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The Commercial Division Rejects Yet Another Insured’s Claim for Coverage for Covid-Related Revenues Losses

By Joshua Schlenger on February 21, 2023
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Does the business harm caused by COVID-19 qualify as “direct physical loss” for insurance purposes? In Spirit Airlines, Inc. v. American Home Assurance Company, Index No. 655755/2021, Commercial Division Justice Robert R. Reed held that the answer is no. In a decision announced on the record at an August 18, 2022 oral argument and entered on September 13, 2022 (see here), Justice Reed explained that his decision was dictated by the First Department’s April 7, 2022 decision in Consolidated Restaurant Operations, Inc. v. Westport Insurance Corp., 205 A.D.3d 76 (1st Dep’t 2022), and that he “follow[s] the First Department until the Court of Appeals says that the First Department is wrong.”

In the Spirit case, Spirit Airlines sued its insurer for breach of contract, alleging that the insurer wrongfully denied coverage to Spirit for Covid-related business interruption losses under a commercial property damage insurance policy, which covered, among other things, economic damages resulting from “direct physical loss.” The insurer, American Home, then moved to dismiss pursuant to CPLR 3211, on the grounds that the Covid pandemic did not constitute “direct physical loss” sufficient to trigger coverage. Spirit countered by, among other things, pointing out that Covid can physically affix to property and that the pandemic forced Spirit to make physical changes to its buildings and premises (e.g., by installing new ventilation systems and dividers).

Justice Reed rejected Spirit’s arguments and granted the motion to dismiss, holding that Spirit’s Covid-related revenues losses did not qualify as economic damages due to direct physical loss. Justice Reed relied heavily on the First Department’s decision early last year in Consolidated Restaurant, in which the Appellate Division affirmed Commercial Division Justice Jennifer Schechter’s grant of a similar motion to dismiss, and concluded: “[W]here a policy specifically states that coverage is triggered only where there is ‘direct physical loss or damage’ to the insured property, the policyholder’s inability to fully use its premises as intended because of COVID-19, without any actual, discernable, quantifiable change constituting ‘physical’ difference to the property from what it was before exposure to the virus, fails to state a cause of action for a covered loss.” Consol. Rest., 205 A.D.3d at 78.

As noted, Justice Reed reasoned that he was bound to follow the First Department’s decision in Consolidated Restaurant unless and until the Court of Appeals says otherwise. Insureds may get their day before the Court of Appeals soon: On November 17, 2022, the Court of Appeals granted in part Consolidated Restaurant’s motion for leave to appeal. See Consol. Rest. Operations, Inc. v. Westport Ins. Corp., 39 N.Y.3d 943 (2022). Briefing in that appeal is now under way. Watch this blog for developments in this fast-developing area of New York insurance law.

Joshua Schlenger

Joshua Schlenger is special counsel in the Business Trial Practice Group in the firm’s New York office.

Read more about Joshua SchlengerEmail
  • Posted in:
    Criminal, Intellectual Property, Real Estate & Construction
  • Blog:
    New York Commercial Division Round-Up Blog
  • Organization:
    Sheppard, Mullin, Richter & Hampton LLP
  • Article: View Original Source

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