On January 7, 2022, the Supreme Judicial Court became the first state high court to hear a business interruption claim under the standard all-risk commercial property policy involving COVID-19 related losses. The case argued before the Court was Verveine Corp et al., v. Strathmore Insurance Company and Commercial Insurance Agency, Inc. Massachusetts Supreme Judicial Court, No. SJC-13172.
The importance of this case of first impression before the SJC is that its decision could affect the legal validity of federal court decisions already rendered in Massachusetts in favor of insurers.
Federal courts, including the United States District Court in Massachusetts, have ruled in numerous suits seeking to recover under the business interruption coverage for Covid-related claims against insureds. However, the United States Supreme Court ruled more than eighty years ago that federal courts must follow state law in deciding diversity suits between residents of different states. This rule requires a federal court to apply Massachusetts contract law in a coverage suit between a Massachusetts insured and an out-of-state domiciled insurer. Therefore, a ruling by the SJC reversing the coverage decision in favor of Strathmore would not only affect state court COVID-19 coverage suits but would also affect similar decisions in the federal courts finding no coverage.
The Verveine appeal seeks business interruption coverage and E&O damages against its insurance agent
Verveine Corp. operates three restaurants located in Boston and Cambridge that have common owners. Commercial Insurance Agency, Inc. (the “Commercial Agency”) provided Verveine’s three locations individual policies for several years with Strathmore Insurance.
Verveine’s restaurants lost significant income because of the COVID-19 shutdowns and the restaurants’ resulting inability to use their properties as intended without endangering their employees’ and their customers’ health and safety. Strathmore’s policies provided coverage for lost business income caused by a covered loss. When Verveine filed business interruption claims for its COVID-19-based losses, Strathmore denied coverage asserting that Verveine’s claims did not satisfy the policies’ condition precedent of a “direct physical loss of or damage to” insured property.
All three Verveine’s restaurants sued Strathmore for breach of contract in the Massachusetts Superior Court. However, one of the restaurants also sued the Commercial Agency for negligence in placing its Strathmore policy with a virus exclusion that the other two Strathmore policies did not include.
After the Superior Court rule ruled in favor of Strathmore and the Commercial Agency, Verveine appealed to the Appeals Court. The Supreme Judicial Court, without any request, transferred Verveine’s appeal to it for a decision
Eight amici curiae submit or join in “friend of the court” briefs
The Supreme Judicial Court occasionally solicits amicus (“friend of the court”) briefs from parties not directly involved in a case if that case may have importance to more than the particular parties to an appeal.
Based on the financial issues involved in the Verveine appeal for insured businesses and their insurers, the Supreme Judicial Court published, in September 2021, a request for amicus briefs from interested parties.
The Court received friend of the court briefs from the American Property & Casualty Insurance Association, the National Association of Mutual Insurance Companies, the Massachusetts Insurance Federation, the Massachusetts Insurance and Reinsurance Bar Association, American Food Systems, Inc., Amphenol Corporation, the Lawrence General Hospital, and United policyholders, a California-based nonprofit focused on policyholder rights.
The Court identified for the amicus briefs three issues that it proposed to address in the Verveine appeal. As stated by the Court, these issues were:
1. Where “all-risk” commercial property insurance policies provide coverage for loss of “business income and extra expense” when there is a “direct physical loss of or damage to” insured property, whether the COVID-19 pandemic and governmental closure orders satisfy the requirements for coverage.
2. Where “all-risk” commercial property insurance policies provide coverage when a covered risk causes damage to non-insured property within one mile of insured property, and a “civil authority” acts to “prohibit access” to a geographic area that includes the insured property, whether the COVID-19 pandemic and governmental closure orders satisfy the requirements for coverage.
3. Whether a virus exclusion provision of an “all-risk” commercial property insurance policy excludes coverage for losses
The argument before the Justice of the Supreme Judicial Court
During the January 7 argument before the full bench of the Supreme Judicial Court, the justices actively questioned the lawyers for Verveine and Strathmore with questions.
Some highlights of the questions to counsel for Verveine, Benjamin Zimmerman of Sugarman and Sugarman, and Stephen Goldman of the firm of Robinson and Cole for Strathmore may have shown some of the issues and concerns the justices.
Forty seconds after Attorney Zimmerman began his argument, Justice David Lowy interjected, stating, “If I could interrupt you for a moment.”
After some preliminary acknowledgment of Verveine’s general statements of legal rules, Judge Lowy continued by identifying multiple court decisions denying Verveine’s coverage position and ended with, “What’s the fundamental flaw on all these other decisions?”
Attorney Zimmerman responded that these decisions did not follow the “tenets of the law of contract construction that have been followed for decades and were supposed to be [followed] in this case. He started to argue that Strathmore had left the terms [direct physical loss of or damage to] undefined “for decades and decades and decades.”
However, Judge Dalila Wendlandt opined, stating, “Counsel, just because something is undefined doesn’t mean you win, or that it is ambiguous. So, can you address that part? How is the forced pivot of your clients towards takeout business? Through the governor’s order, a direct physical loss or damage to property?”
A few moments later, Judge Scott Kafker addressing the question of physical damage or loss, observed that notwithstanding the shutdown, “The property is exactly the same,” and asked, “Is it the problem that people are coming into the property [and] not the property? Particularly for takeout. So, if there’s something wrong with the property, how can they do takeout?”
Judge Kafker also asked counsel for Verveine if “there [was] any appellate courts that have taken your position on the meaning of “physical”? When Attorney Zimmerman answered, “No,” Judge Kafker asked, “Isn’t that troublesome when you don’t have a single appellate court in the country adopting this view?”
After Attorney Zimmerman finished his allotted fifteen minutes of argument, Strathmore’s lawyer, Stephen Goldman, only got twenty-six seconds into his argument in opposition to Verveine’s appeal when Judge Lowy interrupted. He asked, “They buy this all-risk insurance, and now they have to sit around and wait until there’s COVID in the building and people have gotten sick when you’ve purchased all-risk property insurance?
Judge Kafker followed up with a statement, “I’m just worried Mr. Goldman that, you know, we need to be realistic and practical. These restaurants are open…we have people circulating with the virus in them…. I mean, do you win if there are droplets in one of these restaurants if they’re open? Or do you lose, because…if those restaurants are open, they are going to be droplets.”
Justice Lowy also focused on Verviene’s first argument in a colloquy with Attorney Goldman, beginning, “But I’m saying that we’re jumping over [Verveine’s] first argument. That argument is, if you want me to say it again, that something that has to happen to the property that’s ultimately a material change, that something about the integrity of the property that gets infused into these [other] decisions, they [Verveine] say, that’s not required. Just look at the definition.” [“direct physical loss of or damage to” insured property].
Judge Kafker also raised the issue of the legal effect of the virus exclusion added to one of the three Verveine policies, stating, “…if it’s so obvious that viruses are not covered? Why do you need an exclusion for viruses?”
Attorney Andrew Ferguson, representing the Commercial Agency, made a short final argument that any negligence claim by Verveine against their insurance agency failed because Strathmore had denied coverage to the restaurant whose policy had a virus exclusion for lack of any direct physical damage or loss to insured property. Since Strathmore did not deny any coverage based on the virus exclusion, unless the SJC reversed the Superior Court decision in favor of Strathmore, Verveine’s E&O claim was moot
Agency Checklists’ takeaways from the argument
While lower federal courts and state courts have found against coverage, Agency Checklists opined early in the pandemic that the words “direct physical loss or damage” to property in the standard commercial property policy barred coverage (See Agency Checklists’ article of March 17, 2020, “Business Interruption Coverage & The Coronavirus Pandemic,”).
The lower courts in Massachusetts, both federal and state, have had no doubts about the objective meaning of the terminology, “direct physical loss of or damage to” insured property. There seems little reason for the Supreme Judicial Court to deviate from these courts’ legal analysis.
The only possible joker is that, as Verveine argued, insurers have studiously avoided defining the operative terminology “direct physical loss of or damage to” insured property. Conceivably, the Court could apply the reasonable expectations doctrine and “consider what an objectively reasonable insured, reading the relevant policy language, would expect to be covered.”
If the Court decided to weigh its decision toward an insured’s “reasonable expectations, it might find the property policy’s label, “all-risk,” important.
As Justice Lowy implied in questioning Strathmore’s counsel, an insured buying a policy that provides “all-risk” coverage for “business interruption” could reasonably assume that any externally caused business interruptions had coverage.
Whether, in this case, the Supreme Judicial Court would find the labeling of the policy as “all-risk” superseding the requirement of “direct physical loss,” seems, to Agency Checklists, doubtful.
Agency Checklists will report to its readers once the Court issues its opinion
Owen Gallagher
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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