Insurance policies

Massachusetts insurance policies exclude business losses from Covid-19

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

Background

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

As in 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 prohibiting each of the restaurants from operating as usual during the lockdown period. these restrictions. These orders have caused severe economic damage to each of Verbena’s three restaurants, resulting in the complete closure of one restaurant and the transition of the other two to a take-out-only business model. Seeking to recover their business losses, each restaurant filed a claim under its all-risks policy, and Strathmore denied each restaurant’s claim. Strathmore’s denial of coverage was primarily based on a defense of insurance agreement – ​​the absence of “physical loss or damage” of the insured property.[1]

In June 2020, the restaurants filed a declaratory judgment action against Strathmore, seeking a declaration that the policies did in fact cover their losses and asserting claims for damages under GL v. 93A and LD 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. Strathmore sought the dismissal of the claims against it pursuant to Mass. A. Civil. P. 12(b)(6), and Commercial, having responded, filed a motion for judgment on the pleadings under Mass. A. Civil. 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 harm.”[2] The restaurant’s complainants appealed and the SJC referred the case to itself. spontaneously of the Court of Appeal.

Analysis

The SJC began its analysis of plaintiffs’ claims by noting that, under Massachusetts law, “[w]When a policy term is unambiguous, we interpret the policy words in their usual and ordinary meaning.[3] But where a policy is “not at all clear or questionable, we question what an objectively reasonable insured, reading the wording of the relevant policy, would expect to be covered”, and that language is “interpreted against the insurer who used it and in favor of the insured.[4]

The SJC then analyzed the wording of each policy, which provided that Strathmore would “pay for direct physical loss or damage to covered property at the [insured] local . . . caused by or resulting from any covered cause of loss. A “business income (and additional expense) coverage form” also provided that Strathmore would “pay the actual loss of business income [each restaurant sustained] . . . due to the necessary “suspension” of . . . “operations” during the “restoration period”. Suspension must be caused by direct physical loss or property damage to [the insured premises] . . . . The loss or damage must be caused by or result from a covered cause of loss. »[5]

After reviewing the wording of the policies, the SJC concluded that neither stay-at-home orders, nor COVID-19, constituted “direct physical loss or property damage.” Noting that “direct physical loss or damage to” the property requires “distinct, demonstrable physical alteration of the property”, and that “every appellate court that has been asked to consider COVID-19 insurance claims accepted this definition for this language or its equivalent”, the SJC concluded that COVID-19 had no physical effects on the restaurants themselves, and therefore did not trigger coverage:

“The 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 the property.”[6]

The SJC also rejected plaintiffs’ arguments that (1) the existence of a virus exclusion in one policy (and the absence of such exclusion in other policies) created a presumption that virus-related damage was covered in the other policies, and (2) that a “civil authority” clause in the insurance policies provided coverage in this case. Having ruled in favor of the defendants on each of the issues before it, the CSM confirmed the Superior Court’s rejection of the plaintiff’s claims.[7]

Take away food

The SJC’s decision is consistent with that of every other appellate court in the country to deal with business interruption claims under “All Risks” property policies arising from COVID-19. This decision provides further clarity on the state of insurance coverage in Massachusetts and provides insurers with important certainty when reviewing claims for coverage for losses resulting from COVID-19 and related lockdowns.

FOOTNOTES

[1] Strathmore also relied on the viral exclusion contained in one of the three insurance policies, as an additional basis for denying coverage from that entity.

[2] The Superior Court also dismissed the commercial negligence claim against Commercial, finding that the virus exclusion had no negative impact on the restaurant filing the claim, as COVID-19-related losses have been independently excluded as not falling under “direct physical loss or damage”.

[3] Verbena Corp. vs. Strathmore Ins. Co.SJC-13172, at *8 (April 21, 2022) (quotation omitted; citing Quote Ins. Co. c. Gomez426 Mass. 379, 381 (1998)).

[4] Identifier. to *9 (quotes omitted).

[5] Also covered are “necessary expenses [the insured] incur[ed] during the restoration period which [the insured] would not have been incurred had there not been direct physical loss or damage to property caused by or resulting from a covered cause of loss. »

[6] Verbena Corp., SJC-13172, at *18 (citations omitted). The SJC has singled out the COVID-19 virus for other forms of pollution that saturate, root or infiltrate an insured’s property and require active remediation efforts to correct the problem, and have been determined by other courts as causing “direct physical loss or damage to property” at the insured’s premises, triggering coverage. Identifier.at *18-19 (citing cases).

[7] Claims against the broker for obtaining a policy for one of the claimants with a virus exclusion were also dismissed as there was no direct physical loss or damage to the property in question. Since there was coverage under the insurance agreement, the exclusion of the virus was not relevant.