“Direct Physical Loss or Damage” Requires Material Alteration or Complete, Persistent Dispossession; Pre-Answer Dismissal Motions in Declaratory Actions May Be Converted to Declarations for Defendants

Introduction

In Abruzzo Docg, Inc. v Acceptance Indem. Ins. Co. (2026 NY Slip Op 02810 [249 AD3d 654] [2d Dept May 6, 2026]), numerous New York City restaurant, bar, and dining-establishment owners sued a large group of insurers for breach of contract and declaratory relief. The plaintiffs alleged that gubernatorial COVID-19 Executive Orders forced them to make operational and physical changes—such as reconfiguring space for takeout, erecting barriers, rearranging floor plans, and repositioning entrances and exits—triggering coverage under “all risk” policies requiring “direct physical loss of or damage to” covered property.

The core issues were (1) whether the pleaded Executive Order-driven changes constituted “direct physical loss or damage” under New York law (and, for one policy, California law), and (2) the proper procedural treatment of a declaratory-judgment cause of action at the CPLR 3211 pre-answer stage.

Summary of the Opinion

The Second Department largely affirmed dismissal of the coverage claims, holding that the pleaded alterations and restrictions did not allege either (i) a material physical alteration to property or (ii) a complete and persistent dispossession—both necessary to satisfy “direct physical loss or damage” as construed by controlling New York precedent.

Procedurally, the court modified the order as to the first cause of action for declaratory relief: rather than dismissing it outright, the court held that where no factual issues exist, a CPLR 3211 motion may be treated as one seeking a declaration, and the court should enter a declaration in defendants’ favor. The matter was remitted for entry of a judgment declaring that defendants were not obligated to provide coverage.

Analysis

Precedents Cited

  • Consolidated Rest. Operations, Inc. v Westport Ins. Corp., 41 NY3d 415 (2024): The decisive substantive authority. The opinion adopts and applies its rule that “direct physical loss or damage” requires either a material alteration or a complete and persistent dispossession, and that “impaired functionality”/“loss of use” is insufficient. It also supplies the court’s definition of “direct physical damage” as requiring a perceptible material alteration.
  • Carrols Rest. Group, Inc. v American Guar. & Liab. Ins. Co., 225 AD3d 1133 (2024): Cited as consistent Appellate Division application of Consolidated Rest. Operations, Inc. v Westport Ins. Corp. to reject COVID-era claims premised on use restrictions.
  • S. Donadic, Inc. v Utica Mut. Ins. Co., 230 AD3d 606 (2024) and Burlington Ins. Co. v NYC Tr. Auth., 29 NY3d 313 (2017): Provide the contract-construction baseline: unambiguous policy terms get their plain and ordinary meaning and interpretation is a question of law.
  • Drive N.J. Ins. Co. v RT Hospitality Group, LLC, 240 AD3d 105 (2025) and Keller v Keller, 237 AD3d 1183 (2025): Set out the CPLR 3211(a)(7) pleading standard (liberal construction, accept facts as true, determine if facts fit a cognizable theory).
  • Another Planet Entertainment, LLC v Vigilant Ins. Co., 15 Cal 5th 1106 (2024) and United Talent Agency v Vigilant Ins. Co., 77 Cal App 5th 821 (2022): Applied to the one California policy by choice-of-law agreement, supporting the same bottom line—COVID restrictions and related business impacts do not equate to covered “physical” loss/damage.
  • 88-18 Tropical Restaurante Corp. v Utica First Ins. Co., 223 AD3d 772 (2024), Matter of Tilcon N.Y., Inc. v Town of Poughkeepsie, 87 AD3d 1148 (2011), and Matter of 22-50 Jackson Ave. Assoc., L.P. v County of Suffolk, 216 AD3d 943 (2023): Supply the procedural doctrine for declaratory claims at the pleading stage—if no fact questions are presented, the court may reach the merits and convert a dismissal motion into one for a declaration in defendant’s favor.
  • Lanza v Wagner, 11 NY2d 317 (1962): Grounds the remedy that, in a declaratory judgment action, the court should enter an appropriate declaration (often via remittal for a judgment), not merely dismiss.

Legal Reasoning

  1. Policy text treated as a legal question. Relying on S. Donadic, Inc. v Utica Mut. Ins. Co. and Burlington Ins. Co. v NYC Tr. Auth., the court framed “direct physical loss or damage” as an interpretive issue resolvable as a matter of law where the operative facts are not in dispute.
  2. “Physical” requires more than operational disruption. Under Consolidated Rest. Operations, Inc. v Westport Ins. Corp., “direct physical loss” requires “a material alteration or a complete and persistent dispossession.” The plaintiffs pleaded Executive Order-driven changes (reconfiguration for takeout, barriers, reduced crowd density layouts, and altered ingress/egress), but those allegations described adaptive use and compliance measures—not a material alteration to the property itself as insured property, nor an actual complete dispossession.
  3. No “material physical alteration” pleaded. The court treated the alleged changes as non-qualifying because they did not amount to the sort of perceptible, material change contemplated by Consolidated Rest. Operations, Inc. v Westport Ins. Corp.. The pleading therefore failed to allege “direct physical damage.”
  4. No “complete and persistent dispossession” pleaded. Limitations on on-premises service and mandates to alter operations did not equate to an actual, complete dispossession of the insured premises. The court, consistent with Consolidated Rest. Operations, Inc. v Westport Ins. Corp. and Carrols Rest. Group, Inc. v American Guar. & Liab. Ins. Co., rejected “loss of use” theories recast as “direct physical loss.”
  5. Choice-of-law did not change the result. For the California insured (Global Dining, Inc.) and Sompo America Insurance Company, the parties’ agreed California law still required “physical” loss/damage in a manner that the pleaded facts did not satisfy, per Another Planet Entertainment, LLC v Vigilant Ins. Co. and United Talent Agency v Vigilant Ins. Co..
  6. Declaratory judgment procedure: convert, declare, and remit. Although a declaratory judgment claim generally should not be dismissed merely because the plaintiff may not ultimately win, 88-18 Tropical Restaurante Corp. v Utica First Ins. Co. (quoting Matter of 22-50 Jackson Ave. Assoc., L.P. v County of Suffolk) allows a merits declaration for defendants where there are no fact issues. The Second Department therefore modified the order to deem the motions as seeking a declaration in defendants’ favor and granted that relief, then remitted for entry of a judgment with the appropriate declaration as required by Lanza v Wagner.

Impact

  • Substantive coverage: The decision reinforces (and operationalizes at the pleading stage) the New York Court of Appeals’ framework in Consolidated Rest. Operations, Inc. v Westport Ins. Corp., narrowing viable “direct physical loss or damage” claims to cases involving tangible/material alteration or complete, persistent dispossession—not pandemic-era restrictions, reconfigurations, or compliance adaptations.
  • Pleading and motion practice: Plaintiffs attempting to plead “physical” loss based on governmental restrictions face predictable CPLR 3211 vulnerability unless they can allege facts fitting the Court of Appeals’ definitions (not merely conclusions or operational harms).
  • Declaratory judgment cleanup: The opinion signals that, where coverage can be resolved as a pure legal issue on the pleadings, trial courts should enter a defendant-favorable declaration (rather than simply dismiss), promoting finality and reducing procedural ambiguity for insurers and insureds.

Complex Concepts Simplified

“All risk” policy
A policy type that broadly covers fortuitous losses unless excluded—but it still requires the insured to satisfy the coverage trigger (here, “direct physical loss of or damage to” property).
“Direct physical loss” vs. “direct physical damage”
Under Consolidated Rest. Operations, Inc. v Westport Ins. Corp., “loss” means a complete and persistent dispossession (not just reduced use); “damage” means a material physical alteration that is perceptible even if not visible to the naked eye.
“Impaired functionality” / “loss of use”
Business operations may be hindered by regulations or conditions, but that impairment—without qualifying dispossession or material alteration— is not “direct physical loss or damage” as New York defines it.
CPLR 3211(a)(7)
A motion to dismiss for failure to state a cause of action; courts assume pleaded facts are true and ask whether those facts fit a recognized legal theory.
Declaratory judgment at the pleading stage
Even if a declaratory claim is well-pleaded enough to invoke the court’s power, where there are no factual disputes and the legal issue is dispositive, the court may issue a declaration for the defendant rather than merely dismissing the claim.

Conclusion

Abruzzo Docg, Inc. v Acceptance Indem. Ins. Co. confirms that, in New York, COVID-era Executive Order impacts and compliance-driven reconfigurations do not constitute “direct physical loss of or damage to” property absent allegations of material physical alteration or complete, persistent dispossession, as defined by Consolidated Rest. Operations, Inc. v Westport Ins. Corp.. Equally important, it clarifies declaratory-judgment procedure: when no factual issues exist, courts should convert pre-answer dismissal motions into motions for a declaration and enter a defendant-favorable declaration, with an appropriate declaratory judgment entered upon remittal.