In what is certain to be regarded as a landmark ruling in the ongoing battles over coverage for COVID-19 claims, the Massachusetts Supreme Judicial Court handed down its unanimous decision in Verveine Corp. et als. v. Strathmore Insurance Company et al., on April 21, 2022. As this is the first state supreme court in the U.S. to decide the question of coverage for losses arising out of the COVID-19 pandemic, the decision has particular relevance for the insurance industry nationally.
The essence of the ruling is that government-ordered suspension of business operations, without any evidence of some “distinct, demonstrable, physical alteration of the property,” does not constitute “direct physical loss of or damage to” real property. As a result, three restaurants that submitted claims to their property insurers for business-income loss could not satisfy the insuring agreement. The significance lies in the categorical nature of the court’s holding, and in the substantial attention that the court paid to articulating and applying rules of insurance-policy construction that too often do not get said in reported decisions.
The plaintiffs were three Massachusetts restaurants that operated in Boston and Cambridge. When the pandemic began, the restaurants were covered by two different property and liability package policies: one that covered the two restaurants in Boston, and another that covered the restaurant in Cambridge. The policy for the Cambridge restaurant had a virus exclusion that was not present on the other policy.
Massachusetts issued an emergency order in mid-March 2020 that prohibited in-person dining at bars and restaurants. Although the two Boston restaurants remained open to prepare take-out food, they suffered substantial revenue losses. The Cambridge restaurant closed completely, but it allowed its kitchen to be used to prepare meals for first responders. The closure orders were modified in June 2020 to permit limited in-person dining, but revenue did not recover.
The restaurants submitted business-income claims to Strathmore, citing their losses and their expected continuing losses. Strathmore denied the claims under both policies, citing the lack of any “physical loss of or damage to” the properties, as well as the virus exclusion on the policy for the Cambridge restaurant. The trial court agreed with the insurer, and the restaurants appealed.
Insurance policy construction
The Supreme Judicial Court’s opinion opens forcefully. The interpretation “of language in an insurance contract is no different from the interpretation of any other contract,” the court wrote.
The court stated that it “must also assume that every word in an insurance contract serves a purpose, and must be given meaning and effect whenever practicable.” When the policy terms are “unambiguous,” the court said, “we construe the words of the policy in their usual and ordinary sense.” Ambiguity is not created merely because the parties disagree about the meaning of a word: Reasonably intelligent people must differ as to what the words mean.
Direct physical loss
Turning to the policies, the court recited that the critical language in the insuring agreement stated: “[Strathmore] will 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.” In the context of the policies, the court declared that “direct physical loss of or damage to Covered Property” characterizes the effects that the covered causes must have on the property to trigger coverage, not the causes themselves.
The court then proceeded to frame the issue as being “not whether the virus is physical, but rather it has a direct physical effect on property that can be fairly characterized as ‘loss or damage.’” It held, unequivocally, that “direct physical loss of or damage to” property “requires some distinct, demonstrable, physical alteration of the property.” As the court noted, every appellate court in the U.S. that has been asked to review COVID-19 insurance claims has agreed with this definition of the quoted language.
The restaurants’ continuing ability to provide takeout and delivery services, and to make the kitchen in Cambridge available for meal preparation, demonstrated that there were no physical effects on the properties themselves. Similarly, the COVID-19 orders issued by government authorities standing alone could “not possibly constitute ‘direct physical loss of or damage to’ property” because they did not physically alter the property.
The court wrote that “mere ‘presence’ does not amount to loss or damage to the property.” It said: “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.”
Although virtually every federal appellate court in the U.S. has made similar declarations, those decisions were all based upon the federal judiciary’s predictions of how the state courts would rule. The Massachusetts high court was the first state supreme court to issue a coverage decision concerning first-party claims for COVID-19. And it did so unanimously.
Alexander G. Henlin is a vice chair of the Insurance and Reinsurance Committee of the International Association of Defense Counsel and an attorney and member of the Insurance and Reinsurance Group at Sulloway & Hollis, which advises insurers across New England. He may be contacted at [email protected].