Legal Seafoods, LLC (“Legal Seafoods”) is a popular New England restaurant chain which operates thirty-two (32) restaurant concepts on the East Coast. This instant matter, Legal Sea Foods, LLC v. Strathmore Ins. Co., No. CV 20-10850-NMG, 2021 WL 858378, at *1 (D. Mass. Mar. 5, 2021), concerned a declaratory judgement action filed in the United States District Court, District of Massachusetts, involving various losses claimed by Legal Seafoods. The defendant, Strathmore Insurance Company, had issued a commercial liability policy to Legal Seafoods.

As a result of the COVID-19 pandemic, many state and local governments banned indoor dining. In March 2020, Legal Seafoods submitted a claim for business interruption losses as a result of these orders, alleging their restaurants were forced to close, limit capacity, and install protective barriers. They alleged that the virus was “physically present” as there were various individuals “who were known, or suspected, to be infected at various Designated Properties.” Id. Strathmore Insurance Company denied Legal Seafood’s claim and denied its request for reconsideration. Id.

Legal Seafoods, LLC then filed the instant declaratory judgement action, alleging “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); and unfair or deceptive acts or practices in violation of Chapter 93A (Count III). Strathmore moved to dismiss the complaint. Id.

Strathmore argued that the first breach of contract count should be dismissed as Legal Seafoods could not demonstrate “direct physical loss of or damage to” property at any of the establishments covered. Legal Seafoods countered that COVID-19 was physically on its properties and caused damages including shutdowns. Id. *3.

The Court found that Legal Seafoods did not “plausibly allege” that COVID-19 was the cause of the losses; and even if they did so, such claims would not be covered. The Court cited several decisions interpreting “direct physical loss” as requiring “some enduring impact to the actual integrity [of the insured premises and] does not encompass transient phenomena of no lasting effect.” Id. at *3 quoting SAS Int'l, Ltd. v. General Star Indem. Co., No. 1:20-cv-11864, 2021 WL 664043, at *2, 2021 U.S. Dist. LEXIS 31093 at *10 (D. Mass. Feb. 19, 2021).

The court emphasized that COVID-19 does not cause physical damage to the property itself, but rather harms individuals on the property. Additionally, because the virus can be “removed from surfaces with routine cleaning and disinfectant,” it does not threaten property. Id. quoting Terry Black's Barbecue, LLC v. State Auto. Mut. Ins. Co., No. 1:20-CV-665, 2020 WL 7351246, at *7, 2020 U.S. Dist. LEXIS 234939, at *20 (W.D. Tex. Dec. 14, 2020). Additionally, “even actual presence of the virus would not be sufficient to trigger coverage for physical damage or physical loss to the property [and] the pandemic impacts human health and human behavior, not physical structures.” Id. at *4 quoting Pappy's Barber Shops, Inc. v. Farmers Grp., Inc., No. 20-CV-907-CAB-BLM, F.Supp.3d, 2020 WL 5847570 (S.D. Cal. Oct. 1, 2020). The court distinguished cases cited by Legal, including Essex Ins. Co. v. BloomSouth Flooring Corp., 562 F.3d 399 (1st Cir. 2009) and Matzner v. Seaco Ins. Co., No. 96-0498-B, 1998 WL 566658, 1998 Mass. Super. LEXIS 407 (Mass. Super. Aug. 12, 1998) which involved fumes and odors causing losses, stating that COVID-19 “fundamentally differs” from these cases. Id.

Legal Seafoods further argued that the policy at issue did not exclude coverage relative to viruses. The Court rejected this argument, stating that the “‘absence of an express [virus] exclusion does not operate to create coverage’ for pandemic-related losses.” Id. quoting Given v. Commerce Ins. Co., 440 Mass. 207, 212, 796 N.E.2d 1275 (2003).

The plaintiff additionally sought coverage under the civil authority provision of the policy which required “Strathmore to pay for Legal Seafoods LLC's business interruption losses resulting from an action of civil authority only if that action ‘prohibits access’ to the Designated Properties.” Id. at *5. The Court stated that other jurisdictions have “drawn a clear line between actions that ‘prohibit’ access to insured properties and those that merely ‘limit’ such access.” Id. citing Riverside Dental of Rockford, Ltd. v. Cincinnati Ins. Co., No. 20 CV 50284, 2021 WL 346423, at *5, 2021 U.S. Dist. LEXIS 20826 at *12-13 (N.D. Ill. January 19, 2021). As the shutdowns did not prohibit restaurant “pick up orders”, Legal Seafood could not successfully allege that access was entirely prohibited.

Legal Seafoods, LLC has appealed this decision to the First Circuit.

Going Forward

This action is part of a larger ongoing cycle of litigation involving various public facing businesses claiming pandemic related losses. Most courts have determined this issue depends on the meaning of “direct physical loss of or damage to” property. Many jurisdictions have narrowly construed the term. See Kahn v. Pennsylvania Nat'l Mut. Cas. Ins. Co., No. 1:20-CV-781, 2021 WL 422607, at *1 (M.D. Pa. Feb. 8, 2021), Water Sports Kauai, Inc. v. Fireman's Fund Ins. Co., No. 20-CV-03750-WHO, 2020 WL 6562332, at *1 (N.D. Cal. Nov. 9, 2020).

Given the economic losses involved within these various industries due to COVID-19 and the potential resurgence of variants in the Fall and Winter months, this issue will continue to be at the forefront.