By: Christopher W. Morog and Robert T. Ferguson, Jr. and Eric F. Eisenberg

On April 21, 2022, the Massachusetts Supreme Judicial Court (“SJC”) issued a decision 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.

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. Although the restaurants contended that the policies were “‘marketed and sold’ as all-risk policies,” the SJC noted that the policies did not include the term “all-risk” and that the restaurants nevertheless bore the burden of demonstrating coverage under the specific language of the policies. The policies 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 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 pandemic has had – and continues to have – significant impacts on businesses across a wide array of industries. Many insureds have explored whether and to what extent there may be insurance coverage for COVID-19-related losses. Although the SJC’s decision in this case concluded that there was no insurance coverage for the plaintiffs’ claims, the decision underscores the importance of the specific policy language at issue – including grants of coverage unique to particular polices – when evaluating questions of coverage.

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