Are COVID-19 business interruption claims covered under property policies?

In a matter of first impression, DLA Piper argued before the key First Department of the New York Appellate Division the question of whether COVID-19 claims are covered under a property policy.

In this matter, which began in Westchester County but was transferred to New York County by Westport, Consolidated Restaurant Operations (CRO) sought to recover the $50 million limits under the insurance contract issued by Westport Insurance Corporation. CRO claimed that it suffered extensive financial losses due to an array of issues arising from the pandemic: restrictions on its restaurant operations enacted by governments; government negligence; the pandemic itself; and the threatened or actual presence of the virus in its restaurants. CRO claimed that the presence of COVID-19 on its property caused “direct physical loss or damage” to the property. It claimed that all coverages in the insurance contract were thus triggered and sought the full $50 million policy limit.

The coverage issues in the case were whether there was “direct physical loss or damage to insured property,” whether the Contamination Exclusion applied, whether the Microorganism Exclusion applied, and whether the Communicable Disease coverage extensions were triggered.

CRO argued that, at the pleading stage, the court was required to accept its allegations as true and deny the motion to dismiss. CRO alleged that the COVID-19 virus physically altered the air and the physical property of its restaurants and thus triggered coverage. Relying on cases in foreign jurisdictions, CRO contended that COVID-19 was similar to asbestos, gasoline, ammonia, and other toxic substances which actually can physically damage property.

Westport argued that CRO’s losses were caused by government orders enacted to protect humans, not property, and by customers’ reluctance to visit the restaurants during the pandemic. In addition, Westport contended the presence of COVID-19 did not cause “direct physical loss or damage” to property. Westport asserted that CRO did not have to repair or replace any property, an essential element for coverage under the property policy. For example, no tables or chairs were thrown away.

At argument, Justice Jeffrey K. Oing noted that COVID-19 was different from other noxious substances like gasoline, which could infiltrate a property against the will of its owners.  The coronavirus, in contrast, is carried by humans.

This case is a matter of first impression in New York. The argument, which was heavily reported in the press, seemed to go well for insurers. It can be found at 3:39:00 here.