205 A.D.3d 76
N.Y. App. Div.2022Background
- Plaintiff Consolidated Restaurant Operations owned multiple restaurants and purchased an all-risk commercial property policy (including business‑interruption/time‑element coverage) that insured "direct physical loss or damage" to insured property (policy period July 1, 2019–July 1, 2020).
- During the COVID‑19 pandemic plaintiff suspended indoor dining under government orders, implemented enhanced cleaning, and alleged actual or threatened presence of SARS‑CoV‑2 on air and surfaces made its restaurants unusable, causing tens of millions in lost revenue.
- Plaintiff submitted a claim asserting "direct physical loss or damage" from the virus; insurer Westport denied coverage, contending the virus does not cause physical loss/damage and invoking a virus/contaminant exclusion and sublimit for communicable disease coverage.
- Supreme Court granted insurer’s preanswer motion to dismiss under CPLR 3211(a)(1) and (7), holding plaintiff failed to allege physical, tangible alteration or damage to property as required by the policy; it also denied leave to amend.
- The First Department affirmed, holding that under the policy language and controlling New York law a mere loss of use or economic loss without a tangible, demonstrable physical change to the premises does not satisfy "direct physical loss or damage."
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether presence/possible presence of COVID‑19 on premises constitutes "direct physical loss or damage" | Virus particles physically impacted and altered surfaces/air, rendering premises unusable and therefore causing direct physical loss | Virus does not physically alter or damage property; plaintiff only suffered loss of use/economic loss, which is not covered | No — mere presence or alleged contamination and resulting loss of use without tangible alteration does not constitute direct physical loss or damage |
| Whether plaintiff pleaded sufficient facts to show physical change/damage | Complaint alleges virus infiltration, fomites, and remediation difficulty; leave to amend could add facts | Complaint is conclusory and identifies no tangible damage, replacement, or altered item; documentary record refutes physical loss | Complaint is conclusory; no factual allegation of tangible change — dismissal affirmed; leave to amend denied |
| Whether policy language is ambiguous re: "physical" | "Physical" is undefined and could include invisible contamination | "Physical" has its plain meaning — requiring tangible alteration; accepting economic loss would render "physical" meaningless | Policy not ambiguous; ordinary meaning requires tangible physical harm to property |
| Whether absence of a virus exclusion means coverage exists | Lack of a specific virus exclusion implies coverage for virus-caused loss | Exclusions subtract from coverage; absence of exclusion does not expand coverage beyond policy terms | Absence of virus exclusion does not create coverage when policy requires direct physical loss or damage |
Key Cases Cited
- Roundabout Theatre Co. v. Continental Cas. Co., 302 A.D.2d 1 (1st Dept 2002) (interpreting "direct physical loss or damage" to require physical harm to the insured premises)
- County of Columbia v. Continental Ins. Co., 83 N.Y.2d 618 (1994) (contract terms must be given their plain and ordinary meaning)
- 10012 Holdings, Inc. v. Sentinel Ins. Co., 21 F.4th 216 (2d Cir. 2021) (applying New York law, loss of use alone does not constitute direct physical loss)
- Santo's Italian Café, LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. 2021) (loss of use is not the same as physical loss)
- Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021) (some physicality—alteration, contamination, or destruction—is required)
- Terry Black's Barbecue, L.L.C. v. State Auto. Mut. Ins. Co., 22 F.4th 450 (5th Cir. 2022) ("direct physical loss" requires tangible alteration or deprivation of property)
- Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., 17 F. Supp. 3d 323 (S.D.N.Y. 2014) ("physical loss or damage" requires demonstrable harm to premises, not external orders or economic consequences)
- Michael Cetta, Inc. v. Admiral Indem. Co., 506 F. Supp. 3d 168 (S.D.N.Y. 2020) (a negative alteration in the tangible condition of property is necessary for "physical" damage)
- Raymond Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 5 N.Y.3d 157 (2005) (exclusion clauses subtract from coverage rather than create it)
- Keyspan Gas E. Corp. v. Munich Reins. Am., Inc., 31 N.Y.3d 51 (2018) (policy interpretation begins with the policy language and gives plain meaning to terms)