Commercial Insurance Policy Does Not Cover Restaurants’ Loss From COVID19 Stay At Home Orders

On December 21, 2020, the Superior Court/Business Litigation Session in Verveine Corp. v. Strathmore Insurance Company decided that a commercial property insurance policy did not cover loss of income incurred by restaurants as a result of COVID19 stay at home orders issued by Governor Charlie Baker.  What exactly transpired in this case?

On March 15, 2020, in connection with the COVID19 pandemic, Governor Charlie Baker issued an order “prohibiting gatherings of more than 25 people and on premises consumption of good or drink”.  Because of the Governor’s Orders, the plaintiffs could not use their restaurants at full capacity, i.e., no indoor dining.

Plaintiffs relied on two sets of provisions in the insurance policies.  The first set of provisions appear in the ‘Business Income (and Extra Expense) Coverage’ section.  The second major provision relevant to coverage is each insurance policy’s Civil Authority Provision.  The coverage dispute between the parties centered on the meaning of the phrase “direct physical loss of or damage to property” as used in the Business Income and Extra Expense provisions, and similarly, the meaning of “damage” that prohibits access to the premises as used in Civil Authority provision.  The Business Income and Extra Expense Provisions of the Strathmore Policies conditioned coverage on proof of “direct physical loss of or damage to property.”

The Defendants took the position that these words unambiguously required that the physical state of the property in question must be altered in order for there to be coverage.  This position was in line with the majority of recent cases across the country that have dealt with this issue involving the COVID19 pandemic.  Plaintiffs alleged that the limitations imposed on the use of their properties because of the Governor’s Orders constituted a “physical loss” within the meaning of these provisions.  The Plaintiffs further alleged that they parties clearly contemplated and understood that the properties would be used and accessed as dine-in restaurants and that because they no longer could that this was the “direct physical loss.”  The Court disagreed.

In ruling on the Motion to Dismiss, the Court stated that the “Complaint here does not alleged that that the COVID19 virus was actually present in plaintiffs’ restaurants, resulting in physical contamination of the premises.  Rather, it alleges that the loss of income for which they seek coverage was the result of the Governor’s Orders that prevented plaintiffs from using the premises as intended.  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.”

But was this case wrongly decided?  The keystone issue in this case was the interpretation of the “direct physical loss or damage”.  The provision was ambiguous at best.  In Massachusetts, when there is ambiguity in an insurance policy it must be resolved in favor in the policyholder.  Unfortunately, this is part of a nationwide trend of Courts rejecting claims for business interruption coverage at the motion to dismiss stage.  This decision does not bode well for small business owners seeking damages related to the COVID19 pandemic.