January 2022: New York - Property Coverage - COVID-19 Physical Loss or Damage

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The Southern District of New York in J. Kleinhaus and Sons v. Valley Forge Ins. Co., 2021 U.S. Dist. LEXIS 239127 (S.D.N.Y. Dec. 14, 2021) rejected J. Kleinhaus’ bid for business income, extra expense, and civil authority coverage for losses it sustained as a result of COVID-19 business closures, reasoning that an “avalanche of authority” has held that COVID-19 does not qualify as “physical loss or damage” for coverage purposes.


Valley Forge issued a commercial insurance policy to J. Kleinhaus, a Manhattan diamond dealer. The policy’s business income and extra expense parts covered “direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from a Covered Cause [of] Loss.” It also included a civil authority provision that applied on the basis of “direct physical loss of or damage to” properties other than the insured’s premises.

Kleinhaus sought business income, extra expense, and civil authority coverage under the Valley Forge policy for its lost business income as a result of COVID-19 and associated “stay-at-home” and non-essential business closure orders. Valley Forge disclaimed. Kleinhaus then sued in state court seeking a declaration of coverage and damages for breach of contract. Valley Forge removed the case to federal court, and filed a motion to dismiss on the basis that the policy did not cover lost income caused by the pandemic and shut-down orders.

The Parties’ Arguments

Valley Forge argued that the complaint should be dismissed because it failed to allege any “direct physical loss of or damage to property,” a threshold requirement for coverage under the policy’s business income, extra expense, and civil authority parts. Valley Forge supported its arguments with a number of decisions from the Southern District, as well as decisions from federal courts across the country. With respect to civil authority coverage it also observed that the governmental orders at issue in the case did not prohibit access to the insured’s premises.

In opposition, Kleinhaus argued the policy should be construed broadly because, under New York law, Plaintiff’s all risk policy covered all perils not specifically excluded, and the policy did not contain an exclusion for viruses. Kleinhaus also, while citing to numerous legislative and executive bodies’ fact-based determinations, contended that the phrase “direct physical loss of or damage to property” refers to either tangible harm or loss of use. And it asserted that COVID-19 rendered its premises unusable for their intended purpose.

The District Court’s Decision

The Court focused on whether COVID-19 and government shutdown orders lead to “direct physical loss of or damage to property.” The Court noted that it addressed the same issue under the same policy language in Michael Cetta, Inc. v. Admiral Indem. Co., 506 F. Supp. 3d 168 (S.D.N.Y. 2020).

In doing so, it examined the meaning of “direct physical loss of or damage to property.” It looked to dictionary meanings of the words in the absence of a policy definition. The Court concluded, citing Michael Cetta, Inc., that they unambiguously connoted a “negative alteration in the tangible condition of property.” The opinion further stated that the “consensus among courts applying New York law” is that this pivotal phrase requires “a showing of actual, demonstrable physical harm of some form to the insured premises.”

The Court concluded that the “requirement for physical harm shows that none of the three provisions that Kleinhaus points to covers its claims.” With respect to the business income and extra expense portions of the policy, which turned on loss to the insured’s premises, the Court concluded that a loss of use does not qualify as physical loss. It also discounted “comments in orders and laws that mention COVID-19 causing property loss and damage” as conclusory.

It used similar reasoning with respect to the civil authority provision, noting also that Kleinhaus “failed to plead that the orders entirely prohibited access to the covered premises.” The opinion additionally concluded that the “stay-at-home” and business closure orders were “issued in response to the rapid spread of the COVID-19 virus, and not on account of any physical loss or damage to any specific property.”

At root, the Court found that “the overwhelming weight of” case law provides “that the forced closure of premises from COVID-19 does not qualify as physical loss or damage.” In fact, it noted that “every single circuit to address the issue has rejected coverage when interpreting similar insurance policies governed by other states’ laws.” It therefore rejected Kleinhaus’ arguments, including its contention that temporary loss of use triggered its policy.


The Court in this opinion noted the general principle that insurance does not cover everything and “courts must honor the coverage the parties did -- and did not -- provide for in their written contracts of insurance.” In this case, and in “an avalanche” of others, this precept has resulted in a denial of coverage for COVID-19 losses, and the Court here dismissed Kleinhaus’ complaint with prejudice.

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