New York’s High Court Backs Insurer’s Denial of COVID-19 Business Interruption Claim

New York state’s highest court has affirmed that there must be direct physical loss or damage, not just presence of a virus, to trigger coverage under a commercial property policy for COVID-19 business interruption losses.

The Court of Appeals upheld lower courts that rejected Consolidated Restaurant Operations, Inc.’s (CRO) claims under a policy from Westport Insurance Corp.

CRO, like many businesses, sustained a significant reduction in revenue during the pandemic. In its original complaint, CRO alleged that it 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.

CRO sought coverage for the loss of revenue and, after Westport denied coverage, sued Westport for breach of contract. Westport moved to dismiss for failure to state a cause of action, arguing that CRO could not establish that the coronavirus caused “direct physical loss or damage” to its properties as a matter of law.

First, the Supreme Court declared that the policy did not cover CRO’s alleged losses and granted Westport’s motion to dismiss. Then the Appellate Division affirmed the Supreme Court order, noting that numerous federal and state court cases had applied both New York law and the law of other states to hold that the terms “direct” and “physical,” as they relate to “damage or loss to property,” require “a direct physical loss of property, not simply the inability to use it.”

The Court of Appeals took up the issue and reached the same conclusion.

The state’s high court held that the insurance provisions relied upon by CRO only cover economic losses to the extent they are caused by “direct physical loss or damage” to insured property and the business interruption caused by the actual presence of the coronavirus on the premises of CRO’s insured property is insufficient to trigger such coverage. The court said that “direct physical loss or damage requires a material alteration or a complete and persistent dispossession of insured property,” which CRO did not show.

“We do not take lightly the severe economic losses incurred by restaurants and other businesses serving the public as a result of the COVID-19 pandemic,” the opinion by Judge Caitlin Halligan states. “But our task is to faithfully interpret the terms of the insurance policy before us, not to rewrite the language of the policy at issue to reach a result with ‘equitable appeal.'”