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Lawrence Common Hospital (“LGH”) sued its property insurer, Continental Casualty Firm (“Continental”), after Continental denied LGH’s declare for losses associated to the COVID-19 pandemic. LGH argued it was entitled to protection underneath two provisions in its coverage: 1) the principle protection for “direct bodily lack of or harm to property” and a pair of) a separate Well being Care Endorsement overlaying losses from complying with “decontamination orders.” The federal district court docket dismissed LGH’s criticism for failing to state claims entitling LGH to reduction underneath its coverage based mostly on a raft of state and federal court docket selections denying protection underneath business property insurance policies for COVID-19 claims.
On attraction, the First Circuit Courtroom of Appeals affirmed the dismissal of LGH’s protection declare underneath its main coverage’s “direct bodily loss or harm” provision looking for enterprise interruption losses, discovering that LGH did not plausibly allege the kind of tangible, demonstrable bodily harm required underneath the usual property coverage for protection for COVID-19 losses.
On this depend of its criticism, the LGH lawsuit joined 827 different related lawsuits filed in Massachusetts and across the nation looking for enterprise interruption protection for COVID-19 losses that courts have dismissed based mostly on the virus’ infestation not constituting property harm lined underneath business property insurance coverage coverages.
Nonetheless, on LGH’s second declare underneath its Well being Care Endorsement, the appeals court docket reversed the district court docket’s dismissal. It held that varied authorities directives primarily compelled LGH to undertake COVID-19 decontamination efforts in an effort to present most elective procedures, constituting “orders” requiring “decontamination” inside the that means of the endorsement’s protection phrases.
LGH’s COVID-19 losses from state and federal public well being directives
Early on through the COVID-19 pandemic in 2020, Lawrence Common Hospital served as the principle therapy facility for one in every of Massachusetts’ hardest-hit areas. Because the virus quickly unfold, state and federal authorities issued varied directives suspending the hospital’s capability to supply elective and non-emergency procedures pending compliance with enhanced public well being safeguards.
These mandates allegedly required LGH to implement varied cleansing protocols earlier than reopening many companies that included: “enhanced cleansing” utilizing “stronger (and costlier and time-consuming) cleansing merchandise and methods”; in depth testing, cleansing, and upkeep of HVAC programs, together with alternative of HEPA filters; and sterilization or disposal of things reminiscent of “intravenous remedy (IV) poles, medical gasoline, linens, bathroom paper, and meals.”
LGH’s protection claims with Continental
In response to seven-figure monetary losses incurred by LGH throughout this era, the hospital filed an insurance coverage declare underneath its business property coverage issued by Continental.
For the coverage interval, October 1, 2019, by October 1, 2020, LGH had a business property coverage issued by Continental.
The coverage had main protection of as much as $563 million for “direct bodily lack of or harm to lined property, together with harm to LGH’s bodily plant, enterprise interruption losses, and further bills to proceed regular operations.
The coverage additionally had a Well being Care Endorsement LGH bought, which included Illness Contamination Protection for losses from “evacuation or decontamination” orders issued “due to the invention or suspicion of a communicable illness or the specter of the unfold of a communicable illness.”
Below this separate protection, Continental agreed to pay LGH’s “needed and affordable prices” to (a) evacuate the contaminated location; (b) decontaminate or get rid of contaminated property; (c) check after disposal, restore, alternative, or restoration of broken property; and (d) pay worker time beyond regulation prices for offering further care to sufferers affected by a communicable illness.
The coverages underneath the Well being Care Endorsement had a a million greenback restrict per incidence. LGH claimed a number of occurrences.
Based mostly on the uniform place of insurers in regards to the presence of the COVID-19 virus not constituting property harm, Continental denied LGH’s claims for protection.
Continental removes LGH’s state go well with to federal court docket and strikes to dismiss
LGH waited eighteen months after the denial of its claims earlier than submitting go well with towards Continental within the Massachusetts Superior Courtroom. LGH alleged breach of contract and unfair claims settlement practices underneath M.G.L. c. 93A.
The hospital argued it qualified for coverage under two distinct policy triggers.
- First, it claimed that by chemically bonding to physical surfaces, the SARS-CoV-2 virus itself caused covered “direct physical loss of or damage to property” under the general property damage terms.
- Second, the hospital alleged that numerous government directives mandating COVID-19 safety protocols at the risk of suspending critical hospital services constituted “decontamination orders” under its Health Care Endorsement.
Continental removed the case to federal court and quickly moved to dismiss the complaint under Rule 12(b)(6) for failure to state a plausible claim for relief under the existing law relating to COVID-19 policy coverage.
The district court granted Continental’s motion to dismiss, finding, since LGH’s policy was a Massachusetts contract, binding legal precedent from the Supreme Judicial Court of Massachusetts in Verveine Corp. v. Strathmore Ins. Co. precluded coverage. The Verveine held that the presence of the COVID-19 virus did not cause physical loss or damage to property as the standard property policy requires.
See Agency Checklists’ article of April 26, 2022, “First State High-Court COVID-19 Decision On Business Interruption Claims.”
LGH appealed the dismissal of its lawsuit to the United States First Circuit Court of Appeals.
The appeals court affirmation of the dismissal of LGH’s claim of a “direct physical loss or damage” from COVID-19
On appeal, the First Circuit affirmed the dismissal of the hospital’s claim under the broader property damage provisions in light of binding state precedent. Because LGH’s insurance contract was a Massachusetts policy, the First Circuit had to follow Massachusetts law, as stated in the Verveine decision of the SJC, holding that COVID-19 orders and the presence of the virus itself did not cause “direct physical loss or damage to property” as commercial property policies require for coverage.
The First Circuit rejected LGH’s allegations that SARS-CoV-2 particles bonded to and altered the hospital’s physical surfaces through a process called “adsorption.” Even accepting the virus particles caused structural changes, the court found dispositive that the particles naturally dissipated or became non-infectious within 7-28 days. Because the alleged damage repaired itself without any remediation efforts, the court held it did not amount to covered “direct physical loss or damage.”
The Court noted that LGH’s complaint alleged the SARS-CoV-2 virus dissipated or became non-infectious on surfaces within 7-28 days, absent any remediation. Thus, the hospital undertook sanitization measures not to fix unabating physical damage but chiefly to mitigate COVID-19 transmission risks to staff and patients as government directives compelled.
The Court also distinguished LGH’s claim from cases where dangerous fumes or gases rendered properties entirely uninhabitable for a period of time. It explained that commercial property policies cover damage arising from the property itself and not any harm to people from being inside the property. Here, LGH undertook cleaning efforts not to remediate any tangible damage but to prevent COVID-19 transmission to staff and patients.
The appeals court reverses the district court’s denial of coverage under LGH’s Health Care Endorsement
In contrast to dismissing the claim under the main property damage provisions, the First Circuit reversed the district court’s dismissal of LGH’s claim under its separately purchased Health Care Endorsement.
The Health Care Endorsement provided that Continental would cover the hospital’s specified losses or costs incurred when four criteria were met:
(1) LGH is subject to “an evacuation or decontamination order”;
(2) “at a [covered] location”;
(3) issued “by the Nationwide Middle [sic] for Illness Management, approved public well being official or governmental authority,” and,
(4) “due to . . . the specter of the unfold of a communicable illness.”
Continental argues to uphold the district court docket dismissal as a result of there have been no ‘orders’ requiring LGH to decontaminate
In arguing towards protection, Continental didn’t contest that LGH had met the final three standards for protection underneath this provision. As a substitute, Continental argued that LGH was not topic to a “decontamination order” as a result of the DPH and CDC directives cited by LGH were not mandatory orders and did not require any “decontamination” by LGH.
Continental posited whether LGH faced any orders at all, let alone orders requiring “decontamination.” It argued the government merely restricted LGH from performing elective procedures during certain periods, and the hospital could have remained open while awaiting changed requirements.
The Court finds the Health Care Endorsement triggered by regulators’ memoranda and protocols
The court sided with the hospital in finding LGH had plausibly alleged that various Massachusetts Department of Public Health (DPH) memoranda constituted “orders” requiring “decontamination” within the meaning of the endorsement.
The DPH conditioned the hospital’s ability to resume urgent elective procedures with compliance to protocols like “thorough cleaning and disinfection of all common and procedural areas” and certifying adherence before restarting many suspended services. Failing to follow these cleaning directives would result in “remedial action or suspension” of critical offerings.
The Court emphasized that LGH’s compliance with the protocols of the CDC and the Massachusetts DPH “was not optional under any practical understanding of that term.” Losing the ability to perform most procedures indefinitely would significantly impact LGH’s “mission of providing necessary care to its community and to its bottom line.”
Thus, to the Court, the directives conditioning elective procedures on maintaining certain cleaning protocols constituted orders in all but name.
Additionally, the Court held that the meaning of “decontamination” did not require total permanent elimination of a virus, as Continental argued.
Though COVID-19 might be repeatedly reintroduced, LGH’s cleaning efforts to remove or eliminate existing SARS-CoV-2 particles qualified as decontamination under the endorsement. The court reasoned that interpreting decontamination to require near-permanent eradication “appears at odds with the purpose of the policy” to provide coverage during communicable disease outbreaks when recontamination was likely.
Conclusion
The First Circuit’s final order remanded LGH’s seven-figure coverage claims under the Health Care Endorsement back to the federal district court for further proceedings concerning the specific evidence the mandatory decontamination orders necessitated LGH’s pandemic response expenditures.
Continental may still have potential challenges to LGH’s claims. In its appeals court brief, Continental alleged but did not identify, various exclusions contained in the endorsement that were not part of the appeal that could still exclude coverage to LGH under the Health Care Endorsement.
Agency Checklists will keep you posted.
Owen Gallagher
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
Connect with me directly, by calling me at 617-598-3801.
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