Restaurants’ claim denied in first Covid-19 ruling by New York appeals court

An insurer has been upheld in its denial of coverage in an early ruling on Covid-19 business interruption insurance by a New York appeals court.

The appeals court upheld a New York County court — and said it agreed with various other New York state and federal courts — that the loss of use suffered by a restaurant n is not “direct physical loss or damage” necessary to trigger commercial property insurance.

The court agreed with the insurer that the alleged presence of the Covid-19 virus on the restaurant’s property did not constitute physical loss or damage as required by an “all risk” general commercial insurance policy, which included a business interruption coverage.

“[T]Impairment of the function or use of its property for its intended purpose is not sufficient” to trigger coverage, the First Department Court of Appeals concluded.

The judgment of April 7, 2022 in Consolidated Restaurant Operations, Inc. (CRO) v. Westport Ins. Co. It was the first time a New York appeals court has considered whether the business interruption due to COVID-19 was caused by direct “physical” damage to the property, although Courts have already addressed the phrase “direct physical loss or damage” in other contexts involving Insurance.

In April 2020, the CRO plaintiff claimed to have suffered direct physical loss or damage to his property because “the actual or threatened presence of the virus in and on his property (i.e. ambient air and internal surfaces) eliminated the functionality of restaurants for their intended purpose. »

In July 2020, Westport Insurance dismissed the claim filed by CRO, a franchise company with restaurants in the United States and the United Arab Emirates, including III Forks, Cantina Laredo, El Chico, Silver Fox, Black Oak Grill, Lucky’s Café, Cool River and Good. Eat.

The Westport policy insured against all risks of direct physical loss or damage to insured property as well as time or business interruption losses.

Westport denied the claim on the grounds that the “actual or suspected presence” of the virus did not constitute physical loss or damage to property within the meaning of the policy.

CRO argued that “the physical droplets and respiratory particles that transmit the virus are so resilient that they cannot be entirely eradicated” from the property. The lack of a virus exclusion was further evidence that coverage in the context of COVID-19 is available under its policy, CRO further argued.

The insurer countered that the plaintiff’s property suffered no physical changes, let alone damage, due to the virus. Assuming the virus was present, Westport maintained that the plaintiff had not identified “any aspect of his property, any item, or even a single knob or table physically altered by the presence of Covid-19”.

CRO also claimed that the term “physical loss or property damage” as used in its “all perils” policy is ambiguous because the word “physical” is not defined and argued that its claim that virus particles had a physical impact on his property is “entirely plausible”.

A County Supreme Court agreed with the insurer and dismissed the suit on the basis that the plaintiff suffered no “physical” loss or damage within the meaning of its policy and New York law. Now the appeals court has confirmed.

Where a policy specifically states that coverage is triggered only in the event of “direct physical loss or damage” to insured property, “the policyholder’s inability to make full use of their premises as intended due to COVID -19, without any real, discernible, quantifiable change constituting a “physical” difference between the property and what it was before exposure to the virus, does not indicate a cause of action for a covered loss”, a said the court.

“The property must be altered, damaged or tangibly affected, making it different from what it was before the claimed event occurred. If the facts presented identify no physical (tangible) difference in the property, then the complaint does not indicate a cause of action, the ruling added.

The court added that if it were to accept that economic loss without any physical and tangible damage to property is sufficient, it would render the term “physical” meaningless in the policy. “In other words, under the terms of plaintiff’s policy, the impaired function or use of his property for the intended purpose is not enough,” the court concluded.

Amicus briefs in the case have been filed by The Restaurant Law Center, New York State Restaurant Association, New York City Hospital Alliance, The Chef’s Warehouse Inc., United PolicyHolders, New York State Trial Lawyers Association as well as the American Property Casualty Insurance Association.

The appeals court noted that the pandemic has spawned extensive litigation in New York and across the country regarding what constitutes direct “physical” damage or loss, for the purposes of commercial property insurance policies.

Federal courts applying substantive New York law have consistently held that claims that COVID-19 causes physical damage to property because it is contagious and difficult to clean fail to state a basis of coverage when the policy requires direct physical loss or damage to property.

Similarly, in a case applying New York law, the Second Circuit also dismissed the plaintiff’s claim that he suffered a “physical event” within the meaning of its policy because the facts showed no “physical loss.” direct” or “physical damage” to the plaintiff’s property and the policy did not apply to the mere loss of use of premises.

“Although these decisions are not binding on this court, their analysis of New York law is compelling and we adopt their reasoning,” the appeals court said.

Other federal courts across the country, not applying New York law, but rather standard principles of insurance contract interpretation, have come to the same conclusion that the terms “direct” and “physical” in relation to “damage or loss of property” requires direct physical loss of property, not merely the inability to use it.

Several New York trial courts have also dismissed claims alleging facts similar to those in the CRO’s complaint.

COVID-19 New York Restaurant

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