New York Insurance Coverage Law Update

First Department Affirms That Business Interruption From COVID-19 Not Covered

The insured purchased a commercial property policy that included business interruption coverage for its restaurants.  The restaurants were forced to suspend indoor dining operations because of COVID-19 and lost tens of millions of dollars in revenue.  The insured made a claim with its insurance company stating that it suffered a covered “direct physical loss or damage” to its property because the actual or threatened presence of the virus in and on its property (i.e. the ambient air and internal surfaces) eliminated the functionality of the restaurants for their intended purpose.  The insurer denied the claim; the insured sued; and the trial court granted the insurer’s motion to dismiss. On appeal, addressing this issue of first impression for a New York appellate court, the Appellate Division, First Department, affirmed. The court held that where a policy states that coverage is triggered only where there is “direct physical loss or damage” to the covered property, “the insured’s inability to use its premises as intended because of COVID-19, without any actual, discernable, quantifiable change constituting ‘physical’ difference to the property from what it was before exposure”, is not a covered loss.  The court found the insured’s proposed amended complaint alleging that its property was physically altered by the coronavirus “conclusory” and, therefore, devoid of merit.  [Consolidated Rest. Operations, Inc. v. Westport Ins. Corp., 2022 N.Y. App. Div. LEXIS 2227 (1st Dep’t Apr. 7, 2022).]

Northern District Dismisses Bad Faith Claim

State Farm denied its insureds’ first-party property claim under their policy, and the insureds sued State Farm for breach of contract, breach of the covenant of good faith and fair dealing (“bad faith”), and punitive damages.  The United States District Court for the Northern District of New York granted State Farm’s motion to dismiss the bad faith claim, reasoning that “’New York law … does not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim, based upon the same facts, is also pled.’”  While the bad faith claim added allegations about the delay in disclaiming and the improper basis for the denial, the court found that it was based on the same decision to deny coverage.   And to the extent the insureds’ allegations about State Farm’s handling of their consumer claim before the State of New York were unnecessary to the contract claim, the court found that the insureds did not allege any harm.  The court also dismissed the punitive damages claim, explaining that the alleged breach did not involve “’fraud evincing a ‘high degree of moral turpitude’ and demonstrating ‘such wanton dishonesty as to imply a criminal indifference to civil obligations’ [that is] ‘aimed at the public generally.’”  [Converse v. State Farm Fire & Cas. Co., 2022 U.S. Dist. LEXIS 60485 (N.D.N.Y. Mar. 31, 2022).]

First Department Holds That Auto Exclusion Does Not Apply

Rodriguez was allegedly injured when he fell in a hole while at premises to make a delivery at a construction project, and he sued the owner and construction manager who sought coverage under a CGL policy.  Rodriguez testified that he drove his truck through a plastic curtain at the entrance of the building’s interior loading dock where it was offloaded and reloaded with returns.  Rodriguez had not yet checked if anything was loose.  Instead, he walked from the loading dock to make sure the driveway was clear to exit and to raise the curtain.  A plate covering a hole outside the building shifted, and he fell.  The Appellate Division, First Department, held that the auto exclusion, which excluded coverage for accidents resulting from the “use” of the auto, did not apply to precluded coverage.  The court noted that “use” includes loading and unloading, but concluded that the loading was complete.  And even if not complete, the court opined that the exclusion did not apply because “the injury was caused by a defective premises condition, rather than any act or omission related to the use of the automobile”.  [Tishman Constr. Corp. v. Zurich Am. Ins. Co., 2022 N.Y. App. Div. LEXIS 2787 (1st Dep’t Apr. 28, 2022).]