When the COVID-19 pandemic caused states to shut down non-essential businesses, many of those shuttered businesses thought that business interruption coverage would cover some or all their losses. However, the standard forms for business interruption, extra expense, or civil authority coverages require as a condition precedent to coverage that a claim arises from “direct physical loss or damage to property.” While many insureds and their lawyers first believed that this condition would not be upheld by the courts, the course of litigation has proved them wrong. Both state and federal courts have uniformly found this condition unambiguous and a bar to coverage for the monetary losses suffered from business closures caused by the COVID-19 pandemic.
The latest decision in Massachusetts upholding this condition involves the Hampshire House, also known as the home of the “Cheers”
The United States District Court in Boston recently issued a decision denying coverage to the Hampshire House (Hampshire), the owner of several restaurants that sued its insurer for its business losses resulting from the Massachusetts governor’s barring of on-premises dining for several months in 2020.
Hampshire is the Massachusetts restaurant corporation that owns and operates the “Cheers Bar.” This bar gained national recognition and status as a Boston tourist attraction after the façade for it became the opening screenshot for eleven seasons of “Cheers,” one of the most popular sitcom series ever produced. The series ran on national television from 1982 to 1993.
Notwithstanding that the Cheers TV series ended in 1993, the Cheers Bar at the Hampshire’s location in Boston has continued as a tourist destination in Boston and a stop on the Boston Trolley Sightseeing Tours.
Besides the Cheers Bar, the company owns the “Hampshire House,” a restaurant and event venue, located above the Cheers Bar at 84 Beacon Street, “75 Chestnut Street,” a restaurant and bar; “Cheers, at Faneuil Hall,” a restaurant and bar with retail (now closed); and “75 on Liberty Wharf Bar & Grill,” a restaurant and bar.
Hampshire struggles and loses a location because of the COVID-19 restrictions
On March 15, 2020, the Massachusetts governor, responding to the COVID-19 pandemic, issued an order suspending the “on-premises consumption of food or drink” at restaurants. The governor expanded this order eight days later, on March 23, 2020, by requiring all non-essential businesses to “close their physical workplaces and facilities.” Effective June 8, 2020, the governor modified the order to allow “limited capacity on-premises dining”.
The effect of the governor’s orders and the spread of COVID-19 allegedly caused “Hampshire House’s core business functions to be nearly eliminated or destroyed.” Between March 15 and June 8, 2020, Hampshire only had one location providing takeout food as allowed by the governor’s order, the other languished. Hampshire did create outdoor table space and reconfigured its locations’ interiors for the limited capacity on-premises dining and shopping allowed after June 8, 2020, However, notwithstanding this relaxation of the rules, Hampshire in August 2020, closed its Cheers Faneuil Hall location.
Hampshire’s insurance policy and its coverage claim
Like other insureds, the Hampshire looked at the insurance it had purchased for coverage.
Hampshire had a 212-page policy providing property, liability, crime, and inland marine coverage for the company’s four locations for a premium of $141,041.00. The Business Income and Extra Expense insurance had a coverage limit of $10,860,000.
The policy had the AIC’s logo, but the issuer was Associated Indemnity Corporation (AIC), a subsidiary of Allianz Global Risks US Insurance Company.
The policy’s insuring agreements for business interruption stated that AIC would pay:
…for the actual loss of Business Income, you sustain 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 the premises described in the Declarations, including personal property in the open (or in a vehicle) within 100 feet, caused by or resulting from any Covered Cause of Loss. (Emphasis added).
For “Extra Expense” coverage the policy stated:
Extra Expense means necessary expenses you incur during the period of restoration that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss. (Emphasis added).
For “Civil Authority” coverage the agreement was:
We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss. This coverage will apply for a period of up to two consecutive weeks from the date of that action. (Emphasis added).
Hampshire submitted a notice of loss to AIC for business income coverage on March 17, 2020.
Claim denial and Hampshire’s lawsuit
On June 16, 2020, AIC denied the claim, stating that “[b]ecause there has been no direct physical loss of or damage to property, there has been no Covered Cause of Loss under the Policy’s Business Income, Extra Expense or Civil Authority coverages of the Policy.”
On July 27, 2020, Hampshire filed suit against Fireman’s Fund, AIC, and Allianz Global Risks US Insurance Company.
Hampshire’s amended complaint against AIC alleged four counts:
- Breach of contract (Count I).
- Breach of the covenant of good faith and fair dealing (Count II).
- Violation of G.L. c. 176D (Count III).
- Violation of G. L. c. 93A (Count IV).
Hampshire alleged that Allianz (AIC) violated its contractual, statutory, and lawful obligations to pay its losses because Hampshire had coverage for:
- “physical loss of or damage to the insured property from all risks unless expressly limited or excluded by language in the body of the Policy or through a separate exclusion endorsement,” and
- “[t]here [were] no exclusions in Hampshire’s policy for the loss of business income caused by emergency [o]rders, or the COVID-19 virus.”
Hampshire’s position, like that of other similar insureds, was that it “relied on its business interruption insurance to cover what it is supposed to cover–replacement of business income and payment of ongoing expenses in order to rebuild its businesses.”
AIC’s Motion to dismiss
On October 26, 2020, AIC filed a motion to dismiss each of the four counts that Hampshire had alleged against the insurer with supporting legal arguments. The basis for the requested dismissals were:
- Hampshire’s breach of contract claim should be dismissed for failure to state a claim because Plaintiff alleges no facts which, if taken as true, demonstrate physical loss or damage necessary to trigger coverage.
- Hampshire’s breach of the covenant of good faith and fair dealing claim should be dismissed for failure to state a claim because it was objectively reasonable for AIC to deny Plaintiff’s claim absent coverage.
- Hampshire’s M.G.L. c. 176D claim should be dismissed for failure to state a claim because the statute does not provide a private right of action; and
- Hampshire’s M.G.L. c. 93A claim should be dismissed for failure to state a claim because Massachusetts courts do not permit 176D claims to be brought under 93A, § 11.
Hampshire filed an opposition memorandum in which it argued that, since in deciding a motion to dismiss, a court must assume the truth of all well-pleaded facts and give plaintiffs the benefit of all reasonable inferences, it had alleged sufficient facts to show that its property had a physical loss or damage.
In particular, Hampshire pointed to allegations in its amended complaint that it argued properly pleaded physical loss or damage including allegations that:
- The COVID-19 virus was ubiquitous in all parts of the Greater Boston Area where Hampshire’s properties are located.
- Upon information and belief, at all relevant times, the COVID-19 virus was present on all of Hampshire’s insured properties.
- The COVID-19 virus is a cause of real physical loss of or damage to property because, per a cited study, the virus adheres to its environment, remaining stable and transmittable in aerosols for at least three hours, up to four hours on copper, up to 24 hours on cardboard and up to two to three days on plastic and stainless steel and these are common objects found in Hampshire’s insured premises.
- The ongoing presence of large numbers of customers and employees in relatively confined indoor spaces, some of whom are virus carriers, ultimately affects the building. At all relevant times, this caused physical damage to Hampshire’s insured properties.
On December 1, 2020, the parties argued their cases before the judge in a hearing conducted over a Zoom link. The Court took the matter under advisement and issued its decision nine months later.
The Court’s decision addressed each of the four counts in succession
Count I-Breach of Contract
In the first instance, the Court addressed the first count, breach of contract. Whether this count stated a valid claim depended on whether Hampshire had adequately alleged that there was direct loss or damage to property at one or more of Hampshire’s properties.
The judge noted that Hampshire contended that either the actual presence of COVID-19 at their properties or the threat of COVID-19 caused a “loss of or damage to [their] propert[ies].” According to Hampshire’s allegations, COVID-19 was present at each of the insured’s locations at all relevant times, or there was an imminent risk of on-site viral presence at all relative times or both.
Hampshire alleged restaurants are “highly susceptible” to “being or becoming” affected by the presence of or rapid transmission of the virus because the virus adheres to “common objects” found in them, such as copper, cardboard, and stainless steel, and due to the “highly social” and “confined” nature of its properties. In addition, The Court noted that Hampshire alleged that the COVID-19 virus was “ubiquitous” in all areas where Hampshire’s properties were located.
However, the Court found that this allegation did not suffice to state a claim. The Court ruled, based on prior case decisions, that a “presumed or imminent threat of contamination” has no physical effect on the property. The courts noted that some decisions have held that even the actual contamination of a property by COVID-19 did not have a required “physical” effect since “A virus is incapable of damaging physical structures because the virus harms human beings, not property.”
The Court did not dispute, as Hampshire argued, that the spread of the coronavirus is “physical” in the sense that the virus is a submicroscopic organism. However, under the plain language of the policy, the Court ruled that it is the loss or damage itself that must be “physical.”
Hampshire also had argued that the policy provided coverage because “loss of use” was covered. The Court agreed with the premise but disagreed with the conclusion. It reasoned that loss of use had to be tied to a physical condition and in this case, Hampshire “did not lose use because the premises suffered physical damage; nor was the loss of use caused by actual contamination of the property.”
Finally, the Court ruled:
“In sum, the threat or presence of the coronavirus in Hampshire House’s four locations does not constitute “direct physical loss of or damage to property.”9 Even if it did, the complaint does not provide a sufficient factual basis to suggest that coronavirus was actually present at Hampshire House’s properties. Accordingly, the Court will grant defendants’ motion to dismiss Count I to the extent that it depends on claims for Business Income and Extra Expense coverage.”
Count II-Breach of the Implied Covenant of Good Faith and Fair Dealing
In Massachusetts, every contract contains an unstated but implied covenant of good faith and fair dealing. The implied covenant, according to the Supreme Judicial Court, provides that “neither party shall do anything that will have the effect of destroying or injuring the rights of the other party to receive the fruits of the contract.”
Hampshire argued that AIC breached the implied covenant in the insurance agreement of good faith and fair dealing because the June 16, 2020 denial letter was based on no “meaningful or honest investigation of the facts or contractual terms” the company’s website stating that “infectious disease is usually not a covered peril.”
The Court, however, did not find any breach of the covenant sufficiently alleged by Hampshire.
The Court found that AIC’s position that coverage should be denied was objectively reasonable under the circumstances considering the interpretation of “physical loss of or damage to property” by Massachusetts courts. Also, Hampshire had not alleged any “otherwise-unknown facts that such an investigation would have revealed” that would have had a material effect on coverage.
Count III-Violation of Mass. Gen. Laws Chapters 176D
While Chapter 176D has as part of its provisions Massachusetts’ unfair claim practice act, it does not contain a private right of action. The statute’s enforcement is solely within the jurisdiction of the commissioner of insurance.
M.G.L. c. 93A, § 9, does have a specific provision allowing individuals who are injured by unfair claim practices in violation to bring an action under that statute alleging violations of Chapter 176D, However, businesses suing businesses under M.G.L. c. 93A, must sue under § 11 which has no provision for similar to § 9.
As a result, the Court dismissed the stand-alone count alleging a violation of Chapter 176D.
Count IV-Violations of G.L. c. 93A
The Court, in deciding this count, quoted the standards that a Court should consider in finding a business practice or action violates Chapter 93A by being unfair or deceptive. The standards quoted by the Court were:
“(1) whether the practice… is within at least the penumbra of some common-law, statutory, or other established concept of unfairness.
(2) whether it is immoral, unethical, oppressive, or unscrupulous; [and]
(3) whether it causes substantial injury to consumers (or competitors or other businessmen).”
However, to be actionable under M.G.L. c. 93A, §11 the conduct in question, the Court noted, must constitute an “extreme or egregious” business wrong or “commercial extortion,” or rise to some level of “rascality” that raises “an eyebrow of someone inured to the rough and tumble of the world of commerce.”
However, the Court found that Chapters 93A and 176D, do not impose liability in cases of good-faith disputes over insurance coverage in which liability is “not reasonably clear.” In this case, the Court found that AIC had “correctly denied coverage” and that “where an insurer correctly denies coverage, Chapter 93A claims related to that denial cannot survive.”
Based on that ruling, the Court granted AIC’s motion to dismiss Count IV.
The final order of the judge
Hampshire’s hopes for its lawsuit becoming the exception to the rule that has applied to the other lawsuits seeking coverage for COVID-19 business interruption claims ended with the judge’s final order in favor of AIC, stating:
“For the foregoing reasons, defendant’s motion to dismiss is GRANTED.
So Ordered.” (Emphasis in original).
Hampshire has thirty days to appeal to the First Circuit Court of Appeals
Under the Federal Rules of Appellate Procedure, Hampshire has thirty days to appeal the dismissal of its complaint to the First Circuit Court of Appeals. This appeal period will expire on September 26, 2021.
As of the date of the article, Hampshire had not filed an appeal. However, it is likely that it may, if only, to protect its rights in case a Massachusetts appellate court construed the term, “direct physical loss” differently than the United States District Court has.
Under our dual system of state and federal courts, federal courts deciding suits between a Massachusetts insured and a California insurer, as in this case, must follow Massachusetts law as stated by Massachusetts appellate courts. If the Massachusetts Supreme Judicial Court or Appeals Court extended the definition of “direct physical loss” to include virus contamination, the federal courts would have to apply that decision.
Hampshire could keep its lawsuit alive by filing a notice of appeal in case there were an unexpected and unlikely Massachusetts appellate decision that reached a different conclusion than the federal court did in this case.
Agency Checklists will keep its readers posted on future developments.
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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