Massachusetts and Iowa: First State High Courts To Rule That There Is No Property Insurance Coverage For Business Interruption Pandemic Related Losses

By Melinda S. Kollross

The Massachusetts Supreme Judicial Court and the Iowa Supreme Court have issued opinions a day apart becoming the first state high courts to rule that insureds are not owed coverage under their property policies for pandemic related business interruption losses because no physical loss or damage occurred by virtue of the COVID-19 pandemic.

Verveine Corp. v. Strathmore Ins. Co., No. SJC-13172 (Mass. 4-21-22) 

The insureds operated restaurants and were shut down for in-person or indoor dining but could remain open for takeout or delivery service.

The Massachusetts Supreme Court ruled that “direct physical loss of or damage to” property required some “distinct, demonstrable, physical alteration of the property”, and no such alteration had occurred to any insured property. The Court found it significant that “[e]very appellate court that has been asked to review COVID-19 insurance claims has agreed with this definition for this language or its equivalent”, and then cited to the existing, unanimous body of state and federal appellate decisions rejecting pandemic related business interruption claims.

The Massachusetts Supreme Court found that its conclusion was bolstered by the definition of “period of restoration.” According to the Court, the policy provided that business interruption coverage ended when the property was repaired, rebuilt, or replaced or when the business was resumed at a new permanent location. This showed that the property did not experience physical loss or damage in the first place unless there was active repair or remediation measures to correct the claimed damage, or the business moved to a new location. Nothing like this occurred with any of the insured businesses before the Supreme Court.

The Massachusetts Supreme Court also rejected various arguments that insureds keep making nationwide, despite being shut down by most every court hearing them. For example, the Court rejected the insured argument that the presence of the virus on the surfaces of the property constituted physical loss or damage, holding that evanescent presence of a harmful airborne substance that will quickly dissipate on its own, or surface level contamination that can be removed by simple cleaning, did not physically alter, or affect property. The Court also rejected the insured argument that there must be some difference between “loss and damage”. According to the Court, the insured’s argument ignored that the loss itself must be a “direct physical” loss, clearly requiring a direct, physical deprivation of possession. The insureds were not deprived of possession of their property, and indeed continued to inhabit and use it for other purposes. Although they could not use it for in-person or indoor dining but rather for takeout services, without any physical alteration to accompany it, this partial loss of use did not amount to a direct physical loss.

Wakonda Club v. Selective Ins. Co. of Am., No. 21–374 (Iowa 4-22-22)

Jesse’s Embers, LLC d/b/a Jesse’s Embers v. Western Agricultural Ins. Co., No. 21–0623 (Iowa 4-22-22)

The insured in Wakonda Club operated a golf and country club with a restaurant and bar that was shut down because of the COVID-19 pandemic. The insured in Jesse’s Embers also operated a bar and restaurant that was likewise shut down because of COVID-19. Both insureds sought business interruption coverage under their commercial property polices for the income losses they sustained during the shutdown of their businesses.

According to the Iowa Supreme Court opinion in Wakonda Club, this case presented the high court with its first opportunity to address whether the mere loss of use of business property constituted “direct physical loss of or damage to property” to trigger coverage under the business interruption endorsement to an all-risk commercial property insurance policy. The Iowa Supreme Court ruled that mere loss of use did not trigger such coverage.

According to the Court, based upon prior cases addressing the meaning of “physical” in the context of property damage or loss, there had to be a physical aspect to the loss of the property to satisfy the requirement for a “direct physical loss of or damage to property.” In other words, the mere loss of use of property, without more, did not meet the requirement for a direct physical loss of property. Echoing the reasoning of the Massachusetts high court, the Iowa Supreme Court held its conclusion was supported by the “period of restoration” provisions in the policy, as those provisions presumed that there would be some physical alteration to the property and not just mere loss of use. The Iowa Supreme Court found it significant in reaching its decision that every state and federal reviewing court that has addressed the same or very similar language has likewise held that the mere loss of use of property due to government orders made in response to the COVID-19 pandemic did not constitute “direct physical loss” of the insured’s property.

The Iowa Supreme Court relied upon Wakonda Club in its decision in Jesse’s Embers, holding that mere loss of use was insufficient to trigger coverage because there had to be some physical aspect to the loss or damage to satisfy the policy requirements of physical loss or damage. Additionally, the Court ruled that there was no civil authority coverage in the absence of any damage to any neighboring properties. According to the Court, plain and ordinary reading of the policy language concerning civil authority coverage would not extend to the insured’s losses during the mandated closure merely because its neighbors’ properties were also ordered closed due to the COVID-19 pandemic. The Court stated that it would not “rewrite Jesse’s Embers’ policy to make it do so”.

Learning Point: On April 14, 2022, a petition for writ of certiorari was filed by an insured in the United States Supreme Court claiming that the federal courts were not deciding these COVID-19 business interruption matters according to state law, and that federal courts should postpone ruling on these pandemic claims until state courts have spoken. Goodwill Indus. of Central OK, Inc. d/b/a Goodwill Career Pathways Institute v. Philadelphia Indem. Ins. Co., No. 21-___ (Pet. for Writ of Certiorari 4-14-22) The proposition put forth by the insured in that certiorari petition is wrong. The state courts are speaking, and now the Massachusetts and Iowa Supreme Courts have spoken, and the word being spoken is consistent nationwide:   There is no coverage under property policies requiring physical loss or damage for pandemic related business interruption claims.