New York Court of Appeals Weighs in on COVID Business Interruption Claims

We were covering this sort of claim a lot back in 2021, for example here and here.  Things didn't go well for businesses. Many of the cases were being decided in federal courts, even though insurance issues are a matter of state law. The federal courts engaged in Erie guessing, and they consistently guessed that state courts would find that COVID caused no "direct physical loss or damage" covered under business interruption insurance policies.

Back in February, New York's Court of Appeals confirmed in Consolidated Restaurant Operations, Inc. v. Westport Insurance Corporation that, at least with respect to New York law, the federal courts guessed right. With admirable New York-style directness, the Court foregrounds its conclusion:

We hold that direct physical loss or damage requires a material alteration or a complete and persistent dispossession of insured property, which petitioner has not alleged. We therefore affirm the order below dismissing the complaint.

It's a tale as old as 2020. Consolidated Restaurant Operations (CRO) owned and operated dozens of restaurants. Due to the presence of the virus in its restaurants and government-ordered closures of non-essential businesses, CRO had to curtail or shut down its businesses. It sought insurance coverage for its business losses, and its insurer (Westport) denied coverage. The trial court granted Westport's motion to dismiss, and the Appellate Division affirmed.

On appeal, CRO tried two arguments. First, it argued that the court should interpret "physical loss" "to encompass situations where a physical event occurs on insured property and impairs its functionality or renders it, in whole or in part, unusable for its intended purpose." Second, if required to allege a physical alteration to its property, CRO claimed that it had so alleged. The Court of Appeals said, "No and no."

There are plenty of similar cases in which courts have held that "physical loss" requires a physical alteration of the property. CRO came up with a few cases from other jurisdictions in which courts treated contamination, e.g., through gasoline fumes, as physical loss, but only in situations where the harm was permanent and complete, making it impossible for the premises to serve their function. New York thus joined a large number of jurisdictions that have ruled in favor of insurers on such claims. The Court of Appeals dispensed with CRO's argument that it had pled physical loss in a few paragraphs.  While CRO had alleged the presence of the virus in its restaurants, it had not alleged any physical loss caused by the presence of the virus.