Legal Corner

Construction & Public Contracts Group, Hinckley Allen, LLP Christopher Morog Partner Robert T. Ferguson Partner

The Massachusetts SJC Rejects Insurance Coverage Claims for COVID-19 Related Losses

As reported in a recent client alert, the Massachusetts Supreme Judicial Court (SJC) issued a decision on April 21, 2022 addressing whether property insurance policies afforded coverage for alleged losses stemming from the COVID-19 pandemic. Based on the coverage grants in the policies at issue, the SJC concluded that the policies did not cover the plaintiffs’ alleged losses. While the case did not arise in the construction context, it remains noteworthy. Contracting parties are sometimes quick to conclude that they are “insured” or “covered” without actually inspecting particular policy terms or conditions. The SJC’s decision re-confirms that the express words of a given insurance policy matter.

The case involved three restaurants that shared common ownership and management. At the onset of the COVID-19 pandemic, all three restaurants had property and liability insurance policies. One of the three policies had a specific “virus” exclusion, while the other two did not.

The restaurants contended that the policies were “‘marketed and sold’ as all-risk policies,” but the SJC noted that the policies did not include the term “all-risk.” The restaurants bore the burden of demonstrating coverage under the specific language of the policies, which provided coverage for “direct physical loss of or damage to” covered property at the insured premises “resulting from any Covered Cause of Loss” (defined to include “Risks of Direct Physical Loss”).

The restaurants claimed to have incurred losses as a result of the pandemic and its resulting impacts, including governmental stay-at-home orders shutting down non-essential businesses. Although two of the restaurants remained open for takeout and delivery services, it was not feasible for the third restaurant to remain open for takeout and delivery given its location. The absence of in-person dining led to a “steep decline” in revenues. As a result, the restaurants asserted claims under their policies. The claims were denied.

The Superior Court concluded that the policies in question did not afford coverage due to the absence of “direct physical loss of or damage to” covered property. The SJC agreed. According to the SJC, “direct physical loss” requires some “‘distinct, demonstrable, physical alteration of the property.” The Court noted that “[e]very appellate court that has been asked to continued on page 29

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review COVID-19 insurance claims has agreed with this definition . . . .” In the SJC’s view, the suspension of business operations at the restaurants “was not in any way attributable to a direct physical effect on the plaintiffs’ property that can be described as loss or damage.” The Court also concluded that the COVID-19 shut-down orders did not constitute direct physical loss of or damage to property sufficient to trigger coverage under the policies.

The SJC’s decision underscores the importance of the specific policy language at issue – including grants of coverage unique to particular polices – when evaluating questions of coverage. Ensuring appropriate placement and policy coverage is critical. Not only should contractors be sure to understand their own policies, they should take appropriate steps to confirm that their subcontractors comply with applicable insurance requirements and secure all required coverage. It is advisable to consult with an experienced insurance professional to help navigate the many issues that can arise in the insurance context. With respect to both business and personal matters, a trusted insurance advisor can be a valuable asset in mitigating risk and optimizing coverage in the event of a loss. n

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