In Verbena Corp., et al., c. Strathmore Insurance Company, et al.The Massachusetts Supreme Judicial Court (SJC) ruled that business loss claims made by three restaurants resulting from COVID-19-related dining restrictions were not covered by “all-risk” property insurance policies because the losses were not “direct physical loss or damage” under these policies.

In the spring of 2020, Governor Baker issued an emergency order prohibiting in-person dining at restaurants and bars across the Commonwealth. Two of the complainants responded by offering take-out and delivery services, while the third complainant suspended operations. Although limited in-person dining resumed in June 2020, plaintiffs continued to lose revenue due to the restrictions. Restaurants have filed insurance claims for lost revenue. Strathmore Insurance Company denied the claims. The restaurants then sued Strathmore for declaratory judgment and asserted claims for breach of contract and breach of GL v. 93A and LD 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 upheld Justice Sanders’ decision, finding that the phrase “direct physical loss or damage to [property]requires, in the words of the CJS, “distinct, demonstrable physical alteration of the property.” The CJS explained:

The allegations in the complaint do not support recovery under this definition. Although caused, in some way, by the physical properties of the virus, the restaurants’ suspension of operations was in no way attributable to a direct physical effect on the plaintiffs’ property that could be characterized as loss or damage. As demonstrated by the restaurants’ continued ability to provide take-out and other services, there were no physical effects to the property itself. It is only these items that would trigger coverage under property or business interruption coverage forms.

The SJC rejected the plaintiffs’ argument that the “presence” of the virus constituted direct physical loss or damage:

Even accepting the plaintiffs’ premise that the suspension of their activity was caused by the “presence” of the virus on the surfaces and in the air of restaurants (as opposed to the danger that the virus could be introduced into restaurants or spread directly from person to person if indoor dining was permitted), mere “presence” does not equate to loss or damage to property. The evanescent presence of a harmful airborne substance which will quickly dissipate on its own, or surface level contamination which can be removed by simple cleaning, does not alter or physically affect the property. While the saturation, rooting or infiltration of a substance in the materials of a building or the persistent pollution of a premises requiring active remediation efforts is sufficient to constitute “direct physical loss or damage to property,” evanescent presence is not.

The SJC also rejected the plaintiffs’ argument that the term “loss” – as opposed to “damage” – did not require a physical alteration to the property:

Plaintiffs’ interpretation ignores that the loss itself must be a “direct physical” loss, clearly requiring direct physical deprivation of possession. The plaintiffs were not deprived of possession of their property and even continued to inhabit it and use it for other purposes. Although they cannot use it for in-person or indoor dining, but rather for take-out services, “without any physical modifications to accompany it, this partial loss of use does not constitute a” direct physical loss “”.

You can view the SJC decision here.

The Supreme Judicial Court of Massachusetts

File number: SJC-13172

Case name: Verbena Corp., et al., c. Strathmore Insurance Company, et al.

Decision date: April 21, 2022

Judge: Justice Scott Kafker, writing for a unanimous Court.

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