Overview
In an opinion Friday, Judge Cronan dismissed with prejudice a suit brought by Sparks Steak House against its insurance company seeking to recover for business interruption losses arising from the COVID-19 pandemic. The policy covered, as is common in property insurance policies, “direct physical loss of or damage to property” at the premises, and Sparks argued that its inability to use the premises as a steakhouse fell within that language. Judge Cronan disagreed, using illustrations of how the policy language would be used in everyday experience:
The idea that “loss of use” does not constitute a “direct physical loss of or damage to” property resonates in ordinary experience outside the context of insurance coverage. Say, for example, a teenager broke curfew, and his parents punished him by taking away the keys to his car. The teen undoubtedly lost the ability to use the car. However, we would not say that there had been a “direct physical loss of or damage to” the car. The teenager was precluded from driving it. But the car’s physical condition remained unchanged, and its presence likely remained at the residence. Similarly, imagine a fisherman visits a public pond each day to cast his line. One morning he arrived and found that the pond was closed for fishing because a nearby town was hosting its annual swim race. Did the fisherman lose the use of the pond for the day? Yes. He could not enjoy the premises for his intended use (i.e., to fish). But could anyone reasonably conclude there was a “direct physical loss of or damage to” the pond because he could not fish? No. The condition of the pond was not altered physically.As noted in the decision, there have been many similar cases across the country, and “nearly every court to address this issue has concluded that loss of use of a premises due to a governmental closure order does not trigger business income coverage premised on physical loss to property.” Judge Cronan's ruling is the first motion to dismiss decided in the Southern District, although in May Judge Caproni denied a preliminary injunction in a case raising a similar theory. Disclosure: Steptoe and Robinson Cole represent the insurer in the Sparks case, and Steptoe represents the insurer in the case before Judge Caproni.
