Last Thursday, the Massachusetts Supreme Judicial Court (SJC) made a ruling that is bad news for nearly every business owner in the state: Most forms of business insurance coverage will not cover losses in revenue from the coronavirus pandemic.

SJC: Pandemic Revenue Losses Not a “Direct Physical Loss or Damage”

The case, Verveine Corp. v. Strathmore Insurance Company, was brought by the owners of three restaurants in the Boston area. The restaurants hired a company to advise them on their insurance needs, and that company arranged for insurance coverage provided by Strathmore Insurance.

When the coronavirus pandemic hit, all three restaurants lost revenue from the lockdowns and the limited capacity regulations. They filed an insurance claim for lost business income with Strathmore, but the insurance company denied the claims, pointing to the provision that requires “physical loss of or damage to” the property. The restaurants responded to the denial by filing a lawsuit for breach of contract and unfair trade practices.

The Superior Court dismissed the case, and the SJC took the appeal to affirm the dismissal.

According to the SJC, the phrase “physical loss of or damage to” property focuses on the effect to the property, not the cause of the loss or damage. The virus might be physical, but the effect that it had on the restaurants was not, even though it led to loss of revenue or caused the establishment to close: “We conclude that ‘direct physical loss of or damage to' property requires some ‘distinct, demonstrable, physical alteration of the property.'”

Bad, But Expected, News for Business Owners

Obviously, the decision comes as a blow for business owners in Massachusetts who were probably wondering if their financial losses from the pandemic would be covered by insurance. Unless they have insurance policies that specifically cover lost revenue from a virus and that does not require there to be physical damage to the property, insurers will likely deny their claims. Even business interruption insurance is not likely to be enough.

The ruling does not come as a surprise, though. From a practical standpoint, shifting the losses from individual businesses to insurers would have huge repercussions. Insurance companies would be inundated with claims for compensation for lost revenue, would become liable for billions of dollars across the country, and would probably fail. Perhaps because of this catastrophic fallout, nearly every federal appellate court has required that there be a physical effect on property to trigger insurance coverage.

Massachusetts Business Lawyers at the Katz Law Group

The coronavirus pandemic has crippled businesses across Massachusetts, especially small businesses like retail shops, bars, and restaurants. At the Katz Law Group, we have guided business owners through the complicated legal and practical issues that have cropped up during the pandemic, with a focus on helping small businesses survive the virus.

Whether you have concerns about continued compliance with coronavirus regulations or have questions about the legality of requiring vaccines for workers, the business lawyers at the Katz Law Group can help. Contact them online or call their law office at (508) 480-8202 for help in Framingham, Worcester, Marlborough, Middlesex or Norfolk Counties, or the rest of Massachusetts.