On May 4, 2020, Legal Sea Foods became one of the first restaurant chains to commence a well-thought-out and well-funded lawsuit against its commercial property insurer, Strathmore Insurance (“Strathmore”), seeking business interruption coverage for COVID-19 income losses and expenses and coverage for the losses caused by the pandemic-related civil orders restricting access to its restaurants.
While the suit was pending, Legal sold its thirty-two restaurants located in Massachusetts, the District of Columbia, New Jersey, Pennsylvania, Rhode Island, and Virginia to the Medford-based owner of the Strega and Smith & Wollensky restaurants. Legal retained the right to use the Legal Sea Foods brand in non-restaurant channels such as retail food sales and seafood products’ online marketing.
Now, in another setback, the federal Judge hearing Legal’s case has entered a decision dismissing all four counts of Legal’s action against Strathmore.
The Judge found that even assuming all Legal’s factual statements as true concerning possible coronavirus contamination of its restaurant locations, the allegation of virus contamination did not satisfy the policy condition requiring “direct physical loss.” (For more details on this policy condition, see Agency Checklists’ article of March 17, 2020, “Business Interruption Coverage & The Coronavirus Pandemic.”
The Judge also found that Legal’s claim that Strathmore’s Policy provided coverage for losses “caused by action of civil authority that prohibits access” failed. The civil authority provision required, among other conditions, the order “prohibit access,” and the Massachusetts civil orders only prohibited on-premises dining.
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 of $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.
The Policy provided payment, among other coverages, 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 applied under two conditions:
- 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, the Policy did not have an endorsement excluding coverage for viruses or pandemics.
The COVID-19 stay-at-home orders and orders against on-premises restaurant dining
As the devastating effect of the COVID-19 pandemic became apparent, states, counties, cities, and towns began to issue civil authority orders with 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 succession, states entered orders that prohibited restaurants from allowing patrons to dine on their premises.
- On March 13, 2020, Massachusetts issued an order prohibiting on-premises food or drink consumption at restaurants.
- On March 16, 2020, the District of Columbia’s mayor ordered a restaurant table service suspension.
- Also, on March 16, 2020, New Jersey and Rhode Island limited restaurant operations to delivery and take out.21
- 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.
Strathmore moves to dismiss Legal’s coverage claims without any legal discovery
Three weeks after Strathmore’s Policy took effect, Legal filed a claim under the Policy for its business interruption losses caused by these abovementioned state orders requiring Legal to close or limit its restaurant’s guest capacity and to install protective barriers to reduce the spread of the virus.
After a short investigation of Legal’s claim, Strathmore denied the claim and then denied a request by Legal for Strathmore to reconsider its coverage denial.
Legal then filed its lawsuit against Strathmore on May 4, 2020. Legal subsequently amended its complaint to allege four counts:
- Breach of contract for failure to pay business interruption and extra expense coverage (Count I).
- Breach of contract for failure to pay civil authority coverage (Count II).
- Unfair and deceptive claim practices in violation of Chapter 93A (Count III); and
- The entry of a declaratory judgment declaring the Policy provided coverage for Legal’s claim (Count IV).
Legal’s amended complaint alleged that even if the civil authority orders allowed its restaurants to continue delivery and take-out operations, it operated at a loss. Legal also alleged that the virus had been physically present at its restaurants with some examples of individuals known, or suspected, to be infected at some of Legal’s restaurants.
Strathmore did not wait to conduct legal discovery of the factual validity of Legal’s amended complaint’s claims. Instead, on June 19, 2020, Strathmore filed a motion to dismiss under the Federal Rules of Civil Procedure, arguing that Legal’s amended complaint “failed to state a claim upon which relief may be granted.”
Under the decision rules applicable in Massachusetts to a motion to dismiss, state and Federal judges can only look to the facts alleged in the complaint, documents attached to the complaint as exhibits or incorporated by reference, and matters of which judicial notice [accepting without evidence undisputed facts, e.g., “The sun rises in the East every morning.”] can be taken.
Also, under the same rules of decision, the Judge must accept all factual allegations in a complaint as true and draw all reasonable inferences in favor of the complainant. If the facts assumed as true, no matter how doubtful they may seem, are sufficient to state a legal cause of action, the Judge must deny the motion to dismiss.
The Court rules that even assuming as true Legal’s allegations, the Policy still bars coverage
In Legal’s case, the assumed facts and the operative document consisted of Legal’s allegations in its amended complaint and the Strathmore policy attached to the amended complaint.
The Judge’s decision first focused on the rules of interpretation applicable to Massachusetts insurance policies:
- Judges are to construe an insurance policy under the general rules of contract interpretation, beginning with the policy’s actual language, giving its words their plain and ordinary meaning.
- The Judge must construe any of the policy’s ambiguous words or provisions against the insurer.
- But policy provisions that are plainly and definitively expressed by appropriate language must be enforced in accordance with the policy’s terms
Using these policy construction principles, the Federal Judge addressed each count of Legal’s amended complaint’s legal deficiencies.
The first count for breach of contract the Judge found failed for the following reasons:
- Legal did not allege that its business interruption losses resulted from the presence of COVID-19 at its restaurants but instead alleged that the civil orders “caused and are continuing to cause” its business interruption losses.
- Even if Legal had alleged that the presence of the COVID-19 in its restaurants caused its losses, it would still have no coverage because, under Massachusetts law, the “direct physical loss” required for coverage under the Strathmore policy requires “some kind of tangible, material loss.”
According to the Judge, quoting prior case decisions, “the plain meaning of ‘direct physical loss’ require[s] some enduring impact to the actual integrity [of the insured premises and] does not encompass transient phenomena of no lasting effect.”
Thus, to the Judge, the COVID-19 virus could not cause “direct physical loss of or damage to” property because the virus is incapable of damaging physical structures. “the virus harms human beings, not property.”
Besides arguing unsuccessfully that the virus could constitute direct physical loss, Legal also argued that Strathmore’s failure to include a virus exclusion endorsement in its Policy implicitly expanded coverage. However, the Court rejected that argument stating that the absence of an exclusion does not operate to increase coverage. The grant of coverage in the Policy only encompassed “direct physical loss of or damage to” Legal’s restaurant properties. The Policy’s lack of a virus exclusion neither broadened nor lessened Strathmore’s insuring agreement.
The second count for breach of contract on civil authority coverage also failed to state a cause of action.
On the second count, the Judge quickly found no coverage based on the nature of the civil orders alleged in Legal’s amended complaint.
Under its Policy, Strathmore had to pay for Legal’s business interruption losses if an action of civil authority “prohibits access” to Legal’s restaurants. The Judge noted that most courts that have addressed similar civil authority provisions have distinguished between civil orders that “prohibit” access to insured properties from those orders that “limited” but did not prohibit access.
The Judge noted that Legal had acknowledged in its oppositions to Strathmore’s motion to dismiss that the civil authority orders involved in Legal’s damage claim permitted its restaurants to continue carry-out and delivery operations. Based on the undisputed scope of the civil authority order only limiting rather than prohibiting access to Legal’s restaurant premises, the Judge found that:
“Legal cannot establish a necessary prerequisite of coverage under the civil authority provision of the Policy.”
Legal argued that the Court should not dismiss its civil authority claim because keeping its restaurants open for carry-out and delivery services under the terms of these civil authority orders would have increased its financial losses. However, the Court found Legal’s argument that its operating with just carry-out and delivery sales was not economically feasible was irrelevant for coverage purposes. To the Court, the relevant inquiry was whether the civil authority orders prohibited access to Legal’s restaurants. Since these orders limited but did not prohibit access, Legal had no civil authority coverage.
Legal’s third and fourth counts for unfair claim practices and a declaratory judgment fail for lack of coverage
Based on the prior rulings, the Judge gave short shrift to the two remaining counts.
On the unfair claim practice claim under G.L. c.93A, the Judge reiterated that the Policy provided no coverage and, therefore, no unfair claim practice could lie, quoting another Federal case stating as the law that:
“[w]hen coverage has been correctly denied . . . no violation of the Massachusetts statutes proscribing unfair or deceptive trade practices may be found.”
Accordingly, the Judge stated, “The Court has concluded that Strathmore correctly denied coverage under the Policy. Therefore, dismissal of the Chapter 93A claim is warranted.”
On Legal’s fourth count seeking a declaratory judgment that the Policy covers Legal’s claim and that no exclusion applies to bar or limit coverage for its claim, the Judge that:
“the Court has determined that Legal has failed to plead facts sufficient to demonstrate that it is entitled to coverage under the Policy, dismissal of Count IV is appropriate.”
Strathmore’s motion to dismiss allowed, and Legal has thirty days to appeal
The Judge’s decision ended with, “For the foregoing reasons, the motion of defendants to dismiss plaintiff’s complaint…is ALLOWED.”
Under the Federal Rules of Appellate Procedure, Legal will have thirty days to appeal the dismissal of its complaint to the First Circuit Court of Appeals.
Based on Legal’s exit from the restaurant business and that the vast majority of, at least, lower court decisions have found no coverage for similar business interruption insurance claims, it is possible, if not probable, that Legal may waive its appeal.
However, Agency Checklists will keep its readers posted on future developments.
For more detailed information on the original claim and suit, See Agency Checklists’ article of May 12, 2020, “Legal Sea Foods Files A COVID-19 Business Interruption Coverage Suit Against Strathmore Insurance.”
How to obtain a copy of the Legal Sea Food decision
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Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
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