NY court rules COVID-19 does not cause insurable property damage

The New York State Court of Appeals has ruled against claims that the COVID-19 virus caused physical loss or damage to property, a decision aligning with many federal and state courts across the United States. On February 15, 2024, the court determined that "physical damage" requires a material alteration to property that is "perceptible, even if not visible to the naked eye."

This ruling emerged from an insurance coverage dispute involving Consolidated Restaurant Operations (CRO), which sought business interruption coverage due to pandemic-related shutdowns. CRO argued that the presence of COVID-19 at its premises constituted a physical loss under their policy with Westport Insurance Co. The trial court dismissed CRO's complaint in August 2021, stating there must be a "physical problem with the covered property," not just a loss of use.

CRO appealed, claiming it suffered "direct physical loss or damage" when COVID-19 altered air and surfaces at its restaurants. Westport countered that coverage requires demonstrable physical damage or destruction. The Court of Appeals upheld previous rulings, emphasizing that direct physical loss necessitates a "material alteration or complete and persistent dispossession of insured property," which CRO did not demonstrate.

The court rejected CRO's interpretation that impaired functionality equates to direct physical loss, asserting this would blur lines between coverage for direct physical loss and mere loss of use. The decision noted CRO failed to show how virus droplets compromised structural integrity rather than affecting people.

In conclusion, the court stated: “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. But our task is to faithfully interpret the terms of the insurance policy before us, not to ‘rewrite the language of the polic[y] at issue’ to reach a result with ‘equitable appeal.’”

This decision may influence ongoing business interruption claims in New York favoring insurers. Similar outcomes have been seen nationwide, such as in New Jersey’s AC Ocean Walk case.

Questions regarding this impact can be directed to Courtney H. Zucker, Jeffrey L. Kingsley, or David L. Brown.