Victory for AIG in Covid-19 Business Interruption Case

The firm recently scored a significant victory for AIG unit American Home Assurance Company in a high-profile COVID-19 business interruption case brought by Spirit Airlines in the New York State Supreme Court, New York County Commercial Division. Spirit alleged “hundreds of millions, and likely more than a billion, dollars” in business interruption losses resulting from flight cancellations, refunded and decreased ticket sales, and grounded airplanes due to the COVID-19 pandemic and related government stay-at-home orders. Spirit argued it was entitled to reimbursement under various coverage provisions in its “all-risk” property insurance policy, all of which required “direct physical loss of or damage” to its property to trigger coverage, on the theory that the coronavirus permeated the air and altered the surfaces it came into contact with, resulting in direct physical loss or damage to Spirit’s property.

Quinn Emanuel moved to dismiss the complaint in its entirety, with prejudice, on the grounds that the policy’s requirement of “direct physical loss or damage to property” does not include the presence of coronavirus in the air and on surfaces—the core issue driving most COVID-19 business interruption cases. The firm also argued that coverage for virus-related losses was entirely excluded by the policy’s Pollution & Contamination Exclusion—an issue that courts around the country have struggled with to varying outcomes.

On August 18, 2022, immediately following oral argument, the Court issued a bench ruling granting American Home’s motion to dismiss in its entirety, with prejudice, on both grounds. The Court found that the First Department Appellate Division, in Consolidated Restaurant Operations, Inc. v. Westport Ins'.Co., 205 A.D.3d 76 (1st Dep’t 2022), squarely addressed and rejected the argument that the presence of coronavirus in the air and on surfaces constituted “direct physical loss or damage.” Instead, the property must be “changed, damaged or affected in some tangible way, making it different from what it was before the claimed event occurred,” and the presence of the coronavirus does not result in tangible change to property. The Court also ruled that the Pollution & Contamination Exclusion unambiguously applied to the coronavirus and was not limited, as Spirit argued, to industrial or environmental pollution. This ruling is significant because it marks a rare instance in which a New York court has reached the Pollution & Contamination Exclusion’s applicability to COVID-related losses.

This case marks Quinn Emanuel’s third consecutive victory in two years over the well-known insurance recovery law firm Cohen Ziffer Frenchman & McKenna following a successful motion to dismiss in Northwell Health, Inc. v. Lexington Insurance Company (S.D.N.Y.) and a jury trial victory in Conduent State Healthcare, LLC v. AIG Specialty Insurance Company (Del. Super.).