Court Reaffirms Insurance Policies for Direct Physical Loss or Damage Cannot Apply to COVID-19 Absent Any Physical Damage to the Property

On October 5, 2023, Justice Joel M. Cohen of the New York County Commercial Division issued a decision in Westport Insurance Corporation v. Auberge Resorts LLC, Index No. 651396/2022, granting the plaintiff insurer’s motion to dismiss the defendants’ counterclaims, crossclaims and defenses in its entirety. The action was based on a COVID-19 related claim on an insurance policy providing coverage for “direct physical loss or damage.” The court dismissed the defendants’ counterclaims, crossclaims and defenses, finding that no coverage applied as a matter of law based on the First Department’s 2022 decision in Consolidated Rest. Operations, Inc. v. Westport Ins. Corp., 205 AD3d 76 [1st Dept 2022] lv to appeal granted in part, dismissed in part, 39 NY3d 943 [2022]. The Court explained:

Consolidated Restaurant was a COVID-19 insurance case involving a policy that provided coverage for "direct physical loss or damage" (205 AD3d at 78-79). The First Department held that for such coverage to apply "[t]he property must be changed, damaged or affected in some tangible way, making it different from what it was before the claimed event occurred. If the proffered facts do not identify any physical (tangible) difference in the property, then the complaint fails to state a cause of action. Were we to accept that an economic loss, for purposes of the all-risk policy plaintiff purchased from defendant, without any attendant physical, tangible damage to the property is sufficient, it would render the term 'physical' in the policy meaningless" (205 AD3d at 82). The court dismissed the policyholder's complaint because it "fail[ed] to allege any tangible, ascertainable damage, change or alteration to the property so as to plausibly state a claim the damage was 'physical"' (id. at 86-87). The court further found that the policyholder's proposed amendment of its complaint to allege the existence of "fomites" on the surfaces of its restaurants and the COVID-19 virus' "infiltration" of its premises was unavailing (id.).

The same result obtains here, with factually indistinguishable policyholder COVID-19 claims based on a policy covering "direct physical loss, damage or destruction to property." Additionally, as stated on the record, the Court finds that the Biological Agents Exclusion contained in the Westport policy independently warrants dismissal of the Auberge Defendants' Counterclaims and Defenses to the extent they are based on purported Cancellation of Bookings coverage under that policy. Given the conclusion that no coverage applies as a matter of law, the Court does not reach the issue of whether any of the other exclusions raised in the Insurers' supplemental memoranda apply (Consolidated Rest., 205 AD3d at 87).

Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning insurance claims or claims relating to COVID-19 business interruption.