In Verveine Corp., et al., v. Strathmore Insurance Company, et al., the Massachusetts Supreme Judicial Court (SJC) held that claims for business losses made by three restaurants arising from COVID-19 dining restrictions were not covered by “all-risk” property insurance policies because the losses were not “direct physical loss or damage” under those policies.
In spring 2020, Governor Baker issued an emergency order prohibiting in-person dining at restaurants and bars in the Commonwealth. Two of the plaintiffs responded by offering takeout and delivery services, while the third plaintiff suspended operations. Though limited in-person dining resumed in June 2020, the plaintiffs continued to lose revenue due to the restrictions. The restaurants filed insurance claims for the lost income. Strathmore Insurance Company denied the claims. The restaurants then brought a declaratory judgment action against Strathmore and asserted claims for breach of contract and violation of G. L. c. 93A and G. L. c. 176D. Superior Court Judge Sanders dismissed the claims, ruling that the restaurants did not suffer “direct physical loss or damage,” as required by the policies.
The SJC affirmed Judge Sanders’ ruling, holding that the phrase “direct physical loss of or damage to [property]” requires, in the SJC’s words, “some ‘distinct, demonstrable, physical alteration of the property.’” The SJC explained:
The allegations in the complaint do not support recovery under this definition. Although caused, in some sense, by the physical properties of the virus, the suspension of 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. As demonstrated by the restaurants’ continuing ability to provide takeout and other services, there were not physical effects on the property itself. It is only these effects that would trigger coverage under either the property or the business interruption coverage forms.
The SJC rejected plaintiffs’ argument that the “presence” of the virus constituted direct physical loss or damage:
Even accepting the plaintiffs’ premise that the suspension of their business was caused by the ‘presence’ of the virus on surfaces and in the air at the restaurants (as opposed to the danger that the virus would be introduced to the restaurants or spread directly from person to person if indoor dining were allowed), mere ‘presence’ does not amount to loss or damage to the property. 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. While saturation, ingraining, or infiltration of a substance into the materials of a building or persistent pollution of a premises requiring active remediation efforts is sufficient to constitute ‘direct physical loss of or damage to property,’ evanescent presence is not.
The SJC also rejected plaintiffs’ argument that the term “loss”—as opposed to “damage” —did not require physical alteration of the property:
The plaintiffs’ interpretation ignores that the loss itself must be a ‘direct physical’ loss, clearly requiring a direct, physical deprivation of possession. The plaintiffs were not deprived of possession of their property, and indeed continued to inhabit and use it for other purposes. Although they could not use it for in-person or indoor dining but rather for takeout services, ‘without any physical alteration to accompany it, this partial loss of use does not amount to a “direct physical loss.’”
You can review the SJC’s decision here.
The Supreme Judicial Court of Massachusetts
Docket Number: SJC-13172
Case Name: Verveine Corp., et al., v. Strathmore Insurance Company, et al.
Date of Decision: April 21, 2022
Judge: Justice Scott Kafker, writing for a unanimous Court.
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