Covid-19 may cause businesses to be unable to use their property, but loss of use doesn’t constitute the “direct physical loss or damage” necessary to trigger commercial property insurance coverage, according to a first-of-its kind New York appellate court decision issued Thursday.

In Consolidated Restaurant Operations, Inc. (CRO) v. Westport Ins. Co., Index No. 450839/21, App. Case Nos. 2021-02971, 2021-04034, plaintiff CRO, a multinational restaurateur, suspended indoor dining in March 2020 because of Covid-19 executive closure orders, and lost tens of millions of dollars in revenue as a result. Previously, CRO bought a commercial property policy from defendant Westport that insured “all risks of direct physical loss or damage to” insured property. CRO filed a claim for direct physical loss or damage because the actual or threatened presence of the virus at its restaurants eliminated their functionality for their intended purpose. Westport denied coverage because the virus’s presence did not constitute physical loss or damage.

CRO sued Westport in state court and Westport moved to dismiss the complaint. The motion was granted and CRO appealed, arguing:

• “Physical loss or damage to property” is ambiguous because “physical” is undefined.
• Covid-19 does inflict physical damage, even if the damage is invisible or intangible, analogizing to the presence of noxious substances like e. coli, asbestos, ammonia and salmonella.
• Unlike other policyholders’ suits based on government closures, CRO alleged the actual physical presence of the virus in the form of physical droplets and respiratory particles.
• The Westport policy does not contain a virus exclusion further suggests that coverage is available.

The appellate court disagreed, holding that “physical” is not ambiguous. The same appellate court in the pre-Covid-19 case Roundabout Theatre Co. v. Continental Cas. Co., 302 A.D.2d 1 (1st Dept. 2002), held that “loss of use” did not constitute “direct physical damage or loss to property”, which requires that “any claim for coverage must arise from . . . some physical problem with the covered property, not just the mere loss of use.” “The property must be changed, damaged or affected in some tangible way, making it different from what it was before the claimed event occurred.” That is “the impaired function or use of [CRO]’s property for its intended purpose, is not enough.” The court pointed to an “overwhelming number of authorities” that adopted this position, including every New York federal court and New York trial-level court to address the issue.

The court distinguished the handful of out-of-jurisdiction cases holding that conditions rendering property “unusable” can trigger coverage for business interruption because under New York law “a negative alteration in tangible condition of the property [insured] is necessary in order for there to by ‘physical’ damage to the property.”

Ultimately the court held that because the complaint sought coverage for economic loss due to “direct physical loss or damage to insured property,” but failed to allege any “tangible, ascertainable damage, change or alteration to the property” it was properly dismissed. Amendment would be futile and leave to amend was properly denied.

Finally, the court held that the suggestion that the lack of a virus exclusion meant that the policy covered viruses was wrong because “exclusion clauses subtract from coverage rather than grant it.”

Many other companies have made similar claims and met a similar fate. Across the U.S., the vast majority of courts have sided with insurers.