Legal Sea Foods (“Legal”), the well-known Boston-based restaurant chain, filed the first major insurance suit in Massachusetts seeking coverage for its COVID-19 business interruption pandemic losses.
Although domiciled in Delaware, Legal has its principal place of business at One Seafood Way, in the Seaport District of Boston. The company grew from a fish market that George Berkowitz started in 1950 in Inman Square, Cambridge. In 1978, the Berkowitz family opened a restaurant next to the fish market, which gradually morphed into the present restaurant chain that operates thirty-four restaurants in five states and the District of Columbia.
The suit, filed in Federal Court in Boston, seeks to have the Strathmore Insurance Company (“Strathmore”), part of the Greater New York Mutual Group, pay for the business income loss Legal has sustained because of the suspension of its operations during the COVID-19 shutdowns ordered by various governmental bodies.
Legal’s insurance coverage lawsuit raises critical legal issues that may affect other commercial insureds seeking business interruption insurance coverage for the COVID-19 shutdowns and their insurers. However, the businesses this suit may affect the most are those companies that have property insurance policies, like Legal’s, that do not contain any virus or pandemic exclusions.
Strathmore took over as Legal’s insurer on March 1, 2020, issuing a policy without a virus exclusion
Strathmore issued Legal a commercial property policy for the period between March 1, 2020, and March 1, 2021, for a premium $176,949.00. The 235-page Policy covered Legal’s restaurant locations in Massachusetts, the District of Columbia, New Jersey, Pennsylvania, Rhode Island, and Virginia.
Among other coverages, the Policy provided payment for “the actual loss of Business Income” that Legal:
“[S]ustain[s] due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations.”
The business income limit of income shown in the Declarations was $94,852,397, and the Policy’s definition of the term “suspension” was:
“a. The slowdown or cessation of your business activities; or …”
The Policy also provided Civil Authority coverage for “The actual loss of business income … and [any] necessary extra expense caused by an action of civil authority that prohibits access to Legal Sea Food’s property.” The civil authority coverage, though only applied if two conditions were met:
- Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and
- The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.
While the Policy had other standard exclusions, it did not contain an exclusion for viruses or pandemics.
The COVID-19 stay-at-home orders barring on-premise restaurant dining
As the devastating effects of the COVID-19 pandemic became apparent, states, counties, cities, and towns began to put in place orders of varying degrees of strictness to enforce social distancing. One of the main areas of concern was premises where people congregated in relative proximity, including dine-in restaurants.
In quick order, other states entered similar orders that prohibited restaurants from allowing patrons to dine on their premises.
- On March 13, 2020, Massachusetts issued an order prohibiting on-premises consumption of food or drink at restaurants.
- On March 16, 2020, the Mayor of the District of Columbia ordered the suspension of restaurant table service.
- Also, on March 16, 2020, New Jersey and Rhode Island limited restaurant operations to delivery and take out.
- On March 19, 2020, Pennsylvania issued an order requiring all non-life-sustaining businesses to cease operations and close all physical locations.
- Finally, effective March 24, 2020, Virginia ordered the closure of all dining and congregation areas in restaurants.
As a result of these orders, Legal could no longer operate its dining rooms in any of these jurisdictions. While other restaurants could still operate for carry-out or delivery food services, Legal, based on its menu, brand, and business model, could not operate under those conditions.
Legal submits a claim for business interruption and civil authority coverage 23 days into to policy period.
On March 23, 2020. Legal submitted a claim to Strathmore for business interruption and civil authority losses based on the orders and the direct physical damage to its properties or other properties within a one-mile radius.
Strathmore denied the claim three days later, asserting that:
- Loss of Business Income was only covered when a suspension of Legal’s operations was caused by physical loss of or damage to property at the described premises from a covered cause of loss and the risk of the Coronavirus, standing alone, did not trigger coverage for Legal’s claimed business income loss.
- The Policy’s coverage for civil authority only provided coverage for Legal’s loss of business income when access to the described premises was prohibited due to an order of civil authority because of damage by a covered cause of loss to property away from the described premises.
Strathmore noted that Legal not had identified any property within one mile of any Legal premise that had sustained direct physical loss or damage, such that an order of a civil authority caused Legal to lose access to any of its premises.
Legal seeks to have Strathmore reconsider its denial of COVID-19 coverage
On April 13, 2020, Legal, through its general counsel, answered Strathmore’s denial letter with a five-page single-spaced response. Legal’s letter made several points that courts will ultimately have to resolve.
For example, for insurers such as Strathmore that have issued commercial property policies without a virus or pandemic exclusion, Legal asserted that this omission, at least, inferred coverage existed, stating:
“Critically, the Policy was entered into and became effective on March 1, 2020, months after Strathmore had knowledge that the novel virus, SARS-CoV-2, the causative agent for COVID-19, could cause direct physical loss of or damage to property…Strathmore sold this insurance policy to Legal Sea Foods without any virus or pandemic exclusion or limitation whatsoever in exchange for a substantial premium, even though such exclusions are in use throughout the insurance industry. (Emphasis in original).“
In its March 26 denial letter, Strathmore had referenced the policy exclusion barring coverage for losses arising out of: “[a]cts or decisions, including the failure to act or decide, or any person, group, organization or governmental body.” Legal pointed out that a Massachusetts Appeals Court had questioned the exclusion’s effectiveness stating:
“The clause…cannot be taken literally. If it were to be so taken, it would exclude coverage from all acts and decisions of any character of all persons, groups, or entities. Such an interpretation would leave the insurance policy practically worthless.”
On the question of “physical loss or damage,” Legal contested Strathmore’s usage of the terms. According to Legal, the Policy covers “physical loss of” property or “damage to” property. (Emphasis in original). Legal cited case decisions where courts had recognized physical loss when an insured could not use their property due to dangerous conditions.
One of the cases Legal cited included a Massachusetts case where a court found carbon monoxide infiltration due to blocked chimney constituted a direct physical loss under a homeowners insurance policy.
After Strathmore refuses to reconsider its coverage positions, Legal files suit
Notwithstanding the arguments from Legal to reconsider its coverage position, Strathmore refused. Its response on April 23, restated its position and its view of the Policy’s coverage in some detail.
The refusal of Strathmore to reconsider its coverage denials could not have surprised Legal. A little under two weeks after receiving Strathmore’s refusal to reconsider, Legal filed a civil action in the United States District Court of Massachusetts seeking coverage.
The eighteen-page complaint included as attachments the complete Strathmore 235-page policy, the March 26 denial letter of Strathmore, the April 13 reconsideration request of Legal, and Strathmore April 23 denial of Legal’s request for reconsideration. The three counts on the complaint sought damages for business income losses (Count I), damages for civil authority coverage (Count II), and a declaratory judgment (Count III) for a determination by the Court that:
(1) the Policy covers Legal Sea Foods’ claim; and
(2) that no exclusion in the Policy applies to bar or limit coverage for Legal Sea Foods’ claim.
In its 120 paragraphs, the complaint lays out the Policy and claim history. It also introduces a word that may come into common parlance during this and similar coverage suits involving COVID-19-related insurance claims. That word is “fomites.”
As explained in the complaint, fomites are inanimate objects that, when contaminated with or exposed to infectious agents, can transfer disease to a new host. Per the complaint, common fomites that can transmit the COVID-19 virus for varying periods include aerosols, copper, cardboard, and plastic and stainless steel. All these potential fomites are part of the materials used on Legal’s premises.
Presumably, Legal, and other insureds, will argue that the actual or likely existence of fomites on its properties constituted direct physical loss or damage to its property sufficient, with other factors, to trigger coverage.
Agency Checklists will keep you posted
Since Legal only filed its complaint on May 4, 2020, Strathmore has not yet had an opportunity to respond by way of an answer, a motion to dismiss, or for judgment on the pleadings.
Agency Checklists will monitor this case as it progresses and keeps its readers posted as to any further developments.
Co-Founder & Publisher Agency Checklists
Owen is an experienced insurance litigator as well as a certified mediator and arbitrator who specializes in insurance industry disputes. Over the course of his career, Owen has argued a number of cases in the Massachusetts Supreme Judicial Court and has helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth. To reach Owen, please use one of the links below: