A Massachusetts hospital has been denied its insurance claim for Covid-19 related costs and lost revenues under business interruption and disease contamination provisions of its property insurance policy.
U.S. District Judge Nathaniel M. Gorton of the federal court in Boston sided with insurer Continental Casualty Co. in ruling that Lawrence General Hospital (LGH) is not entitled to business interruption coverage because it did not prove it suffered “physical loss or damage” to its property from the Covid-19 virus. Also, the hospital’s disease contamination coverage is not triggered because it was not subject to “an evacuation or decontamination order” as required under that coverage.
LGH operates a nonprofit community hospital in Lawrence, Massachusetts and other facilities in Massachusetts and New Hampshire.
LGH’s insurance policy from Continental provides business interruption coverage and extra expense coverage in the event of “direct physical loss of or damage to” pertinent property. Those provisions are expressly limited to the length of time necessary “to rebuild, repair or replace [the] damaged or destroyed” property. The policy also provides coverages for decontamination expense, contingent business interruption, denial of access by civil authority and ingress-egress that are all contingent upon physical damage to and/or physical loss of property.
The policy also contains a health care endorsement providing disease contamination coverage in the event of “an evacuation or decontamination order at a covered location” arising from the discovery or threat of a communicable disease.
LGH maintains that during the Covid-19 pandemic it changed its operational priorities, delivery of medical care, staffing decisions and cleaning procedures. In the spring of 2020, Massachusetts state officials issued a statewide order to postpone elective surgeries. Such surgeries were allowed to resume, in part, within a few months and then more readily thereafter.
LGH contends that it was forced to “evacuate” its facilities by virtue of those orders and other guidance issued by the Centers for Disease Control and Prevention (CDC). Those so-called “evacuation” orders applied to everyone other than certain emergency personnel and patients requiring essential care, according to the hospital.
LGH further alleges that it was required to incur additional expenses in order to clean and restore its property after the onset of Covid-19. LGH suggests that those expenses were the result of direct physical damage caused by the pervasive presence of the virus at its insured facilities. According to the LGH complaint, the virus physically altered its insured property by forming chemical bonds with surfaces and mixing with air particles.
In April, 2020, LGH filed a claim with Continental for damages it said it suffered beginning in March, 2020. Continental denied coverage in June, 2020, and has not paid any part of LGH’s claim.
In March, 2022, LGH filed its original complaint in the Massachusetts Superior Court for Suffolk County. Continental then removed the case to federal court on diversity grounds.
The primary question before the court was whether LGH has suffered “direct physical loss of or damage to” covered property, which it must do in order to obtain coverage under most of its insurance provisions. Judge Gorton noted that a similar question has been answered by many courts across the country during the past two years, including his own court “but issues raised by variations of policy language, state law and factual allegations continue to appear.”
Continental seeks dismissal of LGH’s business interruption claim on grounds that plaintiff has not pled facts showing direct physical loss of or damage to property.
The parties also dispute whether LGH is entitled to coverage under the disease contamination coverage. Continental denied coverage because it said LGH was not subject to an evacuation or decontamination order as required.
Verveine Case as Guide
The Massachusetts Supreme Judicial Court and the First Circuit Court of Appeals have both issued decisions on the meaning of “direct physical loss of or damage to property” in the past year. Judge Gorton referenced the first of those cases, Verveine Corp. v. Strathmore Insurance Co., in which the SJC held that the phrase refers to a “distinct, demonstrable, physical alteration of the property.”
The policy in the Verveine case referred to a period of restoration during which the covered property “should be repaired, rebuilt or replaced.” The Verveine ruling held that this phrase “clearly implies” that the property 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.
Judge Gorton noted that the LGH policy contains similar language limiting LGH’s potential recovery for loss or expenses to the length of time it would take “to rebuild, repair or replace [the property that] has been damaged or destroyed”.
The SJC applied the standard of “demonstrable, physical alteration of the property” to the claims in Verveine, crediting the complaint’s premise that the alleged interruption of business was caused by the actual “presence of the virus on surfaces and in the air” rather than by the risk of person-to- person contamination at the premises. The Verveine court nevertheless held that “mere presence does not amount to loss or damage to the property.” Because there was no physical damage to the property and the plaintiffs were not otherwise “deprived of possession of their property,” there was no physical loss.
The Verveine case is also relevant to LGH because it stated that although persistent pollution may constitute physical alteration to property, temporary presence of particles does not. Similarly, as to the presence of a harmful substance on a surface, the SJC drew a distinction between “surface-level contamination that can be removed by simple cleaning” and physical alteration caused by “saturation, ingraining, or infiltration of a substance into the materials of a building.”
The Verveine decision thus clarifies the meaning of “physical loss of or damage to” property under Massachusetts law and provides guidelines for evaluating allegations related to Covid-19, according to Judge Gorton.
Continental, citing Verveine and several other similar cases, contended that LGH has failed to allege the kind of physical alteration to property necessary to obtain coverage.
LGH countered that the holding in Verveine is not a per se rule establishing that the Covid-19 virus cannot cause physical loss of or damage to property. It pointed to its alleged additional details about the affected surfaces and air, its extensive cleaning efforts, and the constant reintroduction of the coronavirus onto to its property. LGH argued that such particles “adsorb” to surfaces by forming a chemical bond. They may adhere for up to a month and remain infectious for up to a week depending on the initial viral load and the kind of surface.
The federal district court dismissed LGH’s argument as allegations that reveal the coronavirus to be a “surface-level contaminant” and not a substance which “saturates, ingrains or infiltrates” into physical materials.
“The danger posed to individuals was from evanescent viral particles that might detach from surfaces, not from property which had been physically altered,” the court stated, emphasizing that LGH’s allegations do not suggest that the particles on any of its surfaces constituted a distinct physical alteration rather than a transient, repeated presence.
LGH further contended that it took more than simple cleaning to remove the virus to a sufficient degree for it to carry out its operations safely. LGH said it had to sterilize supplies and equipment, procure and replenish masks and HEPA filters, deep clean HVAC systems and carry out other enhanced cleaning procedures with special products.
Again, the court was not convinced, finding that those activities are not the sort of “active repair or remediation measures” suggested by the policy’s reference to rebuilding, repairing and replacing “damaged or destroyed” property. “Plaintiff’s cleaning and disinfecting efforts were directed toward the physical properties of the virus and its potential to harm exposed individuals but did not actively remediate any direct physical damage to the property itself,” the court said.
The judge concluded that LGH’ is not entitled to coverage under any of its policy provisions requiring either physical damage to or physical loss of insured property.
LGH referred to a purportedly intensifying “drumbeat” of out-of-state decisions permitting similar claims to proceed. However, Judge Gorton said the cases upon which LGH relied “may amount to a hum but not a drumbeat” and most turned on distinct policy language and different pleading standards.
Disease Contamination Coverage
Continental also sought dismissal of LGH’s claim related to the disease contamination coverage. This provision applies to losses caused by an evacuation or decontamination order at a covered location by the National Center for Disease Control, authorized public health official or governmental authority because of the discovery or suspicion of a communicable disease or the threat of the spread of a communicable disease.
Continental put forth two principal reasons LGH was not entitled to coverage. First, it contends that the provision applies only when a pertinent order is directed at a particular covered facility because of the discovery, suspicion or threat of a communicable disease at that location. In other words, generally applicable governmental orders based upon regional circumstances cannot serve as the catalyst for coverage, according to the insurer.
Also, according to the insurer, none of the orders LGH cites can be classified as evacuation or decontamination orders under the policy. The term “evacuation” was not purportedly used in any of the orders. “Decontamination” was used once but not as a directive requiring plaintiff to take any active steps. The orders instead required only the postponement of elective surgeries and other modifications to treatment priorities and cleaning practices, according to the insurer.
In reply, LGH alleged that it was ordered to engage in “thorough cleaning and disinfection” which required hiring more cleaning staff and reducing patient hours. LGH also submits that it had to “evacuate” certain staff and patients who were not involved in Covid-19 treatment or other emergency medical treatment so that it could accept and treat Covid-19 patients. The hospital claims that its insured facilities were effectively evacuated of all patients and staff except for those needing and performing emergency or urgent care.
But the court did not accept the construing of the orders as requiring “evacuation” and/or “decontamination.” The court said coverage would be available here only if the term “evacuation order” extended to a change in the composition of the staff and patient population at insured locations due to the suspension of certain elective, non-urgent operations. That interpretation would, however, be an unwarranted expansion of “evacuation order” that would diverge from the plain meaning of the term and ignore the context of the policy.
Similarly, the governmental directives and CDC recommendations to implement anti-Covid-19 procedures such as social distancing or additional cleaning between patient visits did not constitute decontamination orders under the policy, the court found.
The court concluded that LGH is not entitled to recover under the disease contamination coverage because it was not subject to an applicable “evacuation or decontamination order.”