United States: NY High Court Rules Business Interruption Coverage Not Triggered By Covid-19 Shutdown

On February 15, 2024, the New York Court of Appeals in Consolidated Restaurant Operations, Inc. v. Westport Insurance Corporation rejected a claim by a restaurant owner and operator for coverage for business interruption losses sustained during the Covid-19 pandemic.The Court's decision is consistent with decisions issued in the vast majority of other U.S. jurisdictions, including a recent decision by the New Jersey Supreme Court, which have generally held that Covid-19 losses do not trigger business interruption coverage.

Consolidated Restaurant Operations ("CRO"), which owns and operates dozens of restaurants, sought coverage under a commercial property insurance policy issued by Westport Insurance Company ("Westport") for business interruption losses incurred when CRO stopped or reduced its restaurant operations as a result of the Covid-19 pandemic.

The Westport policy provided coverage for"all risks of direct physical loss or damage to insured property" as well as business interruption losses "directly resulting from direct physical loss or damage" to insured property.

Westport argued that CRO could not show that the virus caused "direct physical loss or damage" to the insured's property as a matter of law.CRO contended that "direct physical loss or damage" encompassed situations where a physical event takes place on insured property and renders it wholly or partially unusable for its intended purpose.

The Court ruled in Westport's favor, holding that business interruption coverage was not triggered by CRO's allegations that the SARS-Co-V-2 virus was physically present at its restaurants and that its presence caused loss or damage to CRO's property.The Court held that the phrase "direct physical loss or damage" means a "material alteration or a complete and persistent dispossession of insured property," which the Court found CRO did not allege.

In so holding, the Court rejected CRO's argument that "'direct physical loss' ...encompasses impaired functionality and either a partial or complete loss of use for a limited period of time."It noted that this construction would ignore the distinction between "direct physical loss" and "loss of use" and would be inconsistent with other provisions in the policy.

The Court further noted that CRO did not allege that the presence of the virus rendered its restaurants contaminated to the point of being completely and persistently uninhabitable.As a result, the Court declined to consider whether such a condition would qualify as "direct physical loss."

The decision is available here.

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