On April 7, 2022, the First Department issued a decision in Consolidated Rest. Operations, Inc. v. Westport Ins. Corp., 2022 NY Slip Op. 02336, rejecting a pandemic property damage coverage claim, explaining:
Where, as here, an insured seeks to recover for a loss under an insurance policy it has the burden of proving that a loss occurred and also that the loss was a covered event within the terms of the policy. In determining a dispute over insurance coverage, we first look to the language of the policy. Moreover, like any other contract, the provisions of an insurance contract must be given their plain and ordinary meaning, and the interpretation of such provisions is a question of law for the court. . . .
Plaintiff claims that the term “physical loss or damage to property,” as used in its commercial property insurance policy, covering “all-risk,” is ambiguous because the word “physical” is undefined. Plaintiff argues that its claim that the virus particles physically impacted its property is entirely plausible. An ambiguity however does not arise from an undefined term in a policy merely because the parties dispute the meaning of that term. Moreover, it is blackletter law that insurance contracts should be interpreted consistent with the reasonable expectation of the average insured. Terms that are clear cannot be disregarded and must be given their plain and ordinary meaning. We reject plaintiff’s argument that the policy is ambiguous.
The pandemic engendered a great deal of litigation in New York and throughout the country concerning what a direct “physical” damage or loss entails, for purposes of commercial property insurance policies, similar to the one at bar. This Court has interpreted “direct physical damage or loss to property” to mean something that directly happens to the property resulting in physical damage to it. In Roundabout Theatre Co., for instance, we clarified that although the plaintiff sustained some minor damage to the roof of its property, its claim was for loss of business income resulting from damage that had occurred elsewhere. We held that the Roundabout Theatre’s claim was for “loss of use,” which was not covered under its policy covering “all risks of direct physical loss or damage to the property described in Paragraph I [i.e., the theatre building or facilities],” not an incidental loss of use.
Roundabout, while factually distinguishable, provides a useful starting point for our analysis, supporting a conclusion that any claim for coverage must arise from something that occurred within the property. Additional authority supports a further conclusion that in order for there to be direct physical damage or loss to property, there be some physical problem with the covered property, not just the mere loss of use. The 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. Phrased differently, under the terms of plaintiff’s policy, the impaired function or use of its property for its intended purpose, is not enough. Rather to survive dismissal the complaint must plausibly allege that the virus itself inflicted actual physical loss of or damage to the property.
Although plaintiff argues that its complaint and certainly its proposed amended complaint allege that its property was physically altered by the coronavirus, we find that the pleadings are conclusory. While plaintiff cites several out-of-state decisions that it believes supports its position, the overwhelming number of authorities, with which we agree, support an opposite view.
Federal courts applying substantive New York law have uniformly held that conclusory assertions that COVID-19 causes physical damage to property because it is contagious and hard to clean fail to state a basis for coverage where the policy requires direct physical loss or damage to the property. In Kim-Chee, for instance, the Second Circuit Court of Appeals rejected the plaintiff’s arguments that property was physically damaged due to COVID-19 exposure. In affirming dismissal of the complaint at an initial stage, the Court held that the complaint did not allege that any part of its building or anything within it was damaged – let alone to the point of repair, replacement, or total loss.
Likewise, in 10012 Holdings, Inc. v Sentinel Ins. Co 21 F4th 216, 222 [2d Cir 2021]), another case applying New York law, the Second Circuit also rejected the plaintiff’s claim that it had suffered a physical event within the meaning of its policy; the court affirmed dismissal of the complaint because the facts did not show direct physical loss or physical damage to the plaintiff’s property and the policy did not extend to mere loss of use of a premises, but rather required actual physical loss of or damage to the insured’s property. While these decisions are not binding on this court, their analysis of New York law is persuasive and we adopt their reasoning.
Other federal courts throughout the country, not applying New York law, but rather standard principles of insurance contract interpretation, have reached the same conclusion, that the terms “direct” and “physical” as it relates to “damage or loss to property” requires a direct physical loss of property, not simply the inability to use it. The Fifth Circuit has specifically adopted the reasoning set forth in the decisions of the Second Circuit, finding that “direct physical loss” to property, as required to recover lost business income and extra expense under an all-risk commercial property policy, necessarily entails a tangible alteration or deprivation of property.
Several trial level New York courts have also granted preanswer dismissals of complaints with alleged facts similar to those in the complaint at bar. Plaintiff argues that those decisions are distinguishable because the policyholders in those cases claimed financial loss attributable to the executive orders shutting down their businesses, but its claim is that COVID-19 actually damaged its property by altering the surfaces of its restaurants and the air within them, resulting in direct physical loss. This is a distinction without any meaningful difference. These trial level courts have concluded that the plain meaning of “physical” as commonly understood, requires some tangible alteration of the property that changes it from what it previously was to what it is now. As stated in Newman Myers, physical loss or damage in an insurance policy requires actual, demonstrable harm of some form to the premises itself, rather than forced closure of the premises for reasons exogenous to the premises themselves, or the adverse business consequences that flow from such closure.
Although the words “direct” and “physical,” modify or qualify the phrase “loss or damage,” to require a showing of actual, demonstrable physical harm of some form to the insured premises, plaintiff nonetheless urges us to embrace a more expansive definition of “physical” because some courts have held that conditions rendering property unusable afford coverage for business interruption losses. None of these cases involve COVID-19, the courts did not apply New York law and these cases are not binding on this court. These cases and others like them are distinguishable 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. Pepsico, Inc. v Winterthur Intl. Amer. Ins. Co., 24 AD3d 743 (2d Dept 2005), also relied on by plaintiff, is unhelpful because the product (soda) was, in fact, physically altered so as to render it unsellable to consumers.
(Internal quotations and citations omitted).