## Facts

- Consolidated Restaurant Operations, Inc. (CRO) operated numerous restaurants insured under Westport Insurance Corporation’s “all-risk” commercial property policy for July 1, 2019–July 1, 2020, governed by New York law.
- The policy insured “all risks of direct physical loss or damage to insured property,” subject to exclusions, and provided business-interruption coverage only for losses “directly resulting from direct physical loss or damage” to insured property.
- During the COVID-19 pandemic, CRO alleged SARS-CoV-2 was present in its restaurants and that public-health restrictions curtailed or suspended in-person dining.
- CRO sought coverage for business-interruption losses, characterizing its harm as a physical loss of usable space and loss of use of its premises for normal operations.
- Westport denied coverage on the ground that CRO did not allege “direct physical loss or damage” to property, and CRO sued for declaratory relief and breach of contract damages.
- The trial court dismissed for failure to state a claim; the Appellate Division affirmed; the Court of Appeals granted leave.

## Issues

1. Whether allegations of SARS-CoV-2 presence and resulting cessation or curtailment of dine-in service plausibly allege “direct physical loss or damage” under an all-risk commercial property policy.
2. Whether business-interruption coverage tied to “direct physical loss or damage” is available where the insured alleges only loss of use and economic harm from health risks and government restrictions.

## Decision

- The Court of Appeals affirmed dismissal of the complaint.
- “Direct physical loss or damage” requires either (a) a material alteration of the insured property or (b) a complete and persistent dispossession of that property.
- CRO’s allegations described limits on use due to transmission risk and governmental restrictions, not a material change to the premises or a complete, persistent deprivation.
- Because business-interruption coverage was conditioned on loss “directly resulting from” direct physical loss or damage, the failure to allege qualifying physical loss or damage defeated the business-interruption claim.

## Legal Principles

- Policy language requiring “direct physical loss or damage” demands a property-related impact: a material alteration to property or complete and persistent dispossession, not purely economic injury.
- Mere “loss of use,” standing alone, does not satisfy “physical loss” when the property remains intact and available for use in some manner.
- Temporary, remediable conditions (such as contamination that dissipates or can be removed through cleaning) do not constitute material alteration or complete and persistent dispossession under this coverage grant.
- Business-interruption coverage that is expressly derivative of “direct physical loss or damage” fails if the insured cannot plead qualifying physical loss or damage as the proximate cause of the claimed interruption.

## Conclusion

The court held that COVID-19-related loss of use and dine-in restrictions, even with alleged virus presence, did not state a claim for coverage because “direct physical loss or damage” requires material alteration of property or complete and persistent dispossession, which was not alleged.


Consolidated Rest. Operations, Inc. v. Westport Ins. Corp., 41 N.Y.3d 415 (N.Y. 2024)