New York Court Of Appeals Rules In Favor Of Insurers On COVID Coverage – Insurance Laws and Products

Our February 2023 post “The Commercial Division Rejects Yet Another
Insured’s Claim for Coverage for Covid-Related Revenues
Losses” left readers wondering whether the New York Court
of Appeals would uphold the First Department’s determination
that COVID-19 does not qualify as “direct physical loss”
for insurance purposes. One year later, the Court of Appeals
provided its answer in Consolidated Restaurant Operations, Inc.
v Westport Insurance Corp., No. 7, 2024 WL 628047 (N.Y. Feb.
15, 2024), affirming the First Department’s decision.

In April 2022, the First Department held in Consolidated
Restaurant Operations, Inc. v. Westport Insurance Corp., 205
A.D.3d 76 (1st Dep’t 2022), that harm caused by COVID-19 did
not qualify as direct physical loss for insurance purposes. Later
that year, the Commercial Division’s Justice Robert R. Reed
came to the same conclusion in Spirit Airlines, Inc. v.
American Home Assurance Company, Index No. 655755/2021
(discussed in our February 2023 post). The Commercial Division
decision relied on Consolidated Restaurant, asJustice Reed
stated that he would “follow the First Department until the
Court of Appeals says that the First Department is wrong.”

In a decision on February 15, 2024, the New York Court of
Appeals conclusively answered the question raised by Spirit
Airlines by affirming the First Department’s holding in
Consolidated Restaurant Operations, Inc. v Westport Insurance
Corp., No. 7, 2024 WL 628047 (N.Y. Feb. 15, 2024). The Court
of Appeals held that harm caused by COVID-19 would in fact
not qualify as direct physical loss for insurance
purposes.

In Consolidated Restaurant, Plaintiff Consolidated
Restaurant Operations, Inc. (CRO) filed a lawsuit against Westport
Insurance Corp. (“Westport”) seeking coverage for losses
stemming from the COVID-19 pandemic under their
“all-risk” commercial property insurance policy. CRO,
which operates various restaurant chains, argued that its policy
with Westport insuring for “direct physical loss of or damage
to property” included loss of revenue that resulted when CRO
was forced to suspend or substantially curtail its operations due
to the presence of the coronavirus in its restaurants and
government restrictions on nonessential businesses.

Westport, however, disputed CRO’s interpretation, contending
that that the alleged losses caused by the COVID-19 pandemic did
not constitute “physical damage to property” as a matter
of law.

Upon review, the Court of Appeals affirmed the First Department
and sided with Westport. The Court found that direct physical loss
or damage in the insurance context requires a “material
alteration or a complete and persistent dispossession of insured
property[.]” Consol. Rest. Operations, 2024 WL
628047, at *3. The Court found that CRO’s loss of use of its
property due to the COVID-19 pandemic was insufficient to trigger
such coverage, reasoning that “direct physical loss”
requires an actual, complete dispossession of the property. The
Court further noted that none of CRO’s allegations pointed to
persistent and complete uninhabitability of the insured
property.

The Court specifically noted that its decision accords with both
New York precedent and the views of courts in jurisdictions across
the country. Indeed, “in cases that allege loss of use due to
COVID–19–related government shutdown orders, no
appellate court has allowed an insurance coverage claim under
similar policy terms to proceed past a motion to dismiss.”
Id. at *6.

The Court similarly rejected CRO’s argument that the
presence of the COVID-19 virus in its restaurants amounted to a
physical alteration of the property as required by the policy. Of
importance to the Court was the fact that CRO did not allege the
virus caused any need to repair or replace insured
property—rather “only business interruption losses are
identified.” Id. at *7.

Watch this blog for developments in this fast-developing area of
New York insurance law.

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