U.S. District Judge Nathaniel M. Gorton dismissed Legal Sea Foods LLC's case against Strathmore Insurance Co. on Friday, ruling that while the policy covers lost business income and expenses incurred during a suspension of operations due to "direct physical loss of or damage to" properties, the restaurant chain failed to plausibly allege that COVID-19 was present at 32 properties and caused such loss or damage.
"Even if Legal had properly alleged that COVID-19 caused business interruption losses due to its presence at the designated properties, it would not be entitled to coverage under the policy," Judge Gorton wrote. "Courts in Massachusetts have had occasion to interpret the phrase 'direct physical loss' and have done so narrowly, concluding that it requires some kind of tangible, material loss."
The judge pointed to two District of Massachusetts rulings, Harvard St. Neighborhood Health Center Inc. v. Hartford Fire Insurance Co., decided in 2015, and Crestview Country Club Inc. v. St. Paul Guardian Insurance Co., decided in 2004.
He also pointed to a Southern District of California decision on Feb. 3, in Wellness Eatery La Jolla LLC v. Hanover Insurance Group, when ruling that the virus doesn't affect the structural integrity of property in the manner contemplated by the policy "and thus cannot constitute 'direct physical loss of or damage to' property."
The Legal Sea Foods chain owns and operates dozens of restaurants in the eastern United States, and the 32 eateries covered by the commercial property insurance policy are in Massachusetts, the District of Columbia, New Jersey, Pennsylvania, Rhode Island and Virginia, according to Judge Gorton.
In late March 2020, Legal submitted a claim to Strathmore seeking coverage under its policy for business interruption losses allegedly caused by civil shutdown orders due to the coronavirus, Judge Gorton said. Orders issued by various state and local governments purportedly caused Legal to close or limit guest capacity to reduce the virus' spread, resulting in "a significant adverse impact on its business," the judge said.
Although Legal believes that the virus was physically present at its restaurants, Strathmore denied the chain's claim following an investigation, "which Legal purports consisted of a single, brief telephone call," Judge Gorton said.
Court filings show that Legal lodged its initial suit on May 4, alleging two counts of breach of contract and one count seeking a declaratory judgment, then added a claim in an amended complaint on June 5 for a violation of the Massachusetts General Laws for deceptive trade practices.
In a second amended complaint on Oct. 30, Legal also alleged the actual presence of the COVID-19 virus at its properties, saying Strathmore sold the policy without any virus or pandemic exclusion or limitation — even though the insurer knew the virus could cause direct physical damage to property.
"Critically, the policy was entered into and became effective on March 1, 2020, months after Strathmore had knowledge that the novel virus, SARS-CoV-2, the causative agent for COVID-19, could cause direct physical loss of or damage to property and months after Strathmore had knowledge that businesses in China, Italy and elsewhere in the world were being shuttered because of the presence and spread of COVID-19," according to the Oct. 30 complaint.
Strathmore on June 19 filed a first motion to dismiss the case and continued in successive filings to say Legal failed to state a claim. In a Nov. 13 brief, Strathmore asserted that Legal's Oct. 30 complaint failed to support a plausible entitlement to coverage under the business income, extra expense and civil authority provisions of the policy.
"After Strathmore directed the court to a substantial body of case law holding that 'loss of use' of insured property, standing alone, does not constitute 'direct physical loss of or damage to property,' and as courts around the country continued to dismiss nearly identical COVID-19 lawsuits on that basis, plaintiff 'became aware of' facts supporting the alleged presence of coronavirus in its restaurants and sought leave to amend the first amended complaint," Strathmore said. "However, plaintiff's new allegations still do not cure the fatal defects in its pleading."
A slew of businesses in the hospitality industry have sued their insurers to recoup losses related to the pandemic, and courts have generally ruled that virus exclusion provisions preclude such losses.
On Feb. 26, a Florida federal judge tossed a Miami restaurant's lawsuit seeking business interruption coverage for financial losses during the pandemic from its underwriters at Lloyd's and other insurers, saying the restaurant didn't suffer any physical losses.
Another Florida federal judge in January threw out a Miami catering company's suit seeking to force its insurer to pay for COVID-19-related losses, ruling that its commercial property policy's business income provision doesn't apply and that a virus exclusion doesn't cover physical loss or damage.
Also in February, a New York state judge ruled that a Great American Insurance unit doesn't have to cover a movie theater's losses, finding that the direct physical loss or damage language at issue in the policy requires a tangible physical alteration to the policyholder's property, which did not occur.
A Pennsylvania federal judge tossed a shuttered South Carolina restaurant's suit against Pennsylvania National Mutual Insurance Co. for much the same reason. Similarly, a California federal judge ruled in November that the "mere threat of coronavirus" doesn't constitute physical damage.
But two Philadelphia federal judges issued differing opinions on a pair of coverage lawsuits, with one judge ruling that a policy's "virus exclusion" bars coverage and the other deferring the issue to state courts.
A lawyer for Legal Sea Foods, Michael S. Levine of Hunton Andrews Kurth LLP, told Law360 in an email Monday that his client is disappointed in Judge Gorton's ruling.
"Like certain other federal courts, this court jumped to an evidentiary conclusion about how COVID-19 affects property," Levine wrote. "This issue was not before the court. The only issue the court should have been weighing is whether Legal 'plausibly' pled a covered claim; proof was not yet necessary, although Legal is able to clear that hurdle, if given the opportunity. In light of these and other errors in the court's decision, Legal is considering its options."
Thomas D. Hughes, executive vice president and general counsel for Greater New York Mutual Insurance Co., Strathmore's parent company, declined to comment Monday.
Representatives for Legal Sea Foods were not immediately available for comment Monday.
Legal Sea Foods is represented by Michael S. Levine, Harry L. Manion III, Christopher M. Pardo and Rachel E. Hudgins of Hunton Andrews Kurth LLP.
Strathmore Insurance Co. is represented by Gregory P. Varga, Jonathan E. Small and Julianna M. Charpentier of Robinson & Cole LLP.
The case is Legal Sea Foods LLC v. Strathmore Insurance Co., case number 1:20-cv-10850, in the U.S. District Court for the District of Massachusetts.
--Editing by Orlando Lorenzo.
Update: This article has been updated to show current counsel information for Legal Sea Foods.
For a reprint of this article, please contact reprints@law360.com.