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February 21, 2024

COVID-19 Business Interruption Update: New York High Court Affirms in Favor of Insurer

As we have previously reported, the vast majority of state and federal courts in the United States have ruled in favor of insurers when addressing whether business interruption losses caused by the COVID-19 pandemic and related government-mandated closures are covered under first-party property insurance policies. The New York State Court of Appeals recently issued a decision joining that majority, finding that losses caused by the COVID-19 pandemic do not constitute “direct physical loss” so as to trigger coverage.

In Consolidated Rest. Operations, Inc. v. Westport Ins. Corp.,1 the policyholder was the owner and operator of dozens of restaurants that sought coverage under a property policy for losses arising out of the March 2020 state-mandated closure of nonessential businesses due to the COVID-19 pandemic. The owner alleged that it sustained business income losses and expenses as a result of the pandemic and was entitled to coverage under the business income, extra expense, and other provisions of its policy. The insurer denied coverage on the grounds that the restaurants had not suffered direct physical damage or loss within the meaning of the policy. 

The owner sued the insurer, arguing that “physical damage” and “physical loss” under the policy included loss of the ability to use its property for its intended purpose. The trial court granted the insurer’s motion to dismiss the owner’s claims, finding that the business income and extra expense provisions of the policy were limited to losses involving physical damage to or alteration of the property, which had not occurred. The Appellate Division, First Department (an intermediate appellate court), affirmed the dismissal of the complaint.

The Court of Appeals granted the owner’s motion for leave to a further appeal but affirmed the dismissal in favor of the insurer. The court held that “direct physical loss” and “physical damage” required a material alteration of or complete dispossession of the subject property; they do not include the mere partial loss of use of a premises as the owner contended. The court noted that its decision was consistent with settled precedent and the rulings of other jurisdictions around the country.

Indeed, there have been over 100 appeals decided across the country in similar COVID-19 business interruption cases. To date, we are unaware of any federal appellate court or state high court that has held in favor of a policyholder under these circumstances. There are still cases pending in other jurisdictions, and Barclay Damon’s attorneys will continue to monitor for further developments.

If you have any questions regarding the content of this alert, please contact Sanjeev Devabhakthuni, Professional Liability Practice Area co-chair, at; Tony Piazza or Mark Whitford, Insurance Coverage & Regulation Practice Area co-chairs, at and; or another member of the firm’s Insurance Coverage & Regulation Practice Area.
1  ___, N.Y.3d __, 2024 N.Y. LEXIS 66 (February 15, 2024).

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