MASSACHUSETTS STATE SUPREME COURT REJECTS COVID-19 CLAIMS
In Verveine Corp. v. Strathmore Ins. Co., Massachusetts’ highest court resolved the issue of whether an insured may recover under a property policy for losses incurred as a result of the government-mandated shutdowns due to the COVID-19 virus. The plaintiffs in the case owned three restaurants which suffered severe reductions in revenue due to the pandemic. Like other businesses across the county, the plaintiffs sought to recover under their property insurance policy for those losses. A Massachusetts trial judge concluded that the policies unambiguously did not provide coverage. The Massachusetts Supreme Judicial Court took the case on its own initiative and affirmed the judgment in favor of the insurers.
While doing so, the Court reached several important conclusions. For example, the Court was not persuaded by the “somewhat inaccurate” reference to the “all-risk” policies issued by the insurers. Rather than evaluating coverage based on this general description of the policies, their terms were controlling. For coverage to apply under the Building and Personal Property Coverage form, the insured had to establish that there was “direct physical loss of or damage to Covered Property at the insured premises . . . caused by or resulting from any Covered Cause of Loss.” Thus, in this context, “direct physical loss of or damage to Covered Property” characterized the effects the covered causes of loss must have on the property.
The Business Income (and Extra Expense) Coverage form provided coverage for actual losses of business income while the insured’s operations are suspended during a period of restoration. This suspension of operations must be caused by “direct physical loss of or damage to property at the insured premises” and caused by or result from a Covered Cause of Loss. Extra Expense coverage likewise required direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.
The Court noted that “direct physical loss of or damage to” property was an “effect” in the Building and Personal Property insurance context. On the other hand, Business Income and Extra Expenses losses had to be caused by the direct physical loss of or damage to the insured property. Nevertheless, this phrase was construed consistently throughout the policy.
The Court then defined “direct physical loss of or damage to” property to require some “distinct, demonstrable, physical alteration of the property.” In support of this conclusion, the Court stated, “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 Court then cited to fourteen cases, from the 2nd, 4th, 5th, 6th, 7th, 8th, 9th, 10th, and 11th Circuits of the Federal Courts and appellate courts from California, Illinois, Indiana, Michigan, and Ohio.
In fact, the 1st Circuit had not rendered a decision, deferring multiple cases until the Massachusetts Supreme Judicial Court decided this issue of state law. Legal Sea Foods, LLC v. Strathmore Ins. Co., Docket No. 21-1202 (1st Cir. 2021); SAS International, LTD. V. General Star Ins. Co., Docket No. 21-1219 (1st Cir. 2021); Select Hospitality, LLC v. Strathmore Ins. Co., Docket No. 21-1380 (1st Cir. 2022); and Kamakura, LLC v. Greater New York Mut. Ins. Co., Docket No. 21-1259 (1st Cir. 2022). In all of these case, the insurer had prevailed. In addition, the insurers prevailed in other cases which apparently were not appealed. Pakachoag Acres Day Care Center, Inc. v. Philadelphia Ind. Ins. Co., 2021 WL 4392088 (D.Mass. 2021); Hampshire House Corp. v. Fireman’s Fund Ins. Co., 557 F.Supp.3d 284 (D.Mass. 2021). Finally, in BN Farm LLC v. Cincinnati Cas. Co., Docket No. 21-1769, the insurer had prevailed below, and the parties were finalizing the filing of their appellate briefs as Verveine Corp. was being decided. Accordingly, this issue has garnered much attention from the courts and litigants, and Verveine Corp. is the first decision by the highest court in any state.
After establishing the definition of what constitutes direct physical loss of or damage to property, the Court noted that the virus may have physical properties, but “the suspension of the business at the restaurants was not in any way attributable to a direct physical effect on the plaintiffs’ property that can be described as loss or damage.” In fact, the restaurants were able to provide takeout and other services.
Moreover, even if the virus was present on surfaces and in the air at the restaurants, the Court found that “mere ‘presence’ does not amount to loss or damage to the property.” That is, “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.” In this way, the COVID-19 cases were considered different from those where a substance saturates, ingrains, or infiltrates into the materials comprising the building, which may constitute direct physical loss of or damage to property.
The Court also addressed the policy’s grant of coverage based on “loss or damage” to property. These terms are distinguishable in that there may be a loss of property without damage to it, as (for example) when it is stolen or misplaced. However, that distinction was not relevant in these circumstances, since the coverage is triggered only for “direct physical loss.” In this case, the plaintiffs could use their property (as they did for takeout). Perhaps more importantly, without any physical alteration of the property, there was no “direct physical loss.”
Furthermore, the three policies at issue in the case were distinguishable in that one had a “virus” exclusion and the other two did not. Nevertheless, the Court rejected the argument that the lack of a virus exclusion created an implication that coverage applied. In support of this conclusion, the Court relied, in part, on a “basic insurance principle” that the absence of an exclusion cannot create coverage where it otherwise does not exist. Stated another way, there is no need for an exclusion when the policy’s insuring agreement has not been satisfied, as in this case.
The Court also rejected the plaintiffs’ claims that “civil authority” coverage applied. That coverage is applicable when access to the area immediately surrounding damaged property is prohibited by a civil authority and the insured premises is within that area and not more than a mile away from the damaged property. Alternatively, coverage may apply when the civil authority responds to dangerous conditions resulting from the damage or the continuation of the covered cause of loss that caused the damage, or the action is taken to enable the civil authority to have unimpeded access to the damaged property. None of these applied to the COVID-19 shutdowns, because the virus did not cause “damage” to any properties near the insureds.
Finally, the plaintiff which purchased the policy with the “virus” exclusion had sued its insurance agent, and the Court found that this claim was also properly dismissed. In this regard, that restaurant did not have coverage because its claim did not satisfy the insuring agreement’s requirement of “direct physical loss or damage,” not because of the exclusion in the policy. Thus, the Errors & Omissions claim based on procuring a policy with this exclusion failed as a matter of law.