DLA Piper secures unanimous decision from New York’s Appellate Division, First Department: COVID-19 business interruption claims are not covered under property policies
In the first Appellate Division decision in New York on COVID-19 business interruption losses, the prominent First Department held that coronavirus disease 2019 (COVID-19) and related government orders do not cause “physical loss or damage” to property.
The Court held that, where a policy states that coverage is triggered only where there is “direct physical loss or damage” to insured property, the “policy holder’s inability to fully use its premises as intended because of COVID-19, without any actual, discernable, quantifiable change constituting ‘physical’ difference to the property from what it was before exposure to the virus, fails to state a cause of action for a covered loss.”
In Consolidated Restaurant, the policyholder argued that COVID-19 droplets and respiratory particles that transmit the virus physically altered its premises. The insured also argued that the virus was so resilient that it could not be entirely eradicated from the property.
The First Department rejected those arguments. The Court held that “property must be changed, damaged or affected in some tangible way, making it different from what it was before the claimed event occurred.” Accepting that economic loss is sufficient – without any “attendant physical, tangible damage to the property” – would render the term “physical” in the policy “meaningless.”
The Court also cited the reasoned decisions from federal appellate courts from the Second, Fifth, Sixth, Eighth, and Eleventh Circuits.
The First Department concluded that neither “government orders, nor the presence of the coronavirus inflicted ‘direct physical loss or damage’ to any of these properties for purposes of property insurance coverage.” The Court also rejected the policyholder’s argument, relying on non-New York cases, that conditions rendering property “unusable” afford coverage for business interruption loss. The Court distinguished the non-New York cases because “under New York law ‘a negative alteration in the tangible condition of the property [insured]’ is necessary in order for there to be ‘physical’ damage to the property.”
The Court additionally rejected the insured’s argument that the absence of a standard form virus exclusion is evidence that coverage for COVID-19 is available. The Court held that that argument was “contrary to well-settled law that ‘exclusion clauses subtract from coverage rather than grant it.’”
Finally, the First Department affirmed the denial of leave for the policyholder to amend its complaint. The Court explained that the insured failed to identify any “item that it had to replace, anything that changed, or that was actually damaged at any of its properties. Nothing stopped working.”