New York Court Finds Insurer Not Responsible for Theater’s COVID-19 Losses

The Supreme Court of the state of New York, Nassau County, has dismissed a movie theater’s claims that its insurer is responsible for covering its COVID-19 related losses and that its insurance brokers were negligent in providing insufficient coverage.

This comes after plaintiff Soundview Cinemas Inc., which operates a movie theater and is based in Port Washington, New York, was closed due to New York Governor Andrew Cuomo’s March 2020 executive order declaring a disaster emergency for the state amidst the COVID-19 pandemic. To date, Soundview remains closed because of the state executive orders and has suffered a loss under its insurance policy, the Supreme Court decision said.

Although Soundview had been issued a commercial insurance policy from Great American Insurance Group – underwritten by Great American Insurance Company of New York – offering coverage from April 10, 2019, to April 10, 2020, Great American has not made any payment to Soundview under the policy terms, the Supreme Court decision stated.

The policy was issued through Jimcor Agency, a Montvale, New Jersey-based agent of Great American, Five Star Coverage Corp. and Wilkinson & Krause, both Blue Point, New York-based domestic business corporations. It provides coverage for loss of business income, extra expense and civil authority and contains a virus exclusion.

Soundview’s complaint alleged that without its knowledge or consent, Five Star delegated its duty to provide the theater with an appropriate insurance policy to Jimcor and Wilkinson. It claimed Jimcor and Wilkinson issued the policy as agents for Great American without consulting Soundview or evaluating its insurance requirements.

With this in mind, Soundview’s complaint asserted causes of action against Great American, Five Star, Wilkinson and Jimcor for negligence and failure to properly procure insurance, against Great American for breach of the policy and against Five Star and Wilkinson for breach of fiduciary duty.

In the complaint, Soundview also alleged it trusted Five Star, relying on the broker’s skill and knowledge of business insurance and its evaluation of Soundview’s insurance needs and recommendations for the type and amount of coverage necessary to protect the theater.

Soundview Principal Jordan Desner claimed a special relationship with Five Star and Wilkinson, as he had purchased the policy in question and many others for his other business from the brokers. The complaint said Desner had purchased insurance policies from Five Star since 2007, and in total, he had purchased at least twenty insurance policies from the brokers.

Desner’s main contact at Five Star was Stuart Schuster, who would answer his insurance questions and advise him on the type and amount of insurance his businesses required, the complaint alleged.

Each time he renewed his insurance, Desner would ask Schuster if he was sufficiently insured for both known and unknown business risks and was repeatedly assured that he had proper coverage, according to the complaint.

Evidence showed the insurance brokers bound Soundview’s fifth renewal of its business income policy.

However, Great American said Soundview’s first claim for breach of contract does not hold up because the policy does not provide coverage for the closure of Soundview’s theater. This is because Soundview was required to close due to the governor’s executive orders shuttering non-essential businesses to slow the spread of COVID-19, rather than due to direct physical damage to its property.

New York law says that economic losses without physical damage to property do not trigger business income coverage, according to the Supreme Court decision.

Great American also contended that Soundview is not entitled to extra expense coverage for this reason. The policy limits extra expense coverage to necessary expenses incurred by the insured during a period of restoration, and in this case, Great American argued there is no period of restoration because there is no physical loss.

The policy’s civil authority additional coverage doesn’t apply either, Great American claimed. This is because Soundview wasn’t prohibited from accessing its property at any time due to the executive order, according to Great American, who went on to say that even if access was prohibited, it was not due to direct physical loss or damage to nearby property.

Finally, Great American argued that the virus exclusion barred coverage because even if Soundview could establish that it met the requirements of the policy for direct physical loss of or damage to the property, that would be the result of a virus and would fall within the exclusion.

The Supreme Court found that the brokers were not negligent as a matter of law, as Soundview’s inability to recoup its COVID-19 losses from its insurers was not a result of the brokers’ ability to provide adequate coverage.

“Plaintiff does not even allege what business income policy existed that would have afforded coverage for a business interruption claim arising from something other than a direct physical loss of or damage to property,” Supreme Court Justice Timothy Driscoll wrote in the court’s decision. “Plaintiff also does not allege that any carrier has taken the position that a client’s business income claim arising from the COVID-19 pandemic is a covered peril.”

Indeed, the decision stated that the Southern District of New York, along with several other courts, has previously ruled on whether business interruption coverage is applicable to COVID-19 government order-related loses. With two exceptions, those decisions have held that coverage does not exist because tangible, physical damage is needed. The exceptions were provided by courts in Missouri and New Jersey, which denied insurers’ motions to dismiss COVID-19-related business interruption lawsuits, finding that a loss of use of property could constitute a direct physical loss. New York courts, however, have rejected this interpretation of policy language, the Supreme Court decision stated.

Although Soundview asserted that it asked the insurance brokers if it had proper coverage and was sufficiently insured for both known and unknown business risks, the court found that a general question about the type and amount of coverage is insufficient to establish a negligence claim against an insurance broker. The court found instead that Soundview was aware of the amount, type and extent of coverage obtained and did not object or make any specific requests about insurance coverage for pandemic-related government closures.

“While the court is sympathetic to the economic consequences resulting from the closure of plaintiff’s movie theater, the court concurs with the majority view that loss of use of the premises due to COVID-19 related government orders does not constitute direct physical loss of or damage to property that would trigger business income coverage under the policy,” Driscoll wrote in the decision. “Extra expense coverage is also inapplicable, and civil authority coverage is not triggered.”

The insurance brokers’ motion to dismiss was granted.

The case is Soundview Cinemas Inc. against Great American Insurance Group, Great American Insurance Company of New York, Jimcor Agency Inc., Five Star Coverage Corp., and Wilkinson & Krause.