An InsurOp-Ed on the Role the Massachusetts Statutory Fire Insurance Policy Could Play with Respect to COVID-19 Claims
Might an exclusion that Massachusetts law requires attached to every policy providing fire coverage bar COVID-19 business interruption insurance claims? If so, property insurance carriers might find it worthwhile to seek a determination from the Supreme Judicial Court as to the meaning of this exclusion in relation to COVID-19 business interruption claims. That Court has never interpreted the scope of the statutory exclusion, in question, which bars coverages for any policy losses caused directly or indirectly by “order of any civil authority.”
Massachusetts is a state that has a statutory fire insurance policy. Under that law, insurers cannot issue policies that “insure against loss or damage by fire…to property or interests in the commonwealth, other than those of the standard forms herein set forth [in G.L. c. 175, § 99]. Under another statute in Chapter 175, property policies that insure fire hazards with other perils “may be written only when insurance against the peril of fire is written in the same policy and on forms which have been submitted to and approved by the commissioner.”
These two laws, when applied, result in a mandatory endorsement to property policies issued in Massachusetts.
This mandatory endorsement adds the statutory fire form that includes several exclusions, including one for losses from orders of civil authority. This specific exclusion appears in the endorsement tracking the statutory provision of G.L. c. 175, § 99, ¶ (22)(h) stating:
This company shall not be liable for loss by fire or other perils insured against in this policy caused, directly or indirectly, by…(h) order of any civil authority… (Emphasis added).
The words in the preamble to the exclusion, “or other perils insured against in this policy,” imply that this civil authority exclusion may, under appropriates circumstances, apply to other coverages within a property policy. The heading of the endorsement states this in capital letters: THIS ENDORSEMENT CHANGES THE POLICY. READ IT CAREFULLY. As written, the only exception to the exclusion allows coverage for a civil authority order issued to destroy the insured property to prevent the further spread of a fire.
While no Massachusetts appellate court has ruled on the scope of this exclusion, in other cases before the courts, the provisions of this endorsement have applied to modify provisions concerning coverages other than fire.
The present COVID-19 business interruption claims in Massachusetts primarily arise out of Governor Baker’s March 23, 2020, COVID-19 Order. This Order issued “due to the outbreak of the 2019 novel Coronavirus (“COVID-19)” mandated all nonessential businesses and other organizations to “close their physical workplaces and facilities (“brick-and-mortar premises”) to workers, customers, and the public as of 12:00 noon on March 24, 2020.”
The March 23, 2020 Order hit restaurants particularly hard. While the Order designated restaurants, bars, and other establishments that offer food or beverages to the public as Essential Services, these businesses were only allowed to offer food and beverages for take-out and by delivery. The Order prohibited on-premises consumption of food or beverages at restaurants, bars, or other establishments.
Restaurants, among other small businesses, have actively organized to file claims with their insurers for business interruption losses caused by the March 23, 2020 Order. Insurers have denied these claims based upon in some cases, a pandemic exclusion, and in other cases where the policy had no such exclusion, the requirement of direct physical loss or damage as a condition precedent for coverage. Also, the Massachusetts restaurateurs have filed for legislation to require their insurers to pay COVID-19 business interruption claims. See Agency Checklists’ article of April 14, 2020, “Will insurers be required to pay COVID-19 business interruption Claims?”
Other insureds have initiated litigation in Massachusetts over the denial of COVID-19 business interruption claims. See Agency Checklists’ articles of May 12, 2020, “Legal Sea Foods Files A COVID-19 Business Interruption Coverage Suit Against Strathmore Insurance, and May 19, 2020, “Class Action Filed Against The Hartford Seeking Business Interruption Coverage.”
The present litigation over COVID-19 business interruption claims focuses on the dispute over whether there is a direct physical loss or damage. If the courts enforce the policy language as written, the insurance industry has an excellent chance of prevailing. See Agency Checklists’ article of March 17, 2020, “Business Interruption Coverage & The Coronavirus Pandemic.”
If the courts do quickly decide that the policy terms for business interruption coverage do not afford coverage for COVID-19 business interruption claims, then seeking a determination of whether the statutory exclusion for an “order of any civil authority” applies becomes unnecessary. However, the insurance industry does have the experience where litigation over seemingly clear policy terms has resulted in the continued parsing of those terms by the courts into ambiguity and inapplicability at a high cost over a long period.
If the decisions from the courts do not come quickly, obtaining a ruling on whether the statutory exclusion for an “order of any civil authority” might apply to COVID-19 business interruption claims could have some advantages for insurers to consider.
First, courts construe contractual policy terms, such as the undefined term “direct physical loss or damage” against insurers. If there is any ambiguity, the Court will construe the ambiguity in favor of the insured having coverage. The exclusion for an “order of any civil authority,” however, falls under a different rule. Because it is a statutory condition, the Court decides the meaning of any ambiguity under the rules of statutory interpretation. These rules require the Court to use the statutory text and the purpose of the statute to arrive at the meaning of the term or expression.
Second, a decision that this statutory exclusion has no application to COVID-19 business interruption claims does not affect the interpretation of the other policy terms and conditions applicable to the business interruption and civil authority coverages, in question. The civil order statutory exclusion is independent of the other terms and conditions of the policy relating to business interruption coverages. The exclusion either applies, or it does not apply. If it applies, there is no coverage for the COVID-19 business interruption claims in Massachusetts caused by the Governor’s March 23, 2020 Order. If it does not apply, it becomes immaterial to any coverage questions concerning the COVID-19 business interruption claims.
Third, the seeking of a ruling in an ongoing case in the United States District Court might offer an avenue to obtain a relatively quick decision on the exclusion’s application to COVID-19 business interruption claims, if any. Federal courts try not to decide novel questions of state law. They can apply state law in insurance coverage actions, but they should defer to the state’s highest Court on open questions of state law that may be case decisive.
The mechanism, in Massachusetts, is the certification process allowed under the rules of the Supreme Judicial Court. If a federal court has a matter before it that poses a potentially case decisive issue that has no controlling legal precedents under Massachusetts law, that Court may certify the question to the Supreme Judicial Court for decision.
As previously stated, there are no state court decisions on this statutory exclusion. Also, if the exclusion were found applicable to the pending COVID-19 business interruption claims, it is case decisive. If the Federal judge hearing the case determines that there is a reasonable basis for the argument that the exclusion might apply, they might certify. However, they are not required to do so, and generally, the Federal judges use the certification process sparingly. The Federal judge hearing the case may rule against certifying and elect to decide the question of the applicability of the exclusion, one way or the other.
However, for all concerned, finding out if the public policy of Massachusetts, as stated in the standard statutory fire insurance policy might bar recovery for losses arising out of the March 23, 2020 Order, is better done sooner rather than later. Litigating coverage issues case by case sometimes leads to contradictory decisions and unexpected consequences for all parties.
Co-Founder & Publisher Agency Checklists
About Owen Gallagher
Owen is an experienced insurance litigator as well as a certified mediator and arbitrator who specializes in insurance industry disputes. His interest and affinity for insurance began at a young age working the counter at his father’s assigned risk agency in Roxbury.
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.
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