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By: Michael Weinberg
A recent decision in the matter of Legal Sea Foods, LLC v. Strathmore Insurance Company, USDC (Mass) further addressed coverage for business income and extra expense losses caused by both state and local governments nationwide orders (the “Orders”) in response to the Covid 19 pandemic. Legal Seafoods is a chain which operates 32 restaurants in the eastern United States (the Designated Properties”). Its restaurants were covered by a Strathmore property insurance policy (the “Policy”) which provided Business Income and Extra Expense for covered causes of loss. Legal Seafoods incurred business income losses because of civil authority orders impacting its operations and because of the physical presence of Covid 19 infected individuals on its premises. The parties agreed interpretation of an insurance policy is a question of law and that Massachusetts law would govern. Based on the Court’s review of alleged facts, the complaint was dismissed.
Legal Seafoods claimed Strathmore breached its insurance contract for failure to provide coverage under the civil authority provision of the policy requiring Strathmore to pay Legal’s business interruption losses resulting from an action of civil authority. The Policy provided coverage if the action “prohibits access” to the Designated Properties. The court distinguished between a government order which “prohibits” access to one which “limits” access. An order not preventing entrance to the insured premises but rather limiting the type of services provided does not “prohibit access.” Legal Seafoods alleged the orders mandated closure of and prohibited access to some of its restaurants. However, Legal Seafoods could not point to an order which “completely prohibited access to any of its Designated Properties.” In fact, Legal acknowledged the Orders permitted its restaurants to continue carry-out and delivery operations. Legal could not establish a necessary prerequisite of civil authority coverage: a prohibition on access to the premises. The fact that it was not financially feasible for Legal Seafoods to continue restaurant operations solely for carryout and delivery sales thereby forcing closure was immaterial. The relevant inquiry was whether the Orders completely prohibited access to the Designated Properties.
Legal Seafoods also pressed for coverage because of direct physical loss. Here, it alleged Covid-19 was “physically present on its properties” and caused loss or damage to those properties resulting in suspension of its operations. The court found the allegations insufficient. Courts in Massachusetts have narrowly construed the meaning of “direct physical loss” as requiring some kind of tangible, material loss. There must be enduring impact to the actual integrity of the premises. While the virus may harm human beings, this is not the case with property.
This decision is in line with the majority of others which have addressed business income loss insurance for companies impacted by the Covid 19 pandemic. Interpretation of the policies is made under the state law which applies. Courts interpreting policy language with a fair reading have found no business income loss. There are some outliers. These courts may find ambiguity in the policy’s insuring agreement or definitions and allow a case to move forward. Certain companies have gone through difficult times and an “ambiguity” may put out a lifeline to some whether called for or not.
For more information, please contact Michael Weinberg at [email protected].