Pandemic-Related Losses Not “Direct Physical Loss of or Damage to Property” And Do Not Trigger Coverage Under Commercial Property Policy

In a win for Wiley’s client, the United States District Court for the District of Massachusetts, applying Massachusetts law, granted the insurer’s motion to dismiss, finding that business losses related to the COVID-19 pandemic could not trigger coverage under a commercial property insurance policy.  SAS Int’l, Ltd. v. General Star Indem. Co., No. 20-11864-RGS (D. Mass. Feb. 19, 2021).  Specifically, the court held that the insured failed to allege “direct physical loss of or damage to” property.  Notably, it was the first federal court in Massachusetts to render a substantive decision on the issue, which has led to more than fifteen hundred similar coverage actions in Massachusetts and states nationwide.

The insured, SAS, owned and leased commercial real estate in Fall River, Massachusetts.  SAS suffered a significant downturn in its business with the onset of the COVID-19 pandemic.  SAS alleged that the COVID-19 virus spreads through respiratory droplets and has the ability to linger in the air and on surfaces.  SAS claimed that, due to the documented prevalence of COVID-19, it was “statistically certain” that  the virus had been on its property and also that infected persons had been on its premises.  SAS sought coverage under its commercial property insurance policy, which provided various coverages, including business interruption and civil authority coverage.  However, a policyholder must show that there is “direct physical loss of or damage to” property under the plain language of the policy.  SAS argued that the loss of the use of its property for its intended purpose was sufficient.  The district court disagreed.

The court found that, as a matter of law, SAS’s claimed loss was not “direct physical loss of or damage to” property.  The court reasoned that the plain language of this phrase, and Massachusetts caselaw interpreting it, generally does not cover intangible or incorporeal losses.   The court  found that “[s]imply put, the Policy does not cover a mere threat to the insured property without any actual physical damage having occurred.”  SAS tried to analogize its virus-related losses to cases involving permeating odors or fumes.  The court was not persuaded.  The court observed that “[u]nlike an unpleasant odor, however, COVID-19 is imperceptible; it does not endure beyond a brief passage of time or a proper cleaning, let alone render the property permanently uninhabitable.”  Also, the fact that the policy did not specifically contain a virus exclusion was irrelevant, since, as a matter of Massachusetts law, the lack of an exclusion cannot create coverage.

The court noted that its conclusion was consistent with the “trend of dismissals in similar cases across the country.”  The court rejected attempts to “stretch the terms of insurance policies to their limits in the wake of the widespread losses caused by COVID-19” and referred to the few cases denying insurers’ motions to dismiss as “outlier cases.”