It is not news that many insureds owning and/or operating businesses that were closed during the pandemic have sued their property insurers for financial losses arising out of such business interruptions.  According to the Covid Coverage Litigation Tracker which is sponsored by the University of Pennsylvania Carey Law School, 2261 of these cases had been filed by mid-March, 2022.  To date, the majority of rulings in both federal and state courts have been insurer friendly.  Although the tougher cases in the pipeline and those cases that are currently on appeal may turn out differently, the trend is concerning for insureds who are looking to their insurance carriers to cover COVID-related business interruption losses.

Last week, another insurer friendly decision was issued when the highest court in Massachusetts, the Supreme Judiciary Court of Massachusetts, affirmed a lower court’s decision granting Strathmore Insurance Company’s motion to dismiss a case brought by the owners of three restaurants which “suffered severe reductions in revenues during the pandemic and the resulting government restrictions on public gatherings.”   The Supreme Judiciary Court agreed with a lower court opinion “…that the plaintiffs’ losses were not ‘direct physical loss of or damage to’ their property within the meaning of the insurance policies…”  The Court held that “…’direct physical loss of or damage to’ property requires some ‘distinct, demonstrable, physical alteration of the property’….(and that) (e)very appellate court that has been asked to review COVID-19 insurance claims has agreed with this definition for this language or its equivalent.”

The Massachusetts case is an important one as it is the first COVID-related/property insurance coverage decision by a state’s highest court.  As one attorney who represents insurance carriers, Patrick Eckler of Freeman Mathis & Gary LLP, noted, “…while the mountain of federal court decisions in favor or insurers are great, they aren’t the last word for policyholders looking to dispute coverage for their pandemic-related losses.  Those federal rulings aren’t ‘the be all to end all,’, he said, but rather ‘guesses on what the state law is.’  ‘That’s the end of anything for these COVID-19 coverage cases under Massachusetts law…  We will see what happens in the other states and go from there.’”

Another representative of insurance carriers, Scott Seaman of Hinshaw & Culbertson LLP said that “especially in an environment in which it seems insurers are facing potentially higher liability claims, more plaintiff-friendly courts and contracts, the stack of court decisions in pandemic cases is striking…. ‘The shutout by insurers at this point is somewhat remarkable in this age of social inflation on steroids.’”

Representatives for insureds, including Bob Gilbert of Latham & Watkins LLP, zeroed in on the fact that the opinion left open the door for “’…claims with detailed allegations of virus-induced ‘physical alteration to property.’”  Others, like Scott Greenspan of Pillsbury Winthrop Shaw Pittman LLP, stated that “…the decision ‘is riddled with…errors.’”

It is important to reiterate that the Massachusetts decision is not binding on any other state.  That noted (and despite the fact that millions in defense costs will still need to be expended to close out this difficult coverage issue for both insureds and insurers) insurers have to be feeling pretty confident that, unless a property has been physically altered by the virus, they have a good chance of escaping potentially catastrophic business interruption losses.

Sources:

Shawn Rice, Mass. Virus Ruling Sounds Death Knell, Insurance Attys Say, Law360, April 22, 2022.

Verveine Corp. et al. v. Strathmore Insurance Co. et al., case number SJC-13172, in the Supreme Judicial Court of Massachusetts.

 

Written By Carrie O’Neal

Direct: 720.563.1106
carrie.oneil@cacspecialty.com