As businesses continue to navigate the economic consequences of the COVID-19 pandemic, many have turned to their commercial property insurance policies for coverage relating to business interruption losses. In such cases, businesses frequently seek coverage for losses arising from government shutdown orders or the actual presence of the coronavirus at insured properties. Insurers have denied coverage for such claims based primarily on a lack of direct physical loss or damage, and/or because a virus exclusion in the policy applies. Generally, a policyholder bears the burden of proving coverage within the scope of the policy’s insuring agreement, while an insurer bears the burden of proving an exclusion applies to bar coverage. Across the country, businesses and insurers are litigating whether insurers’ denials of claims are proper.
In Massachusetts, courts have consistently ruled in favor of insurers in these cases. On Dec. 21, 2020, the Business Litigation Session of the Suffolk Superior Court became the first Massachusetts court to issue a decision. In Verveine Corp. v. Strathmore Insurance Co., No. SUCV2020-1378-BLS2 (Mass. Super. Dec. 21, 2020), a restaurant group claimed business interruption coverage when it could not fully operate its restaurants due to government shutdown orders limiting public gatherings and indoor dining. The Verveine court held that the restaurant group had not established the requisite physical loss or damage for coverage where the "actual property remains the same as it was pre-pandemic, and patrons and employees were not prohibited from entering the premises."
Massachusetts plaintiffs have fared no better in federal court. In SAS International, Ltd. v. General Star Indemnity Company, No. 20-11864-RGS (D. Mass. Feb. 19, 2021), a real estate business similarly claimed coverage for business interruption losses resulting from governmental shutdown orders. The SAS International court held that the direct physical loss or damage prerequisite "requires some enduring impact to the actual integrity of the property" and did not encompass "transient phenomena of no lasting effect." In Legal Sea Foods, LLC v. Strathmore Insurance Co., No. 20-10850-NMG (D. Mass. Mar. 5, 2021), the court similarly held that "[t]he COVID-19 virus does not impact the structural integrity of property" to constitute direct physical loss or damage and dismissed another business interruption coverage claim. Claims for business interruption coverage were similarly dismissed in Kamakura, LLC v. Greater New York Mutual Insurance Co., No. 20-11350-FDS (D. Mass. Mar. 9, 2021); American Food Systems, Inc. v. Fireman’s Fund Insurance Co., No. 20-11497-RGS (D. Mass. Mar. 24, 2021); and Select Hospitality, LLC v. Strathmore Insurance Co., No. 20-11414-NMG (Apr. 7, 2021).
The Massachusetts decisions to date are consistent with the vast majority of rulings across the country. As the Legal Sea Foods court recognized, "[m]any other courts have concluded likewise and have dismissed complaints containing similar allegations." The Kamakura court further noted, "[m]ost courts have come to the same conclusion when considering claims for civil-authority coverage based on comparable COVID-19 orders." Indeed, according to one tracker of nationwide decisions, over 90% of federal COVID-19 business interruption rulings have resulted in full dismissal.1
Although a nationwide trend has developed in favor of insurers with respect to COVID-19 business interruption claims, no Massachusetts or federal appellate court has issued a ruling weighing in on the issue. On April 14, 2021, the Eighth Circuit became the first federal appellate court to hear oral argument on whether the COVID-19 pandemic triggered business interruption coverage in Oral Surgeons, P.C. v. The Cincinnati Insurance Co., No. 20-3211. In Massachusetts, the Appeals Court has docketed the appeal in Verveine (2021-P-0231), with briefing expected over the summer. The Massachusetts federal cases are similarly proceeding through appeals in the First Circuit. The forthcoming appellate rulings could have an important influence on COVID-19 business interruption litigation going forward as insurers await affirmance of the abundant trial court dismissals while businesses seek a shift in authority to potentially breathe new life into their claims.
Robert F. Callahan Jr. is an associate in the Boston office of Robins Kaplan LLP. His national practice focuses on trial and appellate advocacy in the areas of intellectual property and complex commercial litigation. Callahan is also a graduate of the Massachusetts Bar Association’s Leadership Academy.
1See Covid Coverage Litigation Tracker, University of Pennsylvania Carey Law School, https://cclt.law.upenn.edu/judicial-rulings (last visited May 23, 2021).