SDNY Judge Jed Rakoff rejected Northwell Health’s bid for insurance coverage for its increased costs and business losses related to the COVID-19 pandemic in a recent decision. As the COVID-19 pandemic unfolded, Northwell was inundated with new patients, had increased cleaning costs, and stopped offering outpatient care services and elective procedures. In the ruling, Judge Rakoff held that Northwell was not entitled to coverage under two all-risks commercial property insurance policies.
The federal government declared a COVID-19 emergency on March 13, 2020, and New York State issued orders suspending or severely curtailing operations of certain businesses. In its complaint, Northwell alleged that, while caring for over 100,000 COVID-19 patients, it incurred significant new costs, was forced to cease elective surgeries and close physicians’ practices, and saw fewer hospital admissions and visits. Northwell alleged that the respiratory droplets carrying the coronavirus were “physical objects, carrying a physical substance, that attach to [and] cause harm to property.” Examining several different policy provisions, the Court held that Northwell had failed to establish an entitlement to coverage.
Time Element Coverage
The Northwell policies provided “Time Element” coverage for lost earnings from the necessary “suspension” of business activities, if caused by “direct physical loss of or damage to Covered Property … caused by Covered Cause of Loss.” The Court held there was no coverage under this provision because it required the cost or loss to be caused by direct physical loss or damage. While Northwell alleged that the respiratory droplets carrying the coronavirus attached to surfaces, the Court concluded that the complaint failed to allege that the coronavirus compromised the physical integrity of objects by harming surfaces and structures, as opposed to harming the people who touched them. The Court held that (1) the Northwell interpretation would collapse coverage for direct physical loss or damage into “loss of use” coverage; (2) the coronavirus did not “persist” on property, as the property could be usable when sanitized; and (3) the Northwell properties were not unusable, as they did continue to operate with extra precautions.
Interruption by Communicable Diseases Coverage
The Court found that Northwell had satisfied the first two conditions for Interruption by Communicable Diseases coverage, that Northwell ceased or slowed operations because of a governmental authority regulating the spread of a communicable disease. The Court held that there was no coverage, however, because Northwell failed to allege that the government orders declared portions of its locations “uninhabitable,” as patients continued to “inhabit” hospitals and hospitals were not required to close buildings, although elective procedures were suspended. “While the Orders certainly restrict access to hospitals, they fall short of ‘prohibiting’ access.”
Civil or Military Authority, Decontamination Costs, and Ingress/Egress Coverage
Judge Rakoff also rejected Northwell’s claims for coverage under the Civil or Military Authority, Decontamination Costs and Ingress/Egress policy provisions. First, all three required the costs and losses to be caused by “physical loss and damage,” and he had already rejected Northwell’s argument for coverage under this definition. He also found the claims under these provisions deficient for additional reasons.
Civil or Military Authority coverage requires an order prohibiting access in response to physical loss or damage to nearby property not belonging to the insured. The Court held that the complaint did not allege nearby properties that caused a prohibition on access to Northwell facilities, and the facts did not support the allegation that any order prohibited access to Northwell facilities.
Decontamination Costs coverage applies to government-mandated costs to remove a virus or infected property, if the presence of an illness-causing agent was caused by physical loss or damage. The Court held that the presence of COVID-19 was not caused by physical loss or damage, but by infected patients or visitors who released droplets containing the virus into the air.
In addition, the Court held that the Ingress/Egress coverage provision did not apply because it requires “physical obstruction,” and the government orders at issue were legal obstructions rather than physical barriers.
Exclusions to Coverage
Finally, the Court held that, even assuming there were coverage under the provisions above, an exclusion to coverage applied. The policy excluded coverage for a “release, discharge, escape or dispersal” of “contaminants or pollutants,” and defined “contamination” to include disease-causing viruses. The Court found that there was a discharge or dispersal: “What is a sneeze or cough if not a discharge or dispersal?” The Court also rejected Northwell’s argument that “discharge” or “dispersal” should be limited to environmental or industrial pollutants and contaminants because the policies specifically defined “contaminants to include viruses.”
Judge Rakoff’s decision addressed many issues concerning insurance coverage for the COVID-19 pandemic, and rejected Northwell’s arguments across the board. The decision is likely to be appealed by Northwell, so ultimately the Second Circuit may rule on these important coverage issues.