A commercial property insurance policy did not cover loss of income incurred by restaurants as a result of COVID-related stay-at-home orders, a Massachusetts Superior Court judge has decided.

The policy in question, issued by defendant Strathmore Insurance Co., covered loss of business income due to “suspension of operations” caused by “direct physical loss or damage to property” and any consequent “action of civil authority” prohibiting access to the premises.

The plaintiffs, a group of corporate entities that own and operate the Coppa and Toro restaurants in Boston and Little Donkey in Cambridge, filed claims based on Gov. Charlie Baker’s stay-at-home orders last spring that limited restaurants to take-out and delivery and cost the plaintiffs substantial income.

When Strathmore denied their claims, the plaintiffs sued, arguing that the phrase “direct physical loss” could be interpreted to include loss of use of property based on imminent threat of physical harm from the virus and that the policy language was ambiguous enough to be interpreted in their favor.

But Judge Janet L. Sanders, sitting in the Business Litigation Session, disagreed.

“[The] Complaint here does not allege that the COVID-19 virus was actually present in plaintiffs’ restaurants, resulting in physical contamination of the premise,” Sanders wrote, granting the insurer’s motion to dismiss. “Rather, it alleges that the loss of income for which they seek coverage was the result of the Governor’s Orders that prevented plaintiffs from using the premises as intended. Plaintiffs’ actual property remains the same as it was pre-pandemic, and patrons and employees were not prohibited from entering the premises as long as the Governor’s Orders were followed.”

The 10-page decision is Verveine Corp., et al. v. Strathmore Insurance Company, et al., Lawyers Weekly No. 09-118-20. The full text of the ruling can be found here.

Wrongly decided?

Strathmore’s attorney, Gregory P. Varga of Hartford, Connecticut, declined to comment.

Benjamin R. Zimmermann of Boston, who represented the plaintiffs, said he and his clients were disappointed and are appealing, but he did not offer further comment.

Meanwhile, Joshua M. Bowman, a Boston business lawyer who represents restaurants and hotels, said he thought the case was wrongly decided.

“The central issue was the ‘direct physical loss or damage’ provision in the policy,” he said. “I think the provision was ambiguous, and, under Massachusetts law, the court should have resolved the ambiguity to the policyholder’s benefit.”

By not doing so, Bowman continued, the court failed to follow Massachusetts’ rulings in other cases in which judges found that hazardous fumes that did not actually damage the physical structure of a building still constituted coverable “physical loss.”

“A major failing on the plaintiffs’ side in this case was that they didn’t even allege there was COVID in their restaurants or that anyone was made sick from it,” he said. “There are other cases pending where it was alleged that people who worked in a restaurant or visited were made sick by COVID. Hopefully those cases will not face the same result.”

Bowman added that courts elsewhere have found coverage in cases like Verveine.

“A case in North Carolina had the exact same issues and almost identical facts and concluded that those restaurants’ losses constituted a direct physical loss as covered by the policy,” he said.

However, Alexander G. Henlin, an insurance lawyer based in New Hampshire with an office in Needham, described the ruling as a “common-sense resolution” of straightforward issues.

“A ruling the other way would have represented the triumph of a results-oriented reading of coverage, essentially saying that insuring agreements don’t really mean anything,” Henlin said. “When the industry writes policies on standardized forms that discretely define the types of risks they’ll insure against, it really upsets underwriting and solvency if insurers are called upon to pay any kind of claim that could be shoehorned in after the fact.”

Henlin also found it noteworthy that Sanders never addressed the applicability of a virus exclusion in one of the policies, resting her ruling entirely on direct physical loss.

“If this does get reversed and goes back down, there’s still a pretty good basis to maintain [lack of coverage],” he said.

Boston attorney Sara Perkins Jones, who represents policyholders in coverage disputes, said the decision is part of a disappointing nationwide trend of courts rejecting claims for business interruption coverage at the motion-to-dismiss stage.

At the same time, Jones said she was not surprised by the court’s finding that the policy’s civil authority provision did not result in coverage.

“Civil authority coverage is written with a very specific scenario in mind, and a statewide ban on indoor dining is not it, although we can hope that some broader form of emergency closure insurance becomes available in the future,” Jones said.

‘All risk’ policies

Plaintiffs Verveine Corp., 1704 Washington LLC and JKFOODGROUP LLC share common ownership of Coppa, Toro and Little Donkey.

For years the plaintiffs have been insured by Strathmore polices it purchased through its agent, defendant Commercial Insurance Agency.

During the relevant period, Coppa and Toro were insured under a single “all risk” commercial property policy, and Little Donkey was insured under a separate Strathmore policy that contained a “virus exclusion” provision.

On March 15, 2020, Baker issued an order prohibiting gatherings of more than 25 people and on-premises consumption of food or drink, though the order allowed for food take-out and delivery in compliance with social distancing protocols.

Beginning in June, Baker issued an order allowing for outdoor table service and later that month allowed indoor table service to resume under certain restrictions.

As a result of the orders, the plaintiffs could not use their properties as fully operational restaurants and suffered a major loss of business income.

They filed a claim for business losses, but Strathmore determined that the suspension was not caused by direct physical loss of or damage to property, and thus their losses were not covered.

The plaintiffs filed an action in Superior Court alleging breach of contract and unfair business practices in violation of Chapters 93A and 176D. One of the plaintiffs also filed a negligence claim against Commercial, asserting that if the virus exclusion in the Little Donkey policy were to apply, Commercial was negligent in procuring such a policy.

The defendants moved to dismiss.

No coverage

Sanders rejected the plaintiffs’ argument that limitations imposed on the use of their properties as a result of the governor’s orders constituted a “physical loss” within the meaning of the policy.

“[The plaintiffs] contend that the parties clearly contemplated and understood that the properties would be used and accessed as dine-in restaurants; because plaintiffs could no longer use the premises for their intended purpose, they necessarily suffered (it is argued) a ‘direct physical loss,’” the judge wrote. “The weight of authority does not support this interpretation of the Policy language.”

Specifically, Sanders cited cases standing for the premise that “physical loss” precludes claims resulting from economic harm unaccompanied by “distinct, demonstrable physical alteration of property.”

The judge also found that the civil authority provision did not provide coverage in this case.

“First, plaintiffs, their employees, and their customers have not been prohibited from accessing the insureds’ restaurants, a fact the Complaint plainly concedes,” Sanders said. “Rather, the scope of permitted use of those physical spaces was altered by the Governor’s Orders. Plaintiffs still had access to the premises to prepare food and for takeout and delivery. Second, as the Court already has discussed, plaintiffs have failed to allege damage to property, either at their restaurants or at any other building within a mile thereof.”

Meanwhile, regarding the Little Donkey policy, Sanders found that because the coverage denial was proper without reliance on the virus exclusion, the negligence claim against Commercial should be dismissed as well.