(Article from Insurance Law Alert, February 2025)
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Holding
A New York appellate court affirmed the dismissal of COVID-19-related claims under civil authority provisions but reversed the dismissal of a claim pursuant to a special time element coverage provision. Bowlero Corp. v. AIG Specialty Lines Ins. Co., 2025 N.Y. App. Div. LEXIS 54 (N.Y. App. Div. 1st Dep’t Jan. 7, 2025).
Background
After Bowlero was required to suspend operations, in whole or in part, during the COVID-19 pandemic, it sought coverage for business losses under primary and excess commercial property policies. In ensuing coverage litigation, a trial court held that COVID-19 and its effects do not give rise to direct physical loss of or damage to property and therefore that any claims relating to such loss or damage must be dismissed.
The trial court also dismissed a claim under a “Special Coverage” provision, which applied to business losses, absent physical loss, damage or destruction of property where such loss is the direct result of “a contagious or infectious disease,” “an outbreak of a contagious or infectious disease within ten miles of an insured location,” or “the closing, in whole or in part, of the Insured’s premises by order of a public authority because of the existence or threat of hazardous conditions either actual or suspected at an insured location.” The trial court reasoned that the Special Coverage claim failed because Bowlero’s losses were caused by civil authority orders requiring the suspension or restriction of activities, not directly by any of the enumerated categories.
Decision
The appellate court affirmed the trial court’s dismissal of the civil authority coverage claims based on the absence of physical loss. In so ruling, the court rejected Bowlero’s assertion that the Special Coverage provision, which did not require physical loss, was an insured peril that triggered coverage under the civil authority provision, noting that such an interpretation would “violate basic rules of contract construction.”
However, the appellate court held that Bowlero stated a cause of action under the Special Coverage extension. The court also ruled that a pathogenic materials exclusion in the operative policy, which applied to the “discharge, dispersal, seepage, migration, release, escape or application” of such material, did not necessarily negate coverage “as the terms of the exclusion do not clearly and unmistakably apply.” The court stated: “To interpret this exclusion as broadly as [the insurer] argues for would render meaningless the provisions of the special time element that cover infectious or contagious disease.”
Comments
The appellate court’s reinstatement of the special coverage claim turned on the particular language at issue, highlighting the importance of policy verbiage in special endorsements and exclusionary provisions.