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.