10012 Holdings, Inc. v. Sentinel Ins. Co.

• Decision Date: 27 December 2021
• Docket Number: Docket No. 21-80-cv,August Term, 2021
• Citation: 21 F.4th 216
• Parties: 10012 HOLDINGS, INC. dba Guy Hepner, Plaintiff-Appellant, v. SENTINEL INSURANCE COMPANY, LTD., Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

21 F.4th 216

10012 HOLDINGS, INC. dba Guy Hepner, Plaintiff-Appellant,

v.SENTINEL INSURANCE COMPANY, LTD., Defendant-Appellee.^*

Docket No. 21-80-cv

August Term, 2021

United States Court of Appeals, Second Circuit.

Argued: September 2, 2021

Decided: December 27, 2021

John V. Golaszewski, The Casas Law Firm, P.C., New York, NY, for Plaintiff-Appellant 10012 Holdings, Inc. d/b/a Guy Hepner.

Jonathan M. Freiman (Shai Silverman, on the brief), Wiggin and Dana LLP, New Haven, CT, for Defendant-Appellee Sentinel Insurance Company, Ltd.

Jeremy M. Creelan, Michael W. Ross, Jenner & Block LLP, New York, NY; John H. Mathias, Jr., David M. Kroeger, Gabriel K. Gillett, Jenner & Block LLP, Chicago, IL, for Amici Curiae Restaurant Law Center, New York State Restaurant Association, and New York City Hospitality Alliance, in support of Plaintiff-Appellant and reversal.

Joshua L. Mallin, Dennis D'Antonio, Weg & Myers, P.C., New York, NY, for Amicus Curiae Mario Badescu Skin Care, Inc., in support of Plaintiff-Appellant and reversal.

Wystan M. Ackerman, Robinson & Cole LLP, Hartford, CT; Laura A. Foggan, Crowell & Moring LLP, Washington, DC; James R. Martin, Zelle LLP, Washington, DC, for Amici Curiae American Property Casualty Insurance Association and National Association of Mutual Insurance Companies, in support of Defendant-Appellee and affirmance.

Before: WALKER, CALABRESI, and LOHIER, Circuit Judges.

LOHIER, Circuit Judge

In a scenario that has become all too familiar during the COVID-19 pandemic, 10012 Holdings, Inc. d/b/a Guy Hepner, which operates as a brick-and-mortar art gallery and dealership in New York City, was forced to suspend its operations to comply with government restrictions on non-essential businesses. As a result, 10012 Holdings could no longer sell paintings at its gallery and resorted to online sales, with employees allowed to access the gallery for routine business purposes such as packing and shipping a painting purchased online. The company, which was insured under a widely used business property insurance policy (the "Policy") issued by Sentinel Insurance Company, Ltd., sought coverage under the Policy for its business income losses and expenses relating to the gallery's closure. Sentinel denied coverage on the ground that 10012 Holdings did not suffer direct physical loss of or physical damage to its property or property within its vicinity, as the Policy required. Invoking three provisions of the Policy, 10012 Holdings brought this action for breach of contract and a declaratory judgment that Sentinel was liable for coverage of its COVID-19-related business losses, claiming that the Policy's references to "physical damage" or "physical loss" include the loss of use of property as a result of the suspension of business operations. The United States District Court for the Southern District of New York (Schofield, J. ), applying New York law, agreed with Sentinel's reason for denying coverage and dismissed 10012 Holdings's claims with prejudice under Federal Rule of Civil Procedure 12(b)(6).

For the reasons that follow, we AFFIRM .

BACKGROUND

The following facts are drawn from 10012 Holdings's complaint and documents attached thereto, and are assumed to be true for purposes of our de novo review of the District Court's judgment dismissing the complaint for failure to state a claim upon which relief can be granted. See Schlosser v. Kwak, 16 F.4th 1078, 1080 (2d Cir. 2021).

In 2019, 10012 Holdings purchased the Policy from Sentinel to cover the period from April 1, 2019 through April 1, 2020. The Policy provides three principal types of coverage relevant to this appeal: "Business Income," "Extra Expense," and "Civil Authority." The Business Income provision requires Sentinel to cover certain business losses incurred if 10012 Holdings suspended its operations due to "direct physical loss of or physical damage to" its property "caused by or resulting from a Covered Cause of Loss." Joint App'x 83. The Policy defines "Covered Cause of Loss" as "risks of direct physical loss" not otherwise excluded by the Policy. Joint App'x 75. The Extra Expense provision, meanwhile, reimburses "reasonable and necessary Extra Expense" incurred during a "period of restoration" of the premises following "direct physical loss or physical damage to" 10012 Holdings's property "caused by or resulting from a Covered Cause of Loss." Joint App'x 83. Finally, the Civil Authority provision extends coverage for business income losses if access to 10012 Holdings's premises "is 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" 10012 Holdings's premises. Joint App'x 84.

Starting in March 2020, 10012 Holdings was forced to suspend business operations at the art gallery in compliance with the now well-known executive orders issued by the Governor of New York as the immediate response to the COVID-19 pandemic. Relying on the Business Income, Extra Expense, and Civil Authority provisions, 10012 Holdings demanded that Sentinel reimburse it for the losses and expenses it incurred as a result of suspending its operations. In a letter dated April 3, 2020, Sentinel disclaimed coverage, asserting that "COVID-19 did not cause property damage at [10012 Holdings's] place of business or in the immediate area." Joint App'x 15.

When 10012 Holdings filed this action for breach of contract and declaratory relief, Sentinel moved to dismiss the complaint. In a brief opinion, the District Court granted Sentinel's motion and dismissed 10012 Holdings's claims with prejudice. 10012 Holdings, Inc. v. Sentinel Ins. Co., 507 F. Supp. 3d 482 (S.D.N.Y. 2020). The District Court first concluded that 10012 Holdings could not recover under either the Business Income provision or the Extra Expense provision because, under New York law, the provisions are unambiguously "limited to losses involving physical damage to the insured's property," which 10012 Holdings did not allege it suffered. Id. at 486–88. The Civil Authority provision was also inapplicable, the District Court explained, because it provided coverage only if the closure of 10012 Holdings's business resulted directly from the closure of neighboring properties. Id. at 488. The District Court pointed out that 10012 Holdings was forced to close the gallery for the same reason that its neighbors were required to shutter their businesses, namely, the risk of harm to individuals on its own premises due to the pandemic. Id. at 488–89. Finally, the District Court denied 10012 Holdings leave to amend for the simple reason that "the Policy does not provide coverage for the loss Plaintiff suffered." Id. at 489.

This appeal followed.

DISCUSSION

The central question we address is whether the Policy provides coverage for 10012 Holdings's financial losses even though 10012 Holdings does not allege that its closure resulted from physical damage to its property or the adjoining property of its neighbors. To answer that question, we apply New York law, which the parties agree governs our interpretation of the Policy.

Under New York law, "an insurance contract is interpreted to give effect to the intent of the parties as expressed in the clear language of the contract." Parks Real Est. Purchasing Grp. v. St. Paul Fire & Marine Ins. Co., 472 F.3d 33, 42 (2d Cir. 2006) (quotation marks omitted). "The policy must ... be construed in favor of the insured, and ambiguities, if any, are to be resolved in the insured's favor and against the insurer." U.S. Fid. & Guar. Co. v. Annunziata, 67 N.Y.2d 229, 232, 501 N.Y.S.2d 790, 492 N.E.2d 1206 (1986). But "[w]here the provisions of [a] policy are clear and unambiguous, they must be given their plain and ordinary meaning, and courts should refrain from rewriting the agreement." Id. (quotation marks omitted).

I. The Business Income and Extra Expense Provisions

10012 Holdings argues that it is entitled to coverage under the Business Income and Extra Expense provisions because the Policy's use of the term "direct physical loss," which appears in both provisions and which the Policy does not define, plainly includes circumstances where 10012 Holdings is merely deprived of access to its business property. But New York law compels us to reject 10012 Holdings's proposed reading of the term.

In particular, we note that in Roundabout Theatre Co. v. Cont'l Cas. Co., 302 A.D.2d 1, 751 N.Y.S.2d 4 (1st Dep't 2002), the First Department rejected a similar reading of the term "loss of ... property." Id. at 8. There, a municipal order closed a street for safety reasons following a construction accident at a building in the area. Id. at 5. The plaintiff, a theater company, was forced to cancel several scheduled performances when its theater was rendered inaccessible to the public for several weeks due to the street's closure. Id. Although the theater itself suffered no physical damage, it sought coverage for its monetary losses under its insurance policy's business interruption provision. Id. at 5–6. The trial court in Roundabout Theatre ruled in favor of the theater and concluded that the phrase "loss of" as used in the policy's business interruption provision included the theater's "loss of use" of its premises. Id. at 6. Describing the trial court's interpretation as "flawed," id. at 8, the Appellate Division reversed. The policy's business interruption provision, the court noted, covered loss of property "caused by the perils insured against," which the policy defined as "all risks of direct physical loss or damage to the [insured's] property, not otherwise excluded." Id. (quotation marks omitted). Given the plain meaning of the words "direct" and "physical" and the structure of the policy overall, the Appellate Division held that the provision "clearly and unambiguously provides coverage only where the insured's property suffers direct physical damage." Id.

We follow this holding. The relevant provisions at issue in ...