Lawrence General Hospital (“LGH”) sued its property insurer, Continental Casualty Company (“Continental”), after Continental denied LGH’s claim for losses related to the COVID-19 pandemic. LGH argued it was entitled to coverage under two provisions in its policy: 1) the main coverage for “direct physical loss of or damage to property” and 2) a separate Health Care Endorsement covering losses from complying with “decontamination orders.” The federal district court dismissed LGH’s complaint for failing to state claims entitling LGH to relief under its policy based on a raft of state and federal court decisions denying coverage under commercial property policies for COVID-19 claims.
On appeal, the First Circuit Court of Appeals affirmed the dismissal of LGH’s coverage claim under its primary policy’s “direct physical loss or damage” provision seeking business interruption losses, finding that LGH failed to plausibly allege the type of tangible, demonstrable physical damage required under the standard property policy for coverage for COVID-19 losses.
On this count of its complaint, the LGH lawsuit joined 827 other similar lawsuits filed in Massachusetts and around the country seeking business interruption coverage for COVID-19 losses that courts have dismissed based on the virus’ infestation not constituting property damage covered under commercial property insurance coverages.
However, on LGH’s second claim under its Health Care Endorsement, the appeals court reversed the district court’s dismissal. It held that various government directives essentially compelled LGH to undertake COVID-19 decontamination efforts in order to provide most elective procedures, constituting “orders” requiring “decontamination” within the meaning of the endorsement’s coverage terms.
LGH’s COVID-19 losses from state and federal public health directives
Early on during the COVID-19 pandemic in 2020, Lawrence General Hospital served as the main treatment facility for one of Massachusetts’ hardest-hit regions. As the virus rapidly spread, state and federal authorities issued various directives suspending the hospital’s ability to provide elective and non-emergency procedures pending compliance with enhanced public health safeguards.
These mandates allegedly required LGH to implement various cleaning protocols before reopening many services that included: “enhanced cleaning” using “stronger (and more expensive and time-consuming) cleaning products and techniques”; extensive testing, cleaning, and maintenance of HVAC systems, including replacement of HEPA filters; and sterilization or disposal of items such as “intravenous therapy (IV) poles, medical gas, linens, toilet paper, and food.”
LGH’s coverage claims with Continental
In response to seven-figure financial losses incurred by LGH during this period, the hospital filed an insurance claim under its commercial property policy issued by Continental.
For the policy period, October 1, 2019, through October 1, 2020, LGH had a commercial property policy issued by Continental.
The policy had primary coverage of up to $563 million for “direct physical loss of or damage to covered property, including damage to LGH’s physical plant, business interruption losses, and extra expenses to continue normal operations.
The policy also had a Health Care Endorsement LGH purchased, which included Disease Contamination Coverage for losses from “evacuation or decontamination” orders issued “because of the discovery or suspicion of a communicable disease or the threat of the spread of a communicable disease.”
Under this separate coverage, Continental agreed to pay LGH’s “necessary and reasonable costs” to (a) evacuate the contaminated location; (b) decontaminate or dispose of contaminated property; (c) test after disposal, repair, replacement, or restoration of damaged property; and (d) pay employee overtime costs for providing additional care to patients affected by a communicable disease.
The coverages under the Health Care Endorsement had a one million dollar limit per occurrence. LGH claimed multiple occurrences.
Based on the uniform position of insurers concerning the presence of the COVID-19 virus not constituting property damage, Continental denied LGH’s claims for coverage.
Continental removes LGH’s state suit to federal court and moves to dismiss
LGH waited eighteen months after the denial of its claims before filing suit against Continental in the Massachusetts Superior Court. LGH alleged breach of contract and unfair claims settlement practices under M.G.L. c. 93A.
The hospital argued it qualified for coverage under two distinct policy triggers.
- First, it claimed that by chemically bonding to physical surfaces, the SARS-CoV-2 virus itself caused covered “direct physical loss of or damage to property” under the general property damage terms.
- Second, the hospital alleged that numerous government directives mandating COVID-19 safety protocols at the risk of suspending critical hospital services constituted “decontamination orders” under its Health Care Endorsement.
Continental removed the case to federal court and quickly moved to dismiss the complaint under Rule 12(b)(6) for failure to state a plausible claim for relief under the existing law relating to COVID-19 policy coverage.
The district court granted Continental’s motion to dismiss, finding, since LGH’s policy was a Massachusetts contract, binding legal precedent from the Supreme Judicial Court of Massachusetts in Verveine Corp. v. Strathmore Ins. Co. precluded coverage. The Verveine held that the presence of the COVID-19 virus did not cause physical loss or damage to property as the standard property policy requires.
See Agency Checklists’ article of April 26, 2022, “First State High-Court COVID-19 Decision On Business Interruption Claims.”
LGH appealed the dismissal of its lawsuit to the United States First Circuit Court of Appeals.
The appeals court affirmation of the dismissal of LGH’s claim of a “direct physical loss or damage” from COVID-19
On appeal, the First Circuit affirmed the dismissal of the hospital’s claim under the broader property damage provisions in light of binding state precedent. Because LGH’s insurance contract was a Massachusetts policy, the First Circuit had to follow Massachusetts law, as stated in the Verveine decision of the SJC, holding that COVID-19 orders and the presence of the virus itself did not cause “direct physical loss or damage to property” as commercial property policies require for coverage.
The First Circuit rejected LGH’s allegations that SARS-CoV-2 particles bonded to and altered the hospital’s physical surfaces through a process called “adsorption.” Even accepting the virus particles caused structural changes, the court found dispositive that the particles naturally dissipated or became non-infectious within 7-28 days. Because the alleged damage repaired itself without any remediation efforts, the court held it did not amount to covered “direct physical loss or damage.”
The Court noted that LGH’s complaint alleged the SARS-CoV-2 virus dissipated or became non-infectious on surfaces within 7-28 days, absent any remediation. Thus, the hospital undertook sanitization measures not to fix unabating physical damage but chiefly to mitigate COVID-19 transmission risks to staff and patients as government directives compelled.
The Court also distinguished LGH’s claim from cases where dangerous fumes or gases rendered properties entirely uninhabitable for a period of time. It explained that commercial property policies cover damage arising from the property itself and not any harm to people from being inside the property. Here, LGH undertook cleaning efforts not to remediate any tangible damage but to prevent COVID-19 transmission to staff and patients.
The appeals court reverses the district court’s denial of coverage under LGH’s Health Care Endorsement
In contrast to dismissing the claim under the main property damage provisions, the First Circuit reversed the district court’s dismissal of LGH’s claim under its separately purchased Health Care Endorsement.
The Health Care Endorsement provided that Continental would cover the hospital’s specified losses or costs incurred when four criteria were met:
(1) LGH is subject to “an evacuation or decontamination order”;
(2) “at a [covered] location”;
(3) issued “by the National Center [sic] for Disease Control, authorized public health official or governmental authority,” and,
(4) “because of . . . the threat of the spread of a communicable disease.”
Continental argues to uphold the district court dismissal because there were no ‘orders’ requiring LGH to decontaminate
In arguing against coverage, Continental did not contest that LGH had met the last three criteria for coverage under this provision. Instead, Continental argued that LGH was not subject to a “decontamination order” because the DPH and CDC directives cited by LGH were not mandatory orders and did not require any “decontamination” by LGH.
Continental posited whether LGH faced any orders at all, let alone orders requiring “decontamination.” It argued the government merely restricted LGH from performing elective procedures during certain periods, and the hospital could have remained open while awaiting changed requirements.
The Court finds the Health Care Endorsement triggered by regulators’ memoranda and protocols
The court sided with the hospital in finding LGH had plausibly alleged that various Massachusetts Department of Public Health (DPH) memoranda constituted “orders” requiring “decontamination” within the meaning of the endorsement.
The DPH conditioned the hospital’s ability to resume urgent elective procedures with compliance to protocols like “thorough cleaning and disinfection of all common and procedural areas” and certifying adherence before restarting many suspended services. Failing to follow these cleaning directives would result in “remedial action or suspension” of critical offerings.
The Court emphasized that LGH’s compliance with the protocols of the CDC and the Massachusetts DPH “was not optional under any practical understanding of that term.” Losing the ability to perform most procedures indefinitely would significantly impact LGH’s “mission of providing necessary care to its community and to its bottom line.”
Thus, to the Court, the directives conditioning elective procedures on maintaining certain cleaning protocols constituted orders in all but name.
Additionally, the Court held that the meaning of “decontamination” did not require total permanent elimination of a virus, as Continental argued.
Though COVID-19 might be repeatedly reintroduced, LGH’s cleaning efforts to remove or eliminate existing SARS-CoV-2 particles qualified as decontamination under the endorsement. The court reasoned that interpreting decontamination to require near-permanent eradication “appears at odds with the purpose of the policy” to provide coverage during communicable disease outbreaks when recontamination was likely.
The First Circuit’s final order remanded LGH’s seven-figure coverage claims under the Health Care Endorsement back to the federal district court for further proceedings concerning the specific evidence the mandatory decontamination orders necessitated LGH’s pandemic response expenditures.
Continental may still have potential challenges to LGH’s claims. In its appeals court brief, Continental alleged but did not identify, various exclusions contained in the endorsement that were not part of the appeal that could still exclude coverage to LGH under the Health Care Endorsement.
Agency Checklists will keep you posted.
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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