75 Arlington St., Inc. v. Strathmore Insurance Company ( 2024 )

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23-P-407 Appeals Court
75 ARLINGTON ST., INC., & others1 vs. STRATHMORE INSURANCE
COMPANY.
No. 23-P-407.
Suffolk. January 17, 2024. – May 20, 2024.
Present: Meade, Blake, & Desmond, JJ.
Insurance, Business owner's policy, "All risk" policy, Property
damage, Coverage. Contract, Insurance. Practice, Civil,
Motion to dismiss. Words, "Direct physical loss of or
damage to."
Civil action commenced in the Superior Court Department on
March 11, 2022.
A motion to dismiss was heard by Kenneth W. Salinger, J.
Michael S. Levine (Nicholas D. Stellakis also present) for
the plaintiffs.
Gregory P. Varga (Jonathan E. Small also present) for the
defendant.
Catherine R. Castaldo, for United Policyholders, amicus
curiae, submitted a brief.
1 202 Washington St., Inc.; 111 South 17th Street, Inc.; One
Patriot Place LLC; 443 Lexington Avenue, Inc.; 427 Walnut St.,
LLC; 201 Main Street LLC; 151 Granite Street LLC; and 51 Liberty
Drive, LLC.
2
MEADE, J. The plaintiffs are a group of restaurant owners
that filed a claim with their insurance company, defendant
Strathmore Insurance Company (Strathmore), for the loss of
business income sustained during the COVID-19 pandemic.
Strathmore denied the claim on the basis that the loss of
business income was not "caused by direct physical loss of or
damage to property," as required under the plaintiffs' policy.
The plaintiffs filed suit, Strathmore moved to dismiss, and a
Superior Court judge allowed the motion. The plaintiffs appeal
from the judgment of dismissal.2 Discerning no reason to
distinguish this case from Verveine Corp. v. Strathmore Ins.
Co., 489 Mass. 534 (2022) (Verveine), we affirm.
Background. We recite the facts as alleged in the
plaintiffs' first amended complaint but disregard legal
conclusions cast in the form of factual allegations. See Moran
v. Benson, 100 Mass. App. Ct. 744, 745 (2022). See also
Skiffington v. Liberty Mut. Ins. Co., 93 Mass. App. Ct. 1, 2
(2018).
The plaintiffs had an insurance policy with Strathmore that
insured against "direct physical loss of or damage to Covered
Property at the premises described in the Declarations caused by
or resulting from any Covered Cause of Loss." The premises
2 We acknowledge the amicus brief submitted by United
Policyholders.
3
described in the declarations included the plaintiffs'
headquarters and restaurant locations. "Covered Property"
included the "building or structure described in the
Declarations" and personal property "located in or on the
building . . . or in the open (or in a vehicle) within [one
hundred] feet of the described premises," subject to certain
exclusions. A "Business Income (and Extra Expense) Coverage
Form" included the following provisions pertaining to the loss
of business income:
"We will 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 premises which are described in the
Declarations . . . . The loss or damage must be caused by
or result from a Covered Cause of Loss."
During the policy's term, the COVID-19 pandemic swept the
globe, and the virus became physically present at the
plaintiffs' restaurants. As alleged, infected individuals shed
the virus "through normal breathing, talking, and other ways,
into the indoor air and onto surfaces throughout the
restaurants." Once shed, infectious virus particles "settle[d]
on surfaces, adhering through gravitational and electrostatic
forces." The presence of the virus caused the plaintiffs to
take "extraordinary measures," which included "closing certain
operations and services, substantially modifying others,
restricting access to many of the properties, enforcing physical
4
distancing, and undertaking extensive active efforts to repair,
restore, and remediate the facilities." "Some surfaces and
objects retain[ed] residual infectious virus even after
cleaning, and no amount of cleaning [could] prevent aerosolized
infectious particles from attaching to surfaces after cleaning."
However, the plaintiffs were able to continue operating "at
reduced levels" during the COVID-19 pandemic.
Discussion.3 The Supreme Judicial Court's decision in
Verveine, 489 Mass. at 536-537, 540, involves similar facts and
policies. Another group of restaurant owners filed claims with
the same insurance company, Strathmore, for the loss of business
income sustained during the COVID-19 pandemic. See id. at 537.
The restaurant owners had two policies with Strathmore, see id.
at 536, one of which was the same as the plaintiffs' policy in
all material respects, see id. at 540. The other policy
contained a virus exclusion that was not part of the plaintiffs'
policy.4 See id at 536. However, the Verveine decision does not
turn on the virus exclusion. Rather, the Supreme Judicial Court
addressed the same language at issue in this case –- whether
3Our review of the allowance of the motion to dismiss is de
novo. See Verveine, 489 Mass. at 538.
4 The virus exclusion applied to "loss or damage caused by
or resulting from any virus, bacterium or other microorganism
that induces or is capable of inducing physical distress,
illness or disease." Verveine, 489 Mass. at 536.
5
there was any "direct physical loss of or damage to" property --
and concluded that (1) those words require a physical alteration
of the property and (2) the COVID-19 virus did not physically
alter or affect any of the insured property. Id. at 542-543.5
In this appeal, the plaintiffs' sole argument is that they,
unlike the restaurant owners in Verveine, alleged facts showing
how the COVID-19 virus physically altered or affected their
insured property. Specifically, the plaintiffs argue that the
restaurant owners in Verveine had to plead around the virus
exclusion and "scrupulously avoided pleading any fact or detail
describing how the virus had any distinct, demonstrable,
physical effect on their property at all." In other words, the
plaintiffs argue that Verveine is a "product of the record" and
should be distinguished on that basis. This argument reads
Verveine too narrowly.
As noted, Verveine holds that "'direct physical loss of or
damage to' property requires some 'distinct, demonstrable,
physical alteration of the property.'" Verveine, 489 Mass. at
5 The Supreme Judicial Court noted that it did not need to
reach Strathmore's arguments regarding the virus exclusion given
that "coverage did not attach in the first place," but briefly
addressed the exclusion, "not for whether it would exclude
coverage, but whether, as the [restaurant owners] claim[ed], it
creates a clear negative implication that policies that do not
contain the exclusion should cover claims arising from the
COVID-19 virus." Verveine, 489 Mass. at 545-546. The Supreme
Judicial Court "conclude[d] that no such negative implication
[could] or should be drawn." Id. at 546.
6
542, quoting 10A S. Plitt, D. Maldonado, J.D. Rogers, & J.R.
Plitt, Couch on Insurance 3d § 148:46 (rev. ed. 2016). On the
question of what constitutes a physical alteration of property,
Verveine provides the following guidance. "[P]roperty has not
experienced physical loss or damage in the first place unless
there needs to be active repair or remediation measures to
correct the claimed damage or the business must move to a new
location." Verveine, supra at 543. Thus, the "[e]vanescent
presence of a harmful airborne substance that will quickly
dissipate on its own, or surface-level contamination that can be
removed by simple cleaning, does not physically alter or affect
property." Id. at 544. In contrast, the "saturation,
ingraining, or infiltration of a substance into the materials of
a building or persistent pollution of a premises requiring
active remediation efforts" does constitute a physical
alteration. Id.
Similar distinctions have been made in cases across the
country. See Kim-Chee LLC v. Philadelphia Indem. Ins. Co., 535
F. Supp. 3d 152, 161 (W.D.N.Y. 2021), aff'd, U.S. Ct. App., No.
21-1082-cv (2d Cir. Jan. 28, 2022). Courts have ruled that
"contamination that is temporary . . . or that imposes
remediation costs without preventing use of the building . . .
is unlikely to qualify as a direct physical loss [or damage] to
the insured premises." Id. Courts also have ruled "that
7
contamination by a persistent chemical or biological agent, not
otherwise excluded from coverage, may cause . . . direct
physical loss [or damage] if it renders the insured property
unusable." Id. Examples of persistent chemical or biological
agents include ammonia, gasoline, and the persistent odor from
methamphetamine production. See Verveine, 489 Mass. at 544.
In Verveine, the Supreme Judicial Court applied these
principles to the COVID-19 virus. The court assumed that the
virus was physically present in the restaurants but explained,
"[T]he suspension of business at the restaurants was not in
any way attributable to a direct physical effect on the
plaintiffs' property that can be described as loss or
damage. As demonstrated by the restaurants' continuing
ability to provide takeout and other services, there were
not physical effects on the property itself."
Verveine, 489 Mass. at 543.
The overwhelming majority of courts that have addressed
insurance claims for pandemic-related loss of business income
have reached the same conclusion. See Lawrence Gen. Hosp. v.
Continental Cas. Co., 90 F.4th 593, 603 (1st Cir. 2024). As one
court phrased it, the presence of the COVID-19 virus "does not
give rise to the necessary transformative element of something
like fire, water, or smoke" (quotation and citation omitted).
Starr Surplus Lines Ins. Co. v. Eighth Judicial Dist. Court of
the State of Nev., in & for the County of Clark, 535 P.3d 254,
264 (Nev. 2023).
8
Courts have reached the same conclusion even when presented
with detailed allegations regarding how the COVID-19 virus
affects the air and surfaces around it. See, e.g., Lawrence
Gen. Hosp., 90 F.4th at 600-602, citing Legal Sea Foods, LLC v.
Strathmore Ins. Co., 36 F.4th 29 (1st Cir. 2022), and SAS Int'l,
Ltd. v. General Star Indem. Co., 36 F.4th 23 (1st Cir. 2022).
See also Consolidated Restaurant Operations, Inc. v. Westport
Ins. Corp., ___ N.Y.3d ___ (N.Y. Feb. 15, 2024). For example,
some policyholders have alleged that aerosol droplets containing
the virus can linger in the air for hours and that virus
particles, once on surfaces, can remain there for up to twenty-
eight days. See Legal Sea Foods, LLC, supra at 35; SAS Int'l,
Ltd., supra at 27. Other policyholders have alleged that the
virus bonds to surfaces through a process called "adsorption."
Lawrence Gen. Hosp., supra at 596. However, these allegations
do not show the sort of physical alteration required to
establish coverage. See Verveine, 489 Mass. at 542.
The plaintiffs' factual allegations in this case do not
compel a different conclusion. The plaintiffs alleged that
virus particles settled on the plaintiffs' property; the
plaintiffs had to take "extraordinary measures," including
cleaning their property, to combat the virus; and that some
virus particles remained even after cleaning. However, the
plaintiffs also alleged that, through cleaning and other
9
measures, the plaintiffs' restaurants remained in use throughout
the pandemic. The plaintiffs specifically alleged, "[T]here
have been hundreds (if not thousands) of infected guests on-site
since the pandemic's outset." These allegations do not show
that the virus physically altered or affected the insured
property in any way. Rather, they show the "[e]vanescent
presence of a harmful airborne substance," Verveine, 489 Mass.
at 544, and that there was no direct physical loss or damage to
property.6 Accordingly, the judgment of dismissal is affirmed.
So ordered.
6 We note that the plaintiffs also alleged that the COVID-19
virus "physically and tangibly change[d], alter[ed], and
transform[ed] the content of the indoor air and the composition
of the surfaces throughout the buildings and structures at the
restaurants." This, however, is a legal conclusion cast as a
factual allegation, and we therefore do not accept it as true.
See Moran, 100 Mass. App. Ct. at 745.