After nationwide government shutdown orders forced museums, galleries, theaters and other performance venues—as well as restaurants and other places of public accommodation—to close their doors, many organizations turned to business interruption insurance policies to try to recover some of their devastating financial losses.  As previously covered on this blog in September and January, insurance companies have denied those business interruption insurance claims, arguing that financial losses caused by the pandemic are not “physical losses” covered by those policies, and courts around the United States have consistently agreed.  Since our January 2021 blog post, courts have continued to rule against theaters,[1] galleries,[2] cinemas[3] and other art institutions and denied business interruption insurance coverage.[4]

Courts outside of the U.S. have been more favorable to art institutions, partly due to a precedential ruling from the U.K. Supreme Court.  In January of this year, the U.K. Supreme Court issued a decision on a “test case” related to business interruption insurance that set a precedent for business interruption insurance cases in the U.K.[5]  While the issue of whether the presence of COVID-19 constitutes a “physical loss” was not up on appeal, the Court’s rulings on several other pandemic-related policies, including “disease” clauses and “prevention of access” clauses, were generally favorable to policyholders.[6]  Rudy Capildeo, an attorney representing more than 50 organizations in the art sector in the U.K., told Artnet News that “[t]he ruling means that a number of museums, galleries, dealers, and other art market professionals that have had their business-interruption insurance coverage refused to date, can now progress their claim.”[7]

Looking for similar guidance in the U.S., one art gallery has asked the United States Court of Appeals for the Second Circuit to certify to the New York Court of Appeals the question of whether courts should interpret business interruption policies to cover losses caused by shutdown orders in response to the COVID-19 pandemic.[8]  As previously covered on this blog, the District Court for the Southern District of New York recently dismissed claims by the Manhattan-based Guy Hepner Gallery for losses suffered as a result of the gallery’s suspension of business operations during the COVID-19 pandemic.  In its Second Circuit brief, the gallery argued that the question is “of significant importance to the thousands of businesses in New York that were shuttered or limited in response to COVID-19,” and that at least eight cases in New York “have hinged on the interpretation of the ‘direct physical loss of or damage to’ language at issue.”[9]  Courts and policyholders in other states have also sought appellate court clarification on the question of business interruption insurance, but courts in those jurisdictions have not yet issued any guidance.[10]

To date, arts organizations appear to be fighting a losing battle in U.S. courts.  Fortunately, they can turn elsewhere for relief.  The recently-enacted congressional stimulus package includes $470 million for cultural organizations, with $135 million each for the National Endowment for the Arts and the National Endowment for the Humanities, and $200 million for the Institute of Museum and Library Services.  The package also extended the Paycheck Protection Program, which can provide financial relief to smaller arts organizations.  While the stimulus funding likely cannot save all of the struggling businesses in the art world, it will provide some relief to help these organizations and businesses survive through the end of the pandemic.

[1] ABT Performing Arts Assoc. v. Cincinnati Ins. Co., No. CV 2020-010495 (Az. Super. Ct. (Maricopa Cty. Mar. 22, 2021)) (finding that the policy unambiguously required direct physical loss or direct physical damage to property, which was not satisfied by allegations that the virus was present at the property); Indiana Repertory Theatre Inc. v Cincinnati Casualty Company, 49D01-2004-PL-013137 (Ind. Super. Ct. (Marion Cty. Mar. 12, 2021)) (granting defendant insurance company’s motion for summary judgment against large non-profit professional ballet theatre, finding that “COVID-19 has not physically harmed or changed the theatre,” and that “[t]here is no business income coverage without structural alteration to property”).

[2] Kevin Barry Fine Art Assocs. v. Sentinel Ins. Co., Ltd., No. 20-CV-04783, 2021 WL 141180 (N.D. Cal. Jan. 13, 2021) (ruling against gallery, noting that “[t]he virus COVID-19 harms people, not property”); Adrian Moody & Robin Jones d/b/a Moody Jones Gallery v. The Hartford Financial Group, Inc. et al., No. CV 20-2856, 2021 WL 135897, at *12 (E.D. Pa. Jan. 14. 2021) (holding that gallery’s “theory that its loss of use or lost operations stemming from the government order is a covered loss under the [business interruption policy] fails”).

[3] Soundview Cinemas Inc. v. Great American Insurance Group, 2021 N.Y. Slip Op. 21025 at *9 (N.Y. Sup. Ct. (Nassau Cty Feb. 8, 2021)).

[4] Businesses outside of the art world have not had any more success in court.  According to a litigation tracker maintained by the University of Pennsylvania Carey Law School, the majority of state and federal courts that have ruled on motions to dismiss for business interruption claims related to the COVID-19 pandemic have granted dismissal, while the rest have denied the motions and remain pending.

[5] The Financial Conduct Authority & Ors v Arch Insurance (UK) Ltd & Ors, [2021] UKSC 1 (Jan. 15 2021).  The Financial Conduct Authority brought the case as the first Financial Markets Test Case on an expedited basis, using sample policy wordings and an agreed set of facts.  The Court also held that when an insured peril and an uninsured peril operate concurrently, insurers should cover loss resulting from both causes.

[6] Specifically, the U.K. Supreme Court addressed the following four business interruption insurance clauses on appeal:

  • “Disease clauses” (clauses which, in general, provide cover for business interruption losses resulting from the occurrence of a notifiable disease, such as COVID-19, at or within a specified distance of the business premises);
  • “Prevention of access clauses” (clauses which, in general, provide cover for business interruption losses resulting from public authority intervention preventing or hindering access to, or use of, the business premises);
  • “Hybrid clauses” (clauses which combine the main elements of the disease and prevention of access clauses); and
  • “Trends clauses” (clauses which, in general, provide for business interruption loss to be quantified by reference to what the performance of the business would have been had the insured peril not occurred).

Id. at 2–3.

[7] Naomi Rea, UK Galleries Will Benefit From a Court Ruling Forcing Insurers to Pay Businesses for Losses Incurred During Lockdown, ArtNet News (Jan. 18, 2021).

[8] 10012 Holdings, Inc. v. Hartford Ins. Co., No. 21-80 (2d. Cir. Apr. 5, 2021).

[9] Id.

[10] In January, a federal judge in Ohio certified to the Ohio Supreme Court the question of whether the presence of COVID-19 constitutes a ‘direct physical loss or damage to property’ within the meaning of the standard business interruption policy in that case. See Neuro-Communication Services Inc. v. Cincinnati Insurance Co. et al., No. 4:20-cv-01275 (BYP) (N.D. Ohio Jan. 19, 2021). In her order, the judge noted that “[d]ozens, if not hundreds of cases seeking coverage for losses related to the pandemic under policies similar or identical to that at issue in this case have been filed in both federal and state courts,” and that “differing interpretations of . . . contract law by different courts threaten to undermine the uniform application of that law to similarly situated litigants.” Id. at 4.  In February, a group of businesses requested that the Third Circuit certify the same question to the Pennsylvania Supreme Court. Motion of Plaintiffs-Appellants to Consolidate Appeal, No. 21-1175 (3d. Cir. Feb. 1, 2021).  One policyholder has even asked the U.S. Supreme Court to rule on the issue, even though it is a question of state and not federal law.  Petition for Writ of Certiorari, Mama Jo’s, Inc. v. Sparta Insurance Co., No. 20-998 (Jan. 14, 2021). On Petition for a Writ of Certiorari, the policyholder argued that “[b]ecause there is a split amongst the Circuits as to the interpretation of ‘direct physical loss,’” there is “cause for [the Supreme Court] to accept jurisdiction to resolve the conflict,” and that “[d]etermination of this contested issue of law is a matter of great public importance.” Id. at 2, 8. On March 29, 2021, the Supreme Court decided not to hear the case. Mama Jo’s Inc. v. Sparta Ins. Co., No. 20-998, cert. denied (U.S. Mar. 29, 2021).