by the pandemic, there needs to be “some damage to the property to prohibit you from going” for coverage to take effect.

This case gives the Second Circuit the opportunity to weigh in on the specific issue of whether the Covid-19 virus constitutes “physical damage” for purposes of business interruption claims.  As this decision has potential for widespread impact, we will be monitoring it closely.

Thanks to Douglas Giombarrese for his contribution to this post.  Please email <a href="">Georgia Coats</a> with any questions.


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