Wade Clark Mulcahy LLP

In Consolidated Restaurant Operations v. Westport Insurance Corporation, the New York Court of Appeals considered whether a claim for business interruption losses from the COVID-19 virus triggered policy coverage for “direct physical loss or damage to property.” 2024 WL 628047 (N.Y. Feb. 15, 2024).

Westport issued an all-risk property insurance policy to Consolidated Restaurant Operations (“CRO”), which owns and operates various restaurants.  Id. at 1.  That policy covered business operation losses “directly resulting from direct physical loss or damage” to CRO’s property.  Id.  In the wake of the pandemic, CRO, like many other businesses, experienced significant loss of business from the presence of the virus and compliance with government restrictions.  Id.  CRO thus sought coverage from Westport, which Westport denied.  Id.  The lower courts ruled in favor of the insurer, finding that CRO’s claims did not allege a physical change, transformation, or difference to its restaurants sufficient to trigger the policy’s coverage.  Id. at 2.  The Appellate Division explained that “damage or loss to property” required “a direct physical loss of property, not simply the inability to use it.”  Id.

On review, the Court of Appeals opined that “physical damage” requires a “material physical alteration to property … that is perceptible, even if not visible to the naked eye.”  Id. at 4.  Further, the Court held that “direct physical loss” could not encompass loss of functionality without improperly conflating “direct physical loss” and “loss of use,” two distinct areas of coverage.  Id.  Rather, a “direct physical loss” must be limited to “an actual, complete disposition” of the property—like persistent contamination or total uninhabitability.  Id.  Conversely, the Court found that CRO alleged a temporary decline in use of its restaurants—not a complete shutdown of operations.  Id. at 6.  Moreover, CRO failed to show that the virus’s presence physically damaged its restaurants—such as by requiring repair or replacement of property.  Id. at *7.

The Court’s decision reflects a notable judicial trend in favor of interpreting “direct physical loss or damage” policy language strictly, particularly with respect to COVID-19 business interruption claims.  Accordingly, the CRO case offers clear, favorable guidance for insurers in handling and evaluating such claims.