Does Insurance Policy Cover Media Office COVID-19 Closure?

According to court documents, Social Life is distributed at retail businesses on the East End of Long Island. On March 17, 2020, SLM suspended business operations at its New York City office due to the COVID-19 pandemic and filed an insurance claim, under a Business Owner's Policy issued by Sentinel Insurance, for loss of business income.

The Sentinel policy provided coverage for loss of business income due to the necessary suspension of operations, but specifically required that "suspension must be caused by direct physical loss of or physical damage to property" at SLM's premises. The policy also provided coverage due to loss of business income sustained when access to SLM's offices was "specifically prohibited by order of a civil authority as the direct result of a Covered Cause of Loss to property in the immediate area of" the insured premises. The Covered Cause of Loss provision specified "risks of direct physical loss."

After Sentinel denied the claim, SLM filed an action in the Manhattan federal court and sought a preliminary injunction requiring Sentinel to pay $197,000 in business interruption loss. According to SLM's application, these funds were necessary in order for SLM to publish and distribute its magazine in time for the weekend starting May 29, 2020. SLM argued the magazine would not survive the loss of goodwill if it could not publish that issue. In support of its application, SLM contended that the lost business income resulted from: a necessary suspension of business operations due to property damage caused by the coronavirus; and an order of civil authority prohibiting access to its office.

But in addition to arguing that SLM could not meet the irreparable harm requirement, Sentinel argued SLM could not show a likelihood of success on the merits because it could not demonstrate that suspension of operations was caused by direct physical loss of or physical damage to property at its New York City premises. Sentinel contended that SLM was forced to shut down not because of any property damage at the premises but because of governmental orders mandating that non-essential businesses close to limit the spread of COVID-19.

In its opposition papers, Sentinel relied on Roundabout Theatre Co. v. Continental Casualty Co., 302 A.D. 2d 1 (1^st Dept. 2002), an appellate decision involving the collapse of scaffolding at a construction site in midtown Manhattan. As a result of the collapse, a portion of West 43rd Street had been temporarily closed and access to the insured's Broadway theater Kit Kat Club, located two buildings over, restricted, forcing the theater to cancel 35 performances of the musical Cabaret. The "Theatrical Package" insurance policy issued to the theater provided coverage for loss due to cancellation or postponement of performances "as a direct and sole result of loss of, damage to or destruction of property or facilities (including the theater building occupied … by the Insured and [certain equipment], contracted by the insured for use in connection with such Production, caused by the perils insured against, and occurring during the term of coverage …"

The First Department ruled the policy did not cover the situation where the theater was shut down solely due to off-site property damage. The appellate court noted in part: "[T]he 'Substitute Theatre' provision of the policy requires the insured to 'exercise due diligence and dispatch to occupy a substitute theatre … following loss of, damage to or destruction of the theatre,' and that the new theatre must be reasonably comparable in size and quality 'as the theatre which has been damaged or destroyed' (emphasis added). This provision would … make little sense were there no requirement of physical damage to the insured's premises."

At the hearing on the request for a preliminary injunction in Social Life Magazine, SLM's counsel argued that SLM suffered on-site property damage due to the presence of the coronavirus. District Judge Valerie E. Caproni rejected this argument, finding the potential presence of the coronavirus on the SLM property, even if proven, would not satisfy the property damage requirement. The district judge explained that "what has caused the damage is that the governor has said you need to stay home. It is not that there is any particular damage to your specific property."

Although Judge Caproni conceded SLM's argument was creative, she denied the preliminary injunction request. According to the hearing transcript, a written order was to be issued. However, subsequent to the hearing, on May 22, 2020, SLM filed a notice of dismissal without prejudice and the case was dismissed.

The Southern District holding in the SLM case is newsworthy for the entertainment and media industries, as well as the business community in general, because it is one of the first court rulings to address a business interruption coverage dispute related to the COVID-19 pandemic and discusses the issue at the center of most of these cases: Can and must the insured demonstrate physical injury to its property? However, it would be a mistake to overstate the importance of this ruling, including because SLM had sought a preliminary injunction, making the burden SLM was required to satisfy more difficult than insureds will face in most cases.

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Howard B. Epstein is a law partner and Theodore A. Keyes is special counsel based at the New York City office of Schulte Roth & Zabel.