COVID-19 Virus Deemed a Physical Cause of Loss in New York Case

In its arguments, the insured positioned the virus as a physical cause of loss, triggering its business income insurance policy.
By: | September 5, 2021

JDS Construction Group, a construction management company based in New York City, was commissioned to develop an 80-story condominium tower for 9 Dekalb Fee Owner, a construction developer.

When COVID-19 hit North American shores, however, the project faced delays and mandated closures.

The state’s governor issued an executive order on March 7, 2020 telling all non-essential businesses to reduce worker capacity by 50%. By March 18, the percentage was increased to 100%, meaning only essential entities could operate while non-essential businesses had to send their workforce home.

A March 19 order further clarified certain construction projects could be deemed as essential, excluding them from the shutdown mandate and in-person restrictions.

The JDS and 9 Dekalb condominium fell under the non-essential category.

The jobsite closed per the governor’s mandate, then was able to reopen partially with reduced occupancy by April 20, 2020.

JDS wanted to regain revenue lost during the down time. It turned to its insurer, Continental Casualty Company, through which both JDS and 9 Dekalb were issued a builder’s risk insurance policy.

JDS looked to the business income coverage issued under its policy. Coverage would be provided for the actual loss of business income sustained during a “period of delay” as a result of a delay in the completion of a covered project.

The delay “must have been caused by direct physical loss or damage … from a covered cause of loss.”

The policy further defined a “covered cause of loss” as “all causes of direct physical loss or damage” except those excluded in the policy.

Thus, Continental denied business income loss coverage for JDS and 9 Dekalb. It said that the governor’s mandates did not result in physical loss or damage to the construction project or site.

JDS and 9 Dekalb filed a joint eight-count complaint against Continental seeking declaratory judgments of insurance coverage and damages for breach of contract under several coverage provisions.

Continental moved to dismiss.

During an August, 2021 hearing, Continental argued further that no physical loss or damage occurred, thus no policy provision was triggered. Closure orders, it said, “did not prohibit access to the jobsite. Indeed, one of the later executive orders clarified that only certain construction projects were considered essential.”

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JDS and 9 Dekalb countered that the COVID-19 droplets and/or nuclei were present on solid surfaces and in the air at the insured site. Believing the virus to be a physical substance, they argued that it “has attached and adhered to [the condominium] properties,” thus resulting in a physical loss or damage that prohibited the team from working.

The circuit court was left to decide.

Scorecard: The court denied Continental Casualty Company’s motion to dismiss.  The insurer was given until Sept. 13, 2021 to respond.

Takeaway: An interesting argument to say the least, and not the first time a company has used the virus itself as a physical cause of loss in court. Insurers are best suited to prepare for BI-related litigation moving forward ad watch how the courts are responding in order to prepare. &

Autumn Demberger is the content strategist at Risk & Insurance®. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]