Opinion
Index 614493/2020
06-30-2021
SPORTIME CLUBS LLC. Plaintiff, v. AMERICAN HOME ASSURANCE COMPANY, Defendant
Attorney for the Plaintiff Passich LLP By Peter A. Halprin Esq. Attorney for the Defendant Dentons U.S. LLP By Sandra D. Hauser, Timothy J. Straub and Catharine Luo Esqs.
Unpublished Opinion
Attorney for the Plaintiff
Passich LLP
By Peter A. Halprin Esq.
Attorney for the Defendant
Dentons U.S. LLP
By Sandra D. Hauser, Timothy J. Straub and Catharine Luo Esqs.
PRESENT: HON. JAMFS HUDSON Acting Justice of the Supreme Court
Upon consideration of the moving and cross-moving papers of counsel, it is
ORDERED, that the Defendant's cross motion (Seq. No.: 002) to dismiss (CPLR §§ 321 l(a)(1), (7)) is granted to the extent that the Plaintiffs complaint shall be dismissed pursuant to CPLR § 3211(a)(1). It is further
ORDERED that the Plaintiffs motion (Seq. No.:001) for partial summary judgment is denied as moot (CPLR 3212).
The case at bar is an action at law. sounding in breach of contract, arising out of a denial of insurance coverage for business interruption losses. In addition to monetary damages. Plaintiff seeks a declaratory judgment directing the defendant to provide insurance coverage for losses incurred as a result of the COVID-19 Pandemic.
Sportime Clubs, LLC ("Plaintiff or "Sportime"), is a company operating thirteen fitness facilities across New York. American Home Assurance company ("Defendant" or "AIG") is a global insurance provider offering policies that protect against property damage and other business losses.
In May of 2019. The Plaintiff obtained a commercial policy (Policy# 025032601) from the Defendant for the period of May 15, 2019 to May 15, 2020. As described by Plaintiff, this was an "advanced. broad, all-risk property damage and business interruption" policy "designed to maximize our client's recovery in the event of loss." (Complaint paragraph 8)
In the beginning of 2020, our country was beset by the great Covid-19 Pandemic that would ultimately cost the lives of hundreds of thousands of Americans. In response to rising infection rates, civil authorities throughout the United States began issuing "stay-at-home" and "shelter in place" orders, requiring the suspension of non-essential business operations, and ordering businesses to close.
In New York, the Governor issued Executive Order 202.8 (effective March 22nd 2020) directing all non-essential business to close and banning non-essential gatherings of individuals. "Essential" services and gatherings was narrowly defined and the Plaintiffs activities did not qualify as a permitted operation (See Executive Orders 202.3, 202.6, 202.8).
Since Plaintiffs business was closed by the Governor's order, it filed a claim for insurance coverage under the Policy (Affirmation of Bennett Schlansky, dated January 22, 2021, at 1113). On July 1. 2020, AIG sent Plaintiff a letter denying their request for business interruption and civil authority coverage due to COVID-19 (Exhibit F to the Hatprin Aff.).
In its letter denying coverage, AIG stated the following: Under the policy, Covered Cause of Loss "means a peril or other type of loss, not otherwise excluded under this Policy." In this instance, the reason for the Governor's Order was because of the COVID-19 virus. The COVID-19 virus is, according to AIG. defined as a contaminant or pollutant and is specifically excluded by the policy. As such, coverage for the civil authority's actions does not trigger as the peril is specifically excluded. (Halprin, Affi, Ex. F at pg. 10)
On October 5, 2020. Sportime filed its complaint against AIG, asserting two causes of action for: (1) Breach of Contract and (2) Declaratory judgment. Plaintiff alleges business interruption losses and extra expenses, totaling $9,000,000.
The Plaintiff as moved for partial summary judgment. The Defendant has cross-moved for dismissal. As discussed below, the Court finds the Defendant's argument to be compelling.
A motion to dismiss on the ground that an action is barred by documentary evidence (CPLR 3211 [a] [1]) may be appropriately granted only where the documents in question utterly refute plaintiffs factual allegations and conclusively establish a defense as a matter of law (Goshen v. Mitt. Life Ins. Co. of New York. 98 N.Y.2d 314, 326 [2002]). The court is expected to liberally construe the pleadings and accept the facts as alleged in the complaint as true, according plaintiffs the benefit of every favorable inference to ultimately determine only whether the alleged facts conform within any cognizable legal theory. (CPLR 3026; See Leon v. Martinez. 84 N.Y.2d 83, 87-88 [1994]).
The court applies a similar standard in assessing a motion under CPLR 3211 (a)(7). The criterion, however, is merely whether the plaintiff has a cause of action. (Leon v. Martinez supra citing Guggenheimer v. Ginzberg. 43 N.Y.2d 268, 275 [1977]). Where evidentiary material is submitted and considered on a 3211(a)(7) motion, the question becomes whether a plaintiffs cause of action survives the "material fact" test, "and unless it can be said that no significant dispute exists regarding it, dismissal should not eventuate." (See Gawrych v. Astoria Fed. Sav. & Loan. 148 A.D.3d 681, 683 [2nd Dept 2017]).
The resolution of this motion turns on the rights and obligations of the parties set forth in the Insurance Contract. A plaintiff sets forth a cause of action for breach of contract if they "establish "that a specific request was made ... for the coverage that was not provided in the policy." (AB Oil Services, Ltd. v. TCE Insurance Services, Inc., 188 A.D.3d 624, 643 [2d Dept 2020] quoting Brannigan Christie Overhead v. Door, 149 A.D.3d 892. 893-894. [2d Dept 2017]). According to the pleadings and the adjuster's letter "in response to Sportime's request" for coverage for reported business interruption due to COVID-19, Sportime's cause of action for breach of contract would suffice to survive a CPLR 3211 (a) (7) motion. The motion to dismiss under CPLR 3211(a)(1), however, is a different matter.
The operative portions of the documentary evidence (i.e the Insurance Policy-Exhibit "1" attached to the Complaint) are as follows: "Section VI(A) of the policy provides, inter alia,
"We will pay the actual business income loss sustained by you due to the necessary partial or total interruption of your business operations, services or production during the period of indemnity as a result of direct physical loss or damage to: (1) covered property by a covered cause of loss or (2) property of the type insured under this Policy by a covered cause of loss which directly affects your use of the covered property."
The Policy further states:
"4. ...We will pay the actual business income loss sustained by you and extra expense due to an order of civil or military authority that limits, restricts or prohibits partial or total access to a covered location, provided that such order is a direct result of: a. A violent crime, suicide, attempted suicide, or armed robbery at such covered location; or b. A death or bodily injury (not including, disease or sickness) at such covered location..."(Exhibit 1. at ST000037).
Section V of Plaintiffs Policy, however, carries the following list of "Perils Excluded" from coverage (Id. at ST000031 - ST000033)
"2. We will not pay for loss or damage caused by or attributable to any
'"of the following:
...d. The actual, alleged or threatened release, discharge, escape or dispersal of pollutants or contaminants, all whether direct or indirect, proximate or remote or in whole or in part caused by. contributed to or aggravated by any covered cause of loss under this Policy."
In turn. "Pollutants" is defined in Section IX of the Policy as:
"35... any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids. alkalis, chemicals and waste, which after its release can cause or threaten damage to human health or human welfare or causes or threatens damage, deterioration, loss of value, marketability or loss of use to property insured hereunder, including, but not limited to, bacteria, virus, or hazardous substances." [emphasis ours].
It is a well-established principle that a policyholder bears the initial burden of showing that the insurance contract covers the loss (See Morgan Stanley Group Inc. v New England Ins. Co., 225 F.3d 270. 276 [2d Cir 2000]; Chase Manhattan Bank v Travelers Group, 269 A.D.2d 107. 108 (2001); Simplexdiam, Inc. v Brockbank, 283 A.D.2d 34, 37 (2001). Once this has been accomplished, it falls upon the insurer to prove that an exclusion in the policy applies to defeat coverage (Consol. Edison Co. of New York, Inc. v Allstate Ins. Co.. 98 N.Y.2d 208, 218 [2002]).
Both parties have drawn the Court's attention to §V(l)(d) of the policy, the so called "polluter's exclusion".
Sportime challenges AIG's assertion that §V(1)(d) of the policy is not a traditional polluter's exclusion, which presumably would only apply in cases where some specified actor is the cause of the pollution or contamination (See Technicon Elecs. Corp. v Am. Home Assur. Co.. 74 N.Y.2d 66 [1989] (ruling in favor of insurer on the basis of insured's intentional discharge of toxic waste into a creek; not an accident that qualifies as an exception to the pollution exclusion). That part of the policy excludes coverage for perils such as: The release, discharge, escape or dispersal of pollutants or contaminants caused by, contributed to or aggravated by any covered cause of loss.
AIG argues, citing Broome County v. Travelers Indemnity Co., 125 A.D.3d 1241, 1242 (3d Dep't 2015) that its policy's carveout should neither be construed as a "polluters' exclusion" nor should it be limited to traditional environmental pollution. The Court in Broome County, however, opined that controlling authority 'relied on the fact that words such as discharge and dispersal-the policy's terms describing the onset of pollution- were 'terms of art in environmental law' referring to damage 'caused by disposal or containment of hazardous waste.'" (Id. at 1242 quoting Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377 [2003]).
Plaintiff contends that although the policy explicitly includes viruses in its definition of pollutants and contaminants, AIG offers no explanation as to how its use of the word "virus" in §1X35 of the policy relates to the verbs "release, discharge, escape, or dispersal" as suggestive of a non-traditional polluter's exclusion in the context of liability for the insured's improper actions. "To negate coverage by virtue of an exclusion, an insurer must establish that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case." (Continental Cas. Co. v. Rapid American Corp. 80 N.Y.2d 640. 652 (1993). Although this argument is advanced with commendable eloquence by Plaintiffs counsel, the Court is ultimately unpersuaded.
The Court agrees with the Defendant's assertion that direct physical loss or damage is limited to physical property damage, and New York law requires some form of actual. physical damage to the insured premises if the claimant seeks to recover loss of business income and extra expenses (Roundabout Theatre Co., Inc. v Cont. Cas. Co., 302 A.D.2d 1, 4 [1st Dept 2002]; Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., 17 F.Supp.3d 323. 331 [S.D.N.Y. 2014]).
The majority of Federal Courts, both in New York and other states, have generally held that those businesses subjected to mandated closures did not suffer "direct physical loss" within the meaning of the broad-risk policies such as the policy in the case at hand (See 10012 Holdings, Inc. v. Sentinel Ins. Co., Ltd., __ F.Supp.3d __, 2020 WL 7360252 [S.D.N.Y. Dec. 15. 2020]; Michael Cetta, Inc. v. Admiral Indem. Co.. 506 F.Supp.3d 168. 2020 WL 7321405 [S.D.N.Y. Dec. 11, 2020]; Poppy's Barber Shops, Inc. v. Farmers Grp., Inc., 491 F.Supp.3d 738, 2020 WL 5847570 (S.D. Cal. Oct. 1, 2020); Sandy Point Dental, PC v. Cincinnati Ins. Co.. 488 F.Supp.3d 690, 2020 WL 5630465 [N.D. Ill. 2020).
In an attempt to distinguish the foregoing case law, Sportime posits that the virus' microscopic nature, which renders it invisible, can, in fact, represent a form of physical loss or damage. To bolster its argument. Sportime raises Pepsico, Inc. v. Winterhur Intl. Am. Ins. Co., 24 A.D.3d 743 (2d Dept 2005) where the Court found that to prove "physical damages." plaintiffs are not required to show "a distinct demonstrable alteration of [the] physical structure."(Id. at 744). The Pepsico court determined "physical damage" a result of unmerchantability of goods (soda). Sportime. in parallel fashion, alleges "physical damage" as a result of diminishing function and value of its thirteen facilities. Although the viral contamination does not constitute physical alteration to structures. Plaintiff urges this Court to find that the aerosolized covid-19 droplets, suspended in the air or sitting on building surfaces, render the facilities "damaged" under the Pepsico court's rationale.
Although the holding in Pepsico provides Sportime with a spark of hope regarding the meaning of the word "damage" -as it applies in the context of coverage- we find that the only way to reconcile the differing authority presented to us is to find that Pepsico rule is confined to Article Two of the Uniform Commercial Code. The decision in Pepsico was also subjected to analysis in the case of Visconti Bus Serv., LLC v. Utica Nat'l Ins. Grp.. 71 Misc.3d 516. 142 N.Y.S.3d 903. 910 (Sup. Ct. Orange Cty 2021). As in the matter at hand, the Visconti Court was deciding the question of an insurance policy exclusion in light of a COVID-19 related claim. In rejecting the Plaintiffs claim for coverage on the basis of "physical damage" the Court noted that the policy clearly required "a physical event ... [from] which injury or damage resulted...Hence. Pepsico does not support [Plaintiffs'] argument.. .that mere loss of use or functionality in the absence of any physical loss or damage to property is sufficient to trigger coverage." (Id. at 538).
In ascertaining what may constitute "physical" loss or damage to property this Court must note the case of Essex Ins. Co. v. Bloom South Flooring Corp., 562 F.3d 399. 406 (1st Cir. 2009) in which it was held that an odor, although not resulting in structural disfigurement of a building, can constitute physical injury to property under Massachusetts law. Despite this guidance from our sister state, we are persuaded by Defendant's argument (and submitted case law) that the civil authorities" orders issued in response to the Pandemic cannot give rise to a claim of "direct physical loss or damage" under a business loss insurance policy (Harvey DDS, PLLC v. Sentinel Ins. Co., Ltd.. __ F.Supp.3d __, 2021 WL1034259, at *6 [S.D.N.Y. Mar. 18, 2021]; Jeffrey M. Dressel, D.D.S., P.C. v. Hartford Ins. Co. of the Midwest, Inc.. __ F.Supp.3d __, 2021 WL 1091711, at *4 [E.D.N.Y. Mar. 22. 2011]; Soc. Life Mag., Inc. v. Sentinel Ins. Co. Ltd.. __ F.Supp.3d __ 2020 WL 2904834. at * 15 [S.D.N.Y. May 14, 2020]; Visconti Bus Serv., LLC v. Utica Nat'l Ins. Grp.. supra).
Sportime further alleges that the actions taken by civil authorities constitute "direct physical loss or damage to" property because such action substantially impaired its properties by limiting or prohibiting access to the sports clubs. The Court disagrees. The governor's executive orders, which resulted in non-essential business closures, do not place Sportime's claim for coverage within the scope of the policy's coverage because the condition for which civil authorities prohibited access to the property has not been met- that condition being "direct physical loss or damage to property."
In Soundview Cinemas Inc. v. Great Am. Ins. Grp., 71 Misc.3d 493. 142 N.Y.S.3d 724 [Sup. Ct. Nassau Cty. Feb. 8, 2021], the Court (Driscoll J.) granted the dismissal of a movie theater's claim similar to presented in the case before us. As Justice Driscoll eloquently wrote:
"New York law rejects the notion that economic loss unaccompanied by physical damage to property triggers coverage for loss of business income. Moreover, the Policy's coverage for business income loss is limited to that incurred during the period of restoration. It would be senseless to tie an end date for coverage to the completion of repair or resumption of operations at a new location if no amount of repair would result in the end of the claimed losses incurred as a result of the government's orders." (Id. at 500).
This Court concurs with our colleagues persuasive authority and concludes that "...tangible, physical damage is needed to trigger coverage and COVID-19 related government restrictions on business activity do not amount to such damage." (Id. at 501)
In conclusion this court agrees with the majority of Courts in our State and Country that have found that viral particles on building structures do not constitute property damage within the meaning of Insurance policies similar to the contract under review herein. Likewise the Governor's Executive Orders do not trigger the Defendant's obligations under the Insurance contract. Plaintiffs recitations of sustained physical loss or damage will not suffice to give rise to a cognizable cause of action.
Under the circumstances presented the Court is constrained to grant Defendant's cross-motion to dismiss (CPLR 3211[a][1]). The Plaintiffs motion for summary judgement is denied as moot (CPLR 3212). It is further
ORDERED That the Plaintiffs complaint is dismissed.
This memorandum also constitutes the order of the Court