Rainbow USA Inc. v. Zurich American Insurance Company

74 Misc.3d 653

163 N.Y.S.3d 387

RAINBOW USA INC., AIJJ Enterprises Inc., et al., Plaintiffs,

v.ZURICH AMERICAN INSURANCE COMPANY, Defendant

Index No. 513649/20

Supreme Court, Kings County, New York.

Decided on January 27, 2022

Weg & Myers PC, New York City (Joshua Lee Mallin of counsel), for Rainbow USA Inc., plaintiff.

Mound, Cotton, Wollan & Greengrass, LLP, New York City (Philip C Silverberg of counsel), for defendant.

Leon Ruchelsman, J

The defendant moves pursuant to CPLR § 3211 seeking to dismiss the lawsuit. The plaintiff opposes this motion. Papers were submitted by the parties and after reviewing the arguments this court now makes the following determination.

The plaintiff, a New York corporation with a principal place of business in Brooklyn, commenced this action seeking business interruption insurance resulting from the government imposed shutdowns due to the COVID-19 pandemic. According to the Complaint the plaintiff is in the business of selling women's apparel and maintains over one thousand retail stores across the United States, the U.S. Virgin Islands and Puerto Rico. The plaintiff purchased comprehensive insurance from the defendant. The specific provisions that are the subject of this lawsuit concern coverage for losses sustained as a result of any civil or military authority or "an interruption of business, whether total or partial, during the period of time when, in connection with or following a peril insured against, ingress to or egress from real or personal property is impaired" (see , Complaint ¶118). On April 27, 2020 the plaintiff filed a claim with the defendant seeking damages resulting from government imposed shutdowns in excess of five million dollars. On May 27, 2020 the defendant disclaimed coverage citing to a provision of the policy that excluded claims arising from "seepage and/or pollution and/or contamination, direct or indirect, arising from any cause whatsoever" (see , Complaint ¶138). The plaintiff instituted this lawsuit and asserted causes of action for a declaratory judgement, breach of contract and breach of implied covenant of good faith and fair dealing due to the defendant's failure to entertain the claim submitted by the plaintiff. The defendant has now moved seeking to dismiss the lawsuit arguing the plaintiff did not suffer any "direct physical loss" necessary to trigger any coverage. The plaintiff opposes the motion arguing that requirement is ambiguous and is an insufficient basis upon which to dismiss the lawsuit and that in any event there are surely questions whether a direct physical loss has been presented.

Conclusions of Law

It is well settled that upon a motion to dismiss the court must determine, accepting the allegations of the complaint as true, whether the party can succeed upon any reasonable view of those facts ( Strujan v. Kaufman & Kahn, LLP , 168 A.D.3d 1114, 93 N.Y.S.3d 334 [2d Dept., 2019] ). Further, all the allegations in the complaint are deemed true and all reasonable inferences may be drawn in favor of the plaintiff ( Weiss v. Lowenberg , 95 A.D.3d 405, 944 N.Y.S.2d 27 [1st Dept., 2012] ). Whether the complaint will later survive a motion for summary judgment, or whether the plaintiff will ultimately be able to prove its claims, of course, plays no part in the determination of a pre-discovery CPLR § 3211 motion to dismiss (see , Moskowitz v. Masliansky , 198 A.D.3d 637, 155 N.Y.S.3d 414 [2021] ).

The policy in question provides insurance for losses suffered due to business interruption "as a result of direct physical loss or damage to the insured caused by a peril not otherwise excluded" (see , Property Insurance Policy, Policy Provisions, ¶ 2: Coverage, B: Business Interruption). Further, the policy provides that "this Policy insures against all risk of direct physical loss, damage or destruction to property described herein occurring during the term of insurance, except as hereinafter excluded" and that the term peril refers to the above stated conditions regarding physical damage (see , Property Insurance Policy, Policy Provisions, ¶ 1: Perils Insured Against). While the overwhelming majority of cases that have considered whether one can recover for government imposed shutdowns due to the COVID-19 pandemic have rejected such coverage on the grounds there has been no physical damage to any goods, the plaintiff urges the court to adopt positions taken by a minority of courts that have held otherwise. Of course, the sheer volume of cases pointing in one direction does not mean the conclusions reached are correct, however, they do provide persuasive and precedential value which cannot be ignored. In any event, this court will surely engage in its own analysis in deciding this motion.

The first issue that must be explored is whether the phrase "direct physical loss, damage or destruction to property" is ambiguous. It is well settled the court must determine as a threshold question whether an insurance term is ambiguous ( NIACC, LLC v. Greenwich Insurance Company , 51 A.D.3d 883, 857 N.Y.S.2d 723 [2d Dept., 2008] ). "The test for ambiguity is whether the provision is ‘susceptible of two reasonable interpretations’ " ( Concordia General Contracting Company Inc., v. Preferred Mutual Insurance Company , 146 A.D.3d 932, 46 N.Y.S.3d 146 [2d Dept., 2017] ). The plaintiff does not argue the terms are ambiguous in and of themselves but rather the phrase "direct physical loss" as a whole is ambiguous because it is unclear whether the words ‘direct’ and ‘physical’ modify the terms ‘loss’ or ‘damage’ or ‘destruction’ or whether coverage can include damage even without any physical loss. As the plaintiff points out, "the statement "I like green tea, mittens, and hats" could be read to imply that the speaker likes green tea, green mittens, and green hats, or that the speaker's preference for green applies only to tea" (see , Memorandum of Law in Opposition, page 9). It is true that when a single adjective is applied to multiple nouns an ambiguity is raised whether the adjective applies to all nouns. In The Judge As Linguist , by Peter Meijes Tiersma, 27 Loyola of Los Angeles Law Review 269 [1993] the author notes that the phrase "large cars or trucks" is ambiguous because it is unclear if all trucks are included or only large ones. This ambiguity could have far reaching consequences (id., see , also , California v. Brown , 479 U.S. 538, 107 S.Ct. 837, 93 L.Ed.2d 934 [1987] ). However, notwithstanding that ambiguity the phrase in the insurance policy in question does not deal with multiple nouns following an adjective but rather with distinct examples of casualty all connected as a single phrase. The plaintiff argues the adjectives ‘direct’ and ‘physical’ only modify the word ‘loss’ and do not necessarily modify the words ‘damage’ or ‘destruction’ creating an ambiguity whether the policy covers damage or destruction that did not arise from a direct or physical loss. The case of Encino Motorcars, LLC v. Navarro , ––– U.S. ––––, 138 S.Ct. 1134, 200 L.Ed.2d 433 [2018] while discussing statutory interpretation is likewise instructive in interpreting the insurance policy. In that case a statute exempted certain individuals from the prohibition against working more than the maximum forty hours per week. 29 USCA § 213(b)(10)(A) states that maximum hour prohibitions do not apply to "any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements, if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers" (id. ). Thus, the statute covers three individuals, namely, salesmen, partsmen and mechanics and two activities, namely selling or servicing vehicles. The Supreme Court rejected a lower court interpretation that limited salesmen only engaged in sales and partsmen and mechanics only engaged in servicing. The court explained the word "or" in the phrase "selling or servicing" as connecting all the activities together. Therefore, "the use of ‘or’ to join ‘selling’ and ‘servicing’ suggests that the exemption covers a salesman primarily engaged in either activity" (id. ). Likewise, when considering the policy in question and specifically the phrase "direct physical loss, damage or destruction to property" it is clear that ‘direct physical loss’ applies in addition to ‘damage’ and ‘destruction’ as well. Therefore, the policy requires physical damage or physical destruction. In truth, any other reading of the phrase is untenable. The phrase contains three types of casualty, namely loss, damage and destruction. According to the plaintiff's reading of the phrase, the policy covers against risk of direct physical loss, any damage whatsoever or any destruction whatsoever. Of course, even the plaintiff concedes that ‘destruction’ by its very term requires physical damage (see , Memorandum in Opposition, page 10). Thus, the plaintiff's reading would require physical damage for any loss sustained, physical damage for any destruction sustained and the right to recovery for any damage at all, even where no physical damage occurred, for example, damage caused by a governmental shutdown. It strains credulity that of the three sorts of casualty mentioned, the first and third necessarily require physical damage whereas the middle one mentioned does not. Thus, besides ignoring the ordinary disjunctive use of the word ‘or’ plaintiff's reading expands the narrow scope of the phrase's opening reach which only applies where there is "direct physical loss" ( Enrico , supra ).

The plaintiff argues that damage must mean something other than loss or destruction otherwise its inclusion is entirely superfluous. That argument has been considered by other courts which have concluded the language is not superfluous. For example, in Chief of Staff LLC v. Hiscox Insurance Company Inc. , 532 F.Supp.3d 598 [Northern District of Illinois, Eastern...