(Article from Insurance Law Alert, February 2024)
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Holding
The New York Court of Appeals ruled that allegations of the COVID-19 virus at insured property locations and the resulting business closures and accommodations resulting from the virus do not state a claim for “direct physical loss or damage” under a property policy. Consolidated Rest. Operations, Inc. v. Westport Ins. Corp., 2024 N.Y. LEXIS 66 (N.Y. Feb. 15, 2024).
Background
Consolidated Restaurant Operations, an owner and operator of restaurants, sought coverage from Westport Insurance Corporation under an all-risk commercial property policy for business losses incurred during the COVID-19 pandemic. When Westport denied coverage, Consolidated sued, seeking a declaration of coverage and alleging breach of contract. A New York trial court granted Westport’s motion to dismiss, finding that Consolidated could not establish “direct physical loss or damage” to its property, as required by the policy. An intermediate appellate court affirmed, ruling that “direct physical loss or damage” requires a showing of “actual, demonstrable physical harm” and that the pleadings failed to allege such harm. In particular, the appellate court noted that Consolidated did not identify any physical change or transformation of insured property. The New York Court of Appeals affirmed.
Decision
The New York Court of Appeals rejected Consolidated’s assertion that “direct physical loss or damage” encompasses scenarios in which a physical event impairs the functionality of insured property or renders it fully or partially unusable for its intended purpose. Deeming this interpretation “untenable,” the court explained that “it would collapse coverage for ‘direct physical loss’ into coverage for ‘loss of use.’” The court further noted that other policy provisions—such as the “Time Element” and “Period of Liability” clauses—supported this conclusion. Those provisions referred to “direct physical loss” and the “repairing and replacing” of property, respectively, reinforcing the principle that the policy requires more than mere loss of use of insured property.
Consolidated argued that even if the policy requires physical alteration to property, its allegations satisfied this condition. Rejecting this assertion, the court explained that the complaint lacked allegations as to how the presence of the virus affected the physical integrity of property or gave rise to any need to repair or replace insured property.
Because the court ruled that the policy did not cover Consolidated’s claims in the first place, it did not reach the question of whether policy exclusions were applicable.
Comments
The court noted that decisions are split as to whether “persistent contamination” or “total uninhabitability” could satisfy the “direct physical loss” requirement. However, the court explained that it need not decide that question because Consolidated failed to allege either of those scenarios. Rather, the complaint alleged a suspension and curtailment of operations and the necessity of remediation efforts—none of which rise to the level of uninhabitability.
As to the overall conclusion that COVID-19-related business losses are not within the scope of commercial property insurance, the decision aligns with the overwhelming majority of decisions across jurisdictions.