It is without question that Covid-19 affected the insurance industry worldwide resulting in substantial litigation commenced by insureds to recoup losses linked to government mandated shutdowns for nonessential businesses. The question that remains is how will the insurance industry and state governments respond to the Covid-19 litigation?
New York swiftly responded by signing Bill No. A10342 into law, which authorizes stand-alone business interruption coverage. Specifically, the new law allows insurers to bind business interruption insurance policies that do not require physical loss or damage prerequisite to coverage. The law went into effect, as revised, on January 12, 2025, and is codified in New York Insurance Law Section 1113(a)(35), which as discussed in detail below, eliminates the prerequisite of requiring physical property damage and addresses government shutdown orders. Although Section 1113(a)(35) is new, it raises the question of how insurers should respond to this new law and whether it will affect market presence in New York, an already high-risk market for insurers.
Traditional business interruption insurance is designed to assist insureds in recovering lost profits and income caused by a covered loss, if the loss interrupts normal business operations. Importantly, for a loss to be covered under most traditional business interruption policies there must be direct physical loss or damage to covered property.
The traditional condition that requires physical loss or damage to covered property proved fatal to insureds seeking to recover economic losses caused by Covid-19. Insurers across the nation were able to defeat Covid-19 business interruption claims by relying on the plain language of their policies, which required physical loss or damage to covered property. As outlined in many of the Covid-19 cases, the economic losses resulting from the governmentally mandated shutdowns do not constitute direct physical loss or damage to covered property and thus were not covered.
By way of example, the New York Court of Appeals, New York’s highest court, held that Covid-19, a virus, did not result in physical loss or damage to the restaurants as required by the policy. See Consol. Rest. Operations, Inc. v. Westport Ins. Corp., 41 N.Y.3d 415, 423 (2024). Specifically, the Court held that “direct physical loss or damage requires a material alteration or a complete and persistent dispossession of insured property, which petitioner has not alleged.” Id. In Consolidated Restaurant Operations, Incorporated, the insured sought coverage under its “all risk” commercial property policy which covered business interruption losses “directly resulting from direct physical loss or damage” for the ensuing loss of revenue caused by the government restrictions placed on nonessential businesses during the Covid-19 pandemic. Id. Invoking New York rules of contract interpretation, the Court concluded that “direct physical loss” “requires more than loss of use; it requires an actual, complete dispossession” and the direct physical loss must cause business interruption losses to be covered. See id. at 429. The Court further held that the temporary presence of Covid-19 at the insured location is insufficient to meet the requirements of “direct physical loss or damage”, for Covid-19 to be a “direct physical loss or damage” the insured property needed to be replaced, changed, or actually damaged. See id. at 434.
Subsequently, New York codified New York Insurance Law Section 1113(a)(35), which authorizes insurers to remove the physical property damage prerequisite found in traditional business interruption insurance. Section 1113(a)(35) states in the relevant part:
(a) The kinds of insurance which may be authorized in this state, subject to other provisions of this chapter, and their scope, are set forth in the following paragraphs. The power to do any kind of insurance against loss of or damage to property shall include the power to insure all lawful interests in such property and to insure against loss of use and occupancy, rents and profits resulting therefrom. . .
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(35) “Business interruption insurance” means insurance against loss of use and occupancy, rents, and profits resulting from a business closure due to: (A) loss of or damage to insured or neighboring property; (B) an act or threatened act of violence while the perpetrator is on the business premises; or (C) a government order.
N.Y. Ins. Law § 1113(a)(35) (2025). Of particular importance, is that the law defined “business interruption insurance” to include coverage for loss of use and occupancy and profits resulting from a closure due to government orders, without requiring direct physical loss or damage.
Therefore, insurers should consider whether to continue to sell traditional business interruption coverage or elect to sell business interruption insurance that removes the physical damage prerequisite to coverage. While the physical damage requirement under traditional business interruption is a prerequisite to coverage and was a kingpin in the insurers' coverage positions during the Covid-19 litigation, offering business interruption coverage that removes the physical damage requirement may offer insurers increased revenue through higher premiums and expansion in the New York market.
Ultimately, the reality is that insurers must evaluate whether they are willing to provide business interruption coverage that does not require physical damage, and if so whether the premiums paid outweigh the risks. At present, it is unclear whether the financial gain outweighs the potential risks involved in removing the physical damage prerequisite. Nevertheless, Zelle LLP continues to monitor the developments around New York Insurance Law Section 1113(a)(35) and its effects on the market.
