In what will surely be considered a landmark decision in the ongoing battles over coverage for COVID-19 claims, the Massachusetts Supreme Judicial Court issued its unanimous decision in Verbena Corp. et al. vs. Strathmore Insurance Company et al.on April 21, 2022. As this is the first U.S. state Supreme Court to rule on the issue of coverage for losses arising from the COVID-19 pandemic, the decision is of particular significance to the insurance industry. nationwide insurance.
The essence of the ruling is that the government-ordered suspension of business operations, without any evidence of “distinct, demonstrable physical alteration of property,” does not constitute “direct physical loss or damage to” property. real estate. As a result, three restaurants that submitted claims to their property insurers for loss of business income were unable to satisfy the insurance agreement. The significance lies in the categorical nature of the court’s decision and the substantial attention the court paid to the articulation and application of policy-making rules that too often are not not set out in published decisions.
The plaintiffs were three Massachusetts restaurants operating in Boston and Cambridge. When the pandemic began, the restaurants were covered by two different property and liability insurance policies: one that covered the two restaurants in Boston and another that covered the restaurant in Cambridge. The Cambridge restaurant policy had a virus exclusion which was not present on the other policy.
Massachusetts issued an emergency order in mid-March 2020 banning in-person dining in bars and restaurants. Although the two Boston restaurants remained open for take-out, they suffered significant revenue losses. The restaurant in Cambridge has closed completely, but it has allowed its kitchen to be used to prepare meals for first responders. Shutdown orders were changed in June 2020 to allow a limited number of in-person dining, but revenues have not recovered.
The restaurants submitted business income claims to Strathmore, citing their losses and expected continuing losses. Strathmore denied claims under both policies, citing the absence of “physical loss or damage” to the properties, as well as the virus exclusion on the Cambridge restaurant policy. The court of first instance ruled in favor of the insurer and the restaurants appealed.
Construction of an insurance policy
The opinion of the Supreme Judicial Court opens with force. The interpretation “of language in an insurance contract is no different from the interpretation of any other contract,” the court wrote.
The court said it “must also assume that every word in an insurance contract has a purpose and must have meaning and effect whenever possible”. Where the terms of the policy are “unambiguous”, the court said, “we interpret the terms of the policy in their usual and ordinary meaning.” Ambiguity is not created simply because the parties disagree on the meaning of a word: reasonably intelligent people must differ as to the meaning of words.
Direct physical loss
Regarding the policies, the court recalled that the critical language of the insurance agreement stated: “[Strathmore] will pay for direct physical loss or damage to Property covered at [insured] premises…caused by or resulting from any covered cause of loss. In the context of the policies, the court said that “direct physical loss or damage to covered property” characterizes the effects the covered causes must have on the property to trigger coverage, not the causes themselves.
The court then defined the question as being “not whether the virus is physical, but rather whether it has a direct physical effect on the property this can rightly be termed “loss or damage”. “He held, unequivocally, that ‘direct physical loss or damage to ‘property’ requires a distinct and demonstrable physical alteration of the property. As the court noted, every U.S. appellate court that has been asked to review COVID-19 insurance claims has accepted this definition of the quoted language.
The restaurants’ continued ability to provide take-out and delivery services and to make Cambridge’s kitchen available for meal preparation has been shown to have no physical effect on the properties themselves. Similarly, COVID-19 orders issued by government authorities alone could “not constitute ‘direct physical loss or damage’ to the property” because they did not physically alter the property.
The court wrote that “mere ‘presence’ does not equate to loss or damage to property”. He said: “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 n ‘physically affects the property.”
Although virtually every federal appeals court in the United States has made similar pronouncements, these decisions were all based on predictions by the federal judiciary as to how state courts would rule. The Massachusetts High Court was the first state Supreme Court to issue a coverage decision regarding first party claims for COVID-19. And he did it unanimously.
Alexander G. Henlin is Vice Chairman of the Insurance and Reinsurance Committee of the International Association of Criminal Defense Lawyers and a lawyer and a member of the Insurance and Reinsurance Group of Sulloway & Hollis, which advises insurers in New -England. He can be contacted at [email protected].
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