Massachusetts High Court Finds COVID-19 Income Loss Excluded From “All-Risk” Business Insurance Policies

On April 21, 2022, in the case of Verveine Corp. v. Strathmore Insurance Company (No. SJC-13172), the Supreme Judicial Court (SJC), the highest court in the Commonwealth of Massachusetts, determined that various losses incurred by businesses that stemmed from the COVID-19 pandemic were not a “direct physical loss of or damage to” their properties as contemplated by their insurance policies. The Court concluded that a virus such as COVID-19, which at most temporarily exists on surfaces in an insured’s property and can easily be cleaned, does not physically alter or affect property within the meaning of the insuring agreement of an All-Risk property policy. 
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The opinion can be read here.

Background

Verveine Corp. owned and operated three restaurants (each a separate limited liability company) in Boston and Cambridge, MA. Each restaurant engaged Commercial Insurance Agency, Inc. as an insurance broker, and purchased insurance policies from Strathmore Insurance Company. In relevant part, each of the three policies provided coverage for business losses arising from “direct physical loss of or damage to” their property. Additionally, one policy explicitly excluded “loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

As with many other jurisdictions, the Governor of Massachusetts, in an effort to slow the spread of COVID-19, issued stay-at-home orders in March 2020, barring each of the restaurants from operating in their usual manner during the period of these restrictions. These orders caused severe economic harm to each of Verveine’s three restaurants, causing one to close completely and the remaining two to shift to a takeout-only business model. Seeking to recoup their business losses, each restaurant filed a claim under its all-risk policy, and Strathmore denied each restaurant’s claim. Strathmore’s denial of coverage was primarily based on an insuring agreement defense—the lack of any “physical loss of or damage to” the properties insured.[1]

In June 2020, the restaurants brought a declaratory judgment action against Strathmore, seeking a declaration that the policies did, in fact, cover their losses, and asserting damages claims under G.L. c. 93A and G.L. c. 176D for allegedly unfair and deceptive practices. One of the three restaurants also sued Commercial, alleging commercial negligence for selling a policy with a virus exclusion in it. Strathmore moved to dismiss the claims against it pursuant to Mass. R. Civ. P. 12(b)(6), and Commercial, having answered, filed a motion for judgment on the pleadings under Mass. R. Civ. P. 12(c). The Superior Court granted both defendants’ motions, dismissing the case, after finding that neither COVID-19 nor the resulting stay-at-home orders constituted “direct physical loss or damage.”[2] The restaurant plaintiffs appealed, and the SJC transferred the case to itself sua sponte from the Appeals Court.

Analysis

The SJC began its analysis of the Plaintiffs’ claims by noting that, under Massachusetts law, “[w]hen a policy term is unambiguous, we construe the words of the policy in their usual and ordinary sense.”[3] But where a policy is “at all unclear or in doubt, we inquire into what an objectively reasonable insured, reading the relevant policy language, would expect to be covered,” and that such language is “interpreted against the insurer who used them and in favor of the insured.”[4]

The SJC next analyzed the language of each policy, which provided that Strathmore would “pay for direct physical loss of or damage to Covered Property at the [insured] premises … caused by or resulting from any Covered Cause of Loss.” A “Business Income (and Extra Expense) Coverage Form” also provided that Strathmore would “pay for the actual loss of Business Income [each restaurant sustained] … due to the necessary ‘suspension’ of … ‘operations’ during the ‘period of restoration.’ The suspension must be caused by direct physical loss of or damage to property at [the insured premises] … . The loss or damage must be caused by or result from a Covered Cause of Loss.”[5]

Having considered the language of the policies, the SJC concluded that neither the stay-at-home orders, nor COVID-19, constituted “direct physical loss of or damage to property.” Noting that “direct physical loss of or damage to” property requires “distinct, demonstrable, physical alteration of the property,” and that “every appellate court that has been asked to review COVID-19 insurance claims has agreed with this definition for this language or its equivalent,” the SJC concluded that COVID-19 did not have physical effects on the restaurants themselves, and thus did not trigger coverage:

Evanescent presence of a harmful airborne substance that will quickly dissipate on its own, or surface-level contamination that can be removed by simple cleaning, does not physically alter or affect property.[6]

The SJC also rejected plaintiffs’ arguments that (1) the existence of a virus exclusion in one policy (and that exclusion’s absence in the other policies) created a presumption that virus-related damages were covered in the other policies, and (2) that a “civil authority” provision in the insurance policies provided coverage in this case. Having ruled in favor of the defendants on each issue before it, the SJC affirmed the Superior Court’s dismissal of the Plaintiff’s claims.[7]

Takeaways

The SJC’s decision is in line with every other appellate court across the country to address business interruption claims under “All Risk” property policies arising from COVID-19. This decision provides additional clarity on the state of insurance coverage in Massachusetts, and provides insurers with important security when considering claims for coverage for losses arising from COVID-19 and related lock downs. ArentFox Schiff has been predicting and following the impact of the COVID-19 pandemic on insurance coverage issues since the very beginning of the pandemic; its prior legal alerts and articles on various aspects of the subject can be accessed through the following links:

ArentFox Schiff’s insurance lawyers will continue to monitor and report on developments in this arena, and are available to answer questions that you may have.

[1] Strathmore also relied on the virus exclusion contained in one of the three insurance policies, as an additional basis to deny coverage as to that entity.
[2] The Superior Court also dismissed the commercial negligence claim against Commercial, finding that the virus exclusion did not negatively impact the restaurant bringing the claim, because the COVID-19 losses were independently excluded as not falling within “direct physical loss or damage.”
[3] Verveine Corp. v. Strathmore Ins. Co., SJC-13172, at *8 (Apr. 21, 2022) (quotation omitted; citing Citation Ins. Co. v. Gomez, 426 Mass. 379, 381 (1998)).
[4] Id. at *9 (citations omitted).
[5] Also covered were “necessary expenses [the insured] incur[ed] during the period of restoration that [the insured] would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.”
[6] Verveine Corp., SJC-13172, at *18 (citations omitted). The SJC distinguished the COVID-19 virus for other forms of pollution that saturated, ingrained, or infiltrated an insured’s property and required active remediation efforts to correct the problem, and were determined by other courts to have caused “direct physical loss of or damage to property” at the insured’s premises, triggering coverage. Id., at *18-19 (citing cases).
[7] The claims against the broker for obtaining a policy for one of the plaintiffs with a virus exclusion were also dismissed since there was no direct physical loss or damage to the subject property. Since there was coverage under the insuring agreement, the virus exclusion was irrelevant.

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