In early March 2020, Legal Sea Foods (Legal) signed an insurance policy with Strathmore Insurance Co. (Strathmore). Shortly thereafter, Governor Baker issued an order prohibiting Massachusetts restaurants from providing on-premises food or beverage consumption. As a result of this order and similar orders in other states (COVID-19 restriction orders), Legal submitted a claim to Strathmore seeking coverage for business interruption losses. Strathmore denied the claim and, in May 2020, Legal sued Strathmore for two counts of breach of contract.
Count one alleged that Strathmore improperly denied Legal’s claim for coverage because the pandemic, the resulting COVID-19 restriction orders, and the presence of COVID-19 in Legal’s restaurants caused “a significant adverse impact on its business.” Specifically, Legal argued that its losses were caused by “direct physical loss of or damage to” Legal’s restaurants and therefore, should be covered under the corresponding policy provision.
Judge Gorton disagreed. Interpreting the phrase “direct physical loss” narrowly, Judge Gorton concluded that the plain meaning requires a lasting impact on the “integrity” of the insured premises, and does not include a temporary event, which has “no lasting effect.” As such, COVID-19 did not and could not have damaged Legal’s restaurants, even if individuals infected with COVID-19 were present in the restaurants, as viruses cannot harm property. Judge Gorton also rejected Legal’s argument that the absence of a pandemic exclusion clause was significant, as the absence of such a provision did not automatically create pandemic coverage.
Count two alleged that Strathmore improperly denied Legal’s claim for coverage under the policy’s civil authority provision, which covers business interruption losses resulting from the action of a civil authority that “prohibits access” to Legal’s restaurants. Judge Gorton rejected this argument, concluding that the COVID-19 restriction orders merely limited access to Legal’s restaurants, but did not prevent it. Indeed, under the orders, Legal was permitted to remain open for take-out and delivery.
Ultimately, Judge Gorton granted Strathmore’s motion to dismiss, providing another example of the legal challenges facing struggling restaurants as a result of COVID-19.
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