Massachusetts Appeals Court Upholds Restaurants’ COVID-19 Insurance Denial

In a ruling against an upscale restaurant chain, a Massachusetts Appeals Court has followed the recipe the state’s high court set forth in 2022 in ruling that the COVID-19 virus does not trigger business interruption insurance because it does not cause “direct physical loss or damage.”

Davio’s restaurant chain sought to recover under its all-risk business policy issued by Strathmore Insurance Co. for business losses it suffered due to service restrictions and remediation efforts necessitated by the COVID-19 pandemic.

Correction: An earlier version of this article incorrectly identified the Davio’s ruling as one by the Massachusetts Supreme Court. The Davio’s ruling was by the Massachusetts Appeals Court. Insurance Journal regrets the error.

Strathmore, a subsidiary of Greater New York Mutual Insurance Co., denied Davio’s claims on the basis that the loss of business income was not “caused by direct physical loss of or damage to property,” as required under the policy. Davio’s filed suit and a Superior Court judge granted Strathmore’s motion to dismiss. The restaurants then appealed from the judgment of dismissal.

Strathmore was also the defendant in the Massachusetts Supreme Judicial Court 2022 case in which it was sued by a different Boston-area restaurant group, Verveine Corp. The Verveine ruling was the first by a state supreme court on COVID-19-related business interruption claims filed against insurers across the country, the majority of which insurers have won.

Noting the similarities between the Verveine and Davio’s cases, the opinion written by Justice William Meade said the appeals court discerned “no reason to distinguish” the Davio’s case from the Verveine case decided by the high court two years ago.

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Davio’s claimed that the virus became physically present at its restaurants and the presence of the virus caused it to take “extraordinary measures,” which included “closing certain operations and services, substantially modifying others, restricting access to many of the properties, enforcing physical distancing, and undertaking extensive active efforts to repair, restore, and remediate the facilities.”

The restaurant firm also maintained that some surfaces and objects retained residual infectious virus even after cleaning, and “no amount of cleaning could prevent aerosolized infectious particles from attaching to surfaces after cleaning.”

However, the restaurants were able to continue operating “at reduced levels” during the COVID-19 pandemic. Davio’s Massachusetts locations include Boston’s Seaport, Foxboro, Lynnfield, Braintree and Chestnut Hill.

The appeals court faced the same question addressed in Verveine — whether there was any “direct physical loss of or damage to” property — and similarly concluded that those words from the insurance policy require a physical alteration of the property and the COVID-19 virus did not physically alter or affect any of the insured property.

On the question of what constitutes a physical alteration of property, Verveine again provided the guidance that “property has not experienced physical loss or damage in the first place unless there needs to be active repair or remediation measures to correct the claimed damage or the business must move to a new location.”

Thus, the “evanescent presence of a harmful airborne substance that will quickly dissipate on its own, or surface-level contamination that can be removed by simple cleaning, does not physically alter or affect property.” In contrast, the “saturation, ingraining, or infiltration of a substance into the materials of a building or persistent pollution of a premises requiring active remediation efforts” does constitute a physical alteration.

The appeals court noted that similar distinctions have been noted in COVID-19 insurance cases across the country and courts have reached the same conclusion “even when presented with detailed allegations regarding how the COVID-19 virus affects the air and surfaces around it.”

In Verveine, the Supreme Judicial Court assumed that the virus was physically present in the restaurants but explained that the suspension of business 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. As demonstrated by the restaurants’ continuing ability to provide takeout and other services, there were not physical effects on the property itself.”

Davio’s specifically alleged that “there have been hundreds (if not thousands) of infected guests on-site since the pandemic’s outset.” But the court found that these allegations do not show that the virus physically altered or affected the insured property in any way. Rather, they show the “evanescent presence of a harmful airborne substance,” and that there was no direct physical loss or damage to property.

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