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A Tale of Two Cities: COVID-19 Business Interruption Coverage in New York and Paris

6/5/20

By: Isis Miranda

Two sides of the pond. Two different outcomes.

In New York, Social Life Magazine, Inc. sought immediate relief from the court in a case against its insurer, Sentinel Insurance Company, Limited, for business interruption coverage losses it sustained due to the closure of its business as a result of Governor Andrew Cuomo’s shutdown order in the wake of the coronavirus pandemic. Social Life explained in its application to the court in the Southern District of New York that it had “no money to publish any magazines,” as it was left with only $2,106.94 in its two bank accounts and was therefore “already out of business.” Social Life stated that it sustained over $200,000 in lost income in March and April 2020 and explained that it also had contractual obligations to its advertisers, which had already paid Social Life approximately $240,000 and were “expecting their advertisements this summer.” Social Life stated that it had received only $1,000 under the CARES Act and that it had not yet received any response from the Small Business Administration regarding its loan application. For these reasons, Social Life sought a preliminary injunction ordering Sentinel to pay for its business interruption losses incurred thus far while it continued to prosecute its case against Sentinel.

In Paris, Stephane Manigold, the owner of four Paris restaurants, also sought immediate relief from the Paris Commercial Court in a case against his insurer, AXA, S.A., for business interruption losses stemming from the coronavirus as a result of the French Government’s order limiting restaurants to takeout only. Manigold stated that he had a cash deficit of €201,413, which he expected to increase by €45,903 by the end of May. Like Social Life, Manigold sought immediate payment of his restaurants’ business interruption losses incurred to date.

New York

“What is the damage? There is no damage to your property,” the New York judge said to Social Life’s counsel during the telephonic court hearing on its application on May 14. Focusing on whether Social Life could show it sustained a “direct physical loss or damage” under its policy, the judge cut short Social Life’s argument that the absence of a virus exclusion in the policy indicated there was coverage. “Well, the virus exists everywhere,” Social Life’s counsel responded, to which the judge retorted, “It damages lungs. It doesn’t damage printing presses.”

When Social Life’s counsel attempted to argue that the “loss of use” of the property constituted direct physical loss or damage, the judge did not bite. She explained: “With loss of use, I mean, loss of use from things like mold is different from you not being able to, quote, use your premises because there is a virus that is running amuck in the community.” Social Life’s counsel attempted to equate mold spores and bacteria with a virus, stating: “Mold spores, bacteria, virus, all those are physical items which damage whatever they are on, whatever they land on. And in this case, the virus, when it lands on something and you touch it, you could die from it.” The judge, again, explained: “That damages you. It doesn’t damage the property.”

Moving on to the issue of causation, the judge explained: “That is 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 . . . You may not even have the virus in your property.” This led to a short colloquy in which the judge asked, “What evidence do you have that your premises are infected with the COVID bug?” Social Life’s counsel responded: “Well, the plaintiff is here. He got COVID. So that’s evidence there.” The judge replied, “Well, it’s not evidence that he got it in his office.”

Sentinel’s counsel argued that the “loss of use” cases Social Life relied upon were not New York cases and, therefore, not applicable. Sentinel’s counsel went on to explain that “even in those other cases,” the “property has to be entirely unusable or uninhabitable” for “loss of use” to constitute physical loss or damage. Because, according to Sentinel’s counsel, the governor’s order explicitly allowed employees to access their property to get mail or do routine business functions, Social Life could not satisfy the “direct physical loss or damage” requirement, even if the judge decided to apply out-of-state law regarding “loss of use.”

In response, Social Life’s counsel argued that the governor’s shutdown order mandated “100 percent” compliance, to which the judge responded by asking a rhetorical question, “You are in your office?” In part because, in the judge’s opinion, “There is nothing about the governor’s order that prohibits a small businessperson or a big business person from going into their office to pick up mail, to water the plants, to do anything like that, including employees that are working,” she found there was no coverage under the policy.

The judge concluded the debate by telling Social Life’s counsel:

I feel bad for your client. I feel bad for every small business that is having difficulties during this period of time. But New York law is clear that this kind of business interruption needs some damage to the property to prohibit you from going. You get an A for effort, you get a gold star for creativity, but this is just not what’s covered under these insurance policies.

Although Social Life filed a notice of appeal shortly after the hearing, it subsequently dismissed its complaint and the appeal. It’s unclear whether Social Life simply changed its mind or if the dismissal was the result of a settlement with Sentinel. The End.

Paris

Anais Sauvagnac, Stephane Manigold’s attorney, told reporters on May 22 that the Paris Commercial Court had issued an interim order requiring AXA to reimburse Manigold for his legal fees and pay for two months’ worth of coronavirus-related revenue losses. Manigold’s attorney stated: “This means that all companies with the same clause can appeal to their insurers.”

As widely reported, Manigold was in his office when he learned of the court’s decision. He reportedly high-fived a colleague and his supporters applauded. Manigold told Reuters, “This is a collective victory,” and later cried as he spoke to reporters in front of one of his empty restaurants.

In making its decision, the court considered Manigold’s “seriously overburdened financial situation” in finding that his request for immediate relief was sufficiently “urgent” to warrant an immediate ruling by the court. The court also determined that AXA had failed to present a serious challenge to Manigold’s claim for coverage, noting that the policy did not expressly exclude pandemic risk.

Like Sentinel, AXA argued that coverage was not triggered under the policy since the French Government’s order had not mandated the closure of restaurants but rather allowed them to remain open for takeout service. The court disagreed. It found that Manigold had demonstrated coverage for business interruption losses sustained by his restaurants because they were prohibited from allowing customers to dine in, which was their traditional form of business.

AXA immediately vowed to appeal the ruling. Several days later, however, AXA announced it was seeking an amicable resolution and planned to meet the bulk of claims from restaurant owners whose contracts contained some ambiguity. According to AXA’s CEO, Thomas Buberl, “These contracts represent less than 10% out of total contracts with restaurants owners and I am confident that we will find a solution. . . We want to compensate a substantial part of these contracts. We want to do it quickly.” In pledging an additional €500 million in aid for small companies, Burberl explained, “The idea is clearly to reinforce those companies that are weakened by this crisis.” AXA has not said whether it has also changed its mind about appealing the ruling. Fin (with a possible sequel to come).

The Missing Characters

The two most important characters in this story – Social Life’s insurance policy and Manigold’s insurance policy – are missing. Unsurprisingly, Manigold reported that his team had received calls from Britain, South Africa, Spain, and the United States asking about the contents of his insurance policy, causing him to conclude: “This decision in Paris has a global resonance.”

Without analyzing the policies’ express terms, we are left to speculate whether the different outcomes – just one week apart – result primarily from differing policy language or differing approaches to judicial application. This may not be a tale of two cities but a tale of two policies.

One thing we know for certain during these uncertain times is that the words of Charles Dickens ring truer than ever:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way. – A Tale of Two Cities

Another certainty is that this is the beginning of a new era. We will continue to report on the myriad business interruption coverage cases citing COVID-19-related losses as they progress through the courts across the globe.

If you have questions or would like more information, please contact Isis Miranda at imiranda@fmglaw.com.

Additional Information:

The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues on a regular basis.  Click here to view upcoming webinars.

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients.  Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments.  For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at coronavirustaskforce@fmglaw.com.

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