On January 10, the New York Court of Appeals heard oral arguments on a COVID-19 coverage appeal by a restaurant operator, Consolidated Restaurant Operations, Inc. (CRO), which posed issues of first impression. Courts nationwide are looking to see how New York’s highest court will decide the case.
The case before the Court of Appeals stems from an Appellate Division, First Department decision affirming dismissal of the company’s complaint against Westport Insurance Corp.
Like many other COVID-19 business interruption suits, CRO’s claim for $50 million in coverage eventually failed when a panel of First Department judges found that CRO had not alleged the kind of direct physical loss or damage required to trigger coverage under its commercial all-risk property policy.
Questions from the Court focused primarily on the meaning of the phrase “direct physical loss or damage” and how CRO’s allegation that COVID-19 was physically present on its property could be sufficient to constitute physical loss or damage to property.
In its opening brief to the Court of Appeals, CRO, represented by Robin Cohen, of Cohen Ziffer Frenchman & McKenna, argued that the First Department had violated “core principles of insurance policy interpretation” and acted as “amateur armchair epidemiologists” by concluding that CRO did not suffer “physical loss or damage” because it could have easily cleaned away any trace of the virus.
During oral argument, Court of Appeals Judge Jenny Rivera aggressively questioned Cohen, expressing skepticism toward CRO’s arguments. Judge Rivera asked Cohen if CRO was advancing the argument that there was physical loss or damage to the air (as opposed to tangible physical property). Cohen responded it wasn’t just the air quality itself; the air quality made the restaurants unsafe. Judge Rivera said that sounded like “economic loss.”
Judge Rivera later added that CRO’s problem was that nothing had been physically damaged because of COVID. To adopt CRO’s interpretation, Judge Rivera commented, would require the Court to add the phrase “loss of use” into the insuring agreement, which it simply cannot do.
The Court also questioned Cohen about how CRO’s case was different from the long-standing First Department precedent, Roundabout Theatre Co., Inc. v. Cont’l Cas. Co., 302 A.D.2d 1, 751 N.Y.S.2d 4 (1st Dep’t 2002). In Roundabout, a municipal order closed a street for safety reasons following a construction accident. Id. at 5. The plaintiff theater company’s building was rendered inaccessible due to the closure and the theater was forced to cancel several performances. Id. Despite having suffered no physical loss or damage to its property, the theater sought coverage for its economic losses under the business interruption provision of its insurance policy. Id. at 5-6. The policy required “direct physical loss or damage” to trigger coverage. Id. The First Department rejected the theater’s argument that “loss of” must include “loss of use” and held that the provision “clearly and unambiguously provides coverage only where the insured’s property suffers direct physical damage.” Id. at 6.
Cohen responded that in Roundabout, there was no “physical event” on the property, whereas in this case, CRO had alleged the virus was physically present on its restaurants’ surfaces.
Counsel for Westport, Aiden McCormack of DLA Piper, urged the Court to adopt a plain meaning of the contract terms and noted that the phrase “physical event” – which had been used by Cohen and the Court of Appeals judges during Cohen’s opening argument – appears nowhere in the policy.
“I don’t want to make light of the situation because we all know it was very serious… we lived through it,” McCormack argued. “But they’re cleaning with Lysol instead of Pine-Sol every night.” McCormack added, “it isn’t physical loss or damage to property where you can wipe it down.” McCormack said in closing that 172 federal appellate court decisions on this issue unanimously dismissed these same kinds of allegations.
A reversal of the First Department decision could overturn decades of New York law (including Roundabout Theatre Co.) and impose a new less stringent standard for pleading direct physical loss or damage in New York. Either way, the Court of Appeals’ decision is likely to have implications beyond New York, as the Court’s interpretation of the policy language could impact how other courts rule on similar COVID-19 coverage cases.
The case is Consolidated Restaurant Operations, Inc. v. Westport Insurance Corp., index number 450839/21, in the Court of Appeals of the State of New York.
