01.15.2021 | Articles

MA Court Weighs In On The Question Of Business Interruption Coverage

By Kelly E. Petter

The Suffolk County Superior Court released its first pandemic related business interruption decision in which the carrier’s motion to dismiss and the insurance agent’s motion for judgment on the pleadings were granted, and the Complaint was dismissed. The Hon. Janet L. Sanders issued her decision in Verveine Corp. d/b/a Coppa, 1704 Washington LLC d/b/a Toro, and JKFoodgroup LLC d/b/a Little Donkey v. Strathmore Insurance Company and Commercial Insurance Agency, Inc. on December 21, 2020 in which she decided the coverage issues related to three Massachusetts restaurants – Coppa and Toro in Boston, and Little Donkey in Cambridge.

The Court took judicial notice of the March 15, 2020 order issued by the Governor of Massachusetts related to the COVID-19 pandemic, which stated, in relevant part:

Any restaurant, bar, or establishment that offers food or drink shall not permit on-premises consumption of food or drink; provided that such establishments may continue to offer food for take-out and by delivery provided that they follow the social distancing protocols set for the Department of Public Health guidance.

Another order was issued about one week later continuing to permit take-out and delivery operations from restaurants and bars. A phased reopening began in June 2020 with outdoor table service permitted beginning June 8, 2020, and indoor table service permitted beginning June 22, 2020. The Court noted that “[a]s a consequence of the Governor’s Orders, plaintiffs could not use their properties as fully operational restaurants: although they could still use the premises to prepare food for take-out and delivery, plaintiffs suffered a major loss of business income because of the restrictions related to on-premises dining.” Plaintiffs instituted the suit seeking declaratory relief, and alleging breach of contract and violations of G. L. c. 93A and 176D against Strathmore as too all three restaurants. JKFoodgroup, LLC also asserted a claim against the agent, Commercial, arguing that, if the virus exclusion applied, Commercial was negligent in procuring that policy on its behalf.

The Court rejected plaintiffs’ contention that plaintiffs suffered a “physical loss” within the meaning of the business income and extra expense coverage finding that, when the word “physical” is afforded its plain meaning, it does not include intangible losses. Accordingly, the Court held that “direct physical loss of or damage to property” in a property insurance policy “cannot therefore be construed to cover physical loss in the absence of some physical damage to the insured’s property.” The Court recognized that the majority of courts across the country addressing similar COVID-19 insurance claims have held that restrictions on the use of an insured’s property due to government orders are not “physical losses or damage” within the meaning of the policy provisions, and “there is no indication in Massachusetts caselaw that would suggest a different conclusion.” The Court also rejected plaintiff’s attempt to compare the COVID-19 virus to an insured property rendered too dangerous to occupy because of a dangerous substance – poisonous carbon monoxide buildup, presence of asbestos, noxious fumes from an oil spill – noting that the Complaint in the instant case did not allege that COVID-19 was actually present at the plaintiffs’ restaurants resulting in physical contamination of the premises. “Plaintiffs’ actual property remains the same as it was pre-pandemic, and patrons and employees were not prohibited from entering the premises as long as the Governor’s Orders were followed.” The Court also found that the policy as a whole supported the conclusion that tangible change was required because the policy referred to the “period of restoration” and the costs to “repair or replace property,” which contemplate that the property was in some way lost or damaged. The Court also noted that it would be unreasonable for any insured to assume that the policy would cover loss of use damages since the policy included an exclusion for loss or damage caused by or resulting from “[d]elay, loss of use or loss of market.”

The Court also held that plaintiff’s claims for civil authority coverage were unfounded because plaintiffs, their employees and their customers were not prohibited from accessing the restuarant and, thus, access was not prohibited as required by that coverage. Instead, the scope of use of those spaces was altered, which was insufficient to trigger civil authority coverage. Moreover, for the same reasons already discussed, plaintiffs failed to allege damage either at their property or at another building within a mile thereof, as required by the coverage.

The Court granted Strathmore’s motion to dismiss concluding the policy does not afford coverage for plaintiffs’ claimed damages, and, further, granted Commercial’s motion for judgment on the pleadings finding that no cause of action exists against Commercial, because the denial of coverage by Strathmore was proper without reliance on the virus exclusion that formed the basis of the count against Commercial.

If you have any questions or would like further information about this decision or Business Interruption claims, please contact Attorney Kelly Petter at: 860-247-0644 or kpetter@hassettanddonnelly.com

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