Consolidated Restaurant Operations v. Westport Insurance Corporation
Not available in text (2024)
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Rule of Law:
Under New York law, 'direct physical loss or damage' in a commercial property insurance policy requires a material physical alteration to the property or a complete and persistent dispossession of it. Business interruption losses resulting merely from the presence of a virus, like SARS-CoV-2, on the premises do not meet this standard.
Facts:
- Consolidated Restaurant Operations, Inc. (CRO) owned and operated dozens of restaurants.
- CRO obtained an 'all-risk' commercial property insurance policy from Westport Insurance Corporation (Westport) for the period of July 1, 2019, through July 1, 2020.
- The policy insured against 'all risks of direct physical loss or damage to insured property' and covered business interruption losses 'directly resulting from' such loss or damage.
- In late 2019 and early 2020, the spread of the SARS-CoV-2 virus led to a global pandemic.
- CRO alleged that the virus was present in its restaurants, attaching to surfaces and compromising the physical integrity of the structures.
- Due to the alleged presence of the virus and related government restrictions, CRO suspended or severely curtailed its operations, including limiting on-premises dining.
- As a result of the curtailed operations, CRO sustained a significant reduction in revenue and other business interruption losses.
Procedural Posture:
- Consolidated Restaurant Operations, Inc. (CRO) submitted a claim to its insurer, Westport Insurance Corporation, for business interruption losses, which Westport denied.
- CRO filed a lawsuit against Westport in the New York Supreme Court (the state's trial-level court) for breach of contract and seeking a declaratory judgment.
- Westport moved to dismiss the complaint for failure to state a cause of action.
- The Supreme Court granted Westport’s motion to dismiss, finding the policy did not cover CRO’s alleged losses.
- CRO, as appellant, appealed the dismissal to the Appellate Division of the Supreme Court, First Department (an intermediate appellate court).
- The Appellate Division affirmed the trial court's order dismissing the complaint.
- The New York Court of Appeals (the state's highest court) granted CRO leave to appeal from the Appellate Division's order.
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Issue:
Does the presence of the SARS-CoV-2 virus on restaurant premises, which results in business interruption losses, constitute 'direct physical loss or damage' under a commercial property insurance policy governed by New York law?
Opinions:
Majority - Judge Halligan
No, the presence of the SARS-CoV-2 virus on restaurant premises does not constitute 'direct physical loss or damage' under the policy. The court held that 'direct physical loss or damage' requires a material physical alteration to the property or a complete and persistent dispossession, which CRO failed to allege. The court reasoned that 'physical damage' necessitates a perceptible material alteration, while 'physical loss' requires more than a temporary loss of use; it requires a complete dispossession. The court distinguished between losing the functional use of a property and losing the property itself, noting that if the parties had intended to cover 'loss of use,' they would have stated so explicitly. The policy's references to 'repair' and 'replace' further supported the interpretation that a tangible harm to the property is required. CRO’s allegations that the virus could be cleaned from surfaces and that operations were only 'curtailed' rather than completely and persistently stopped, demonstrated that the property was neither physically altered nor completely dispossessed.
Analysis:
This decision aligns New York's highest court with the overwhelming national judicial consensus that standard 'all-risk' commercial property insurance policies do not cover business interruption losses stemming from the COVID-19 pandemic. By defining 'direct physical loss or damage' to require a tangible physical alteration or complete dispossession, the court has set a high bar for future claims based on intangible harms like viral contamination. The ruling effectively forecloses such claims in New York, clarifying that economic losses due to pandemics are not covered unless specifically provided for in the policy, thus reinforcing the traditional boundaries of property insurance.
