Lawrence Gen. Hosp. v. Cont'l Cas. Co.

Decision Date24 February 2023
Docket NumberCivil Action 22-10979-NMG
PartiesLawrence General Hospital, Plaintiff, v. Continental Casualty Company, Defendant.
CourtU.S. District Court — District of Massachusetts

Nathaniel M. Gorton, United States District Judge.

This case arises out of a dispute between Lawrence General Hospital (“LGH” or plaintiff) and Continental Casualty Company (“Continental” or defendant) about whether certain costs and lost revenue related to the COVID-19 pandemic are recoverable under a commercial property insurance policy. Pending before the Court is defendant's motion to dismiss plaintiff's amended complaint in its entirety. For the reasons that follow, the motion will be allowed.

I. Background
A. Factual Background

LGH is a Massachusetts corporation that operates a nonprofit community hospital in Lawrence, Massachusetts and other facilities in Massachusetts and New Hampshire. It brings this suit under a property insurance policy with a one-year term issued to LGH by Continental on October 1, 2019 (“the Policy”). LGH claims that it is entitled to coverage under several provisions of the Policy.

The Policy provides Business Interruption Coverage and Extra Expense Coverage in the event of “direct physical loss of or damage to” pertinent property.[1]Those provisions are expressly limited to the length of time necessary “to rebuild, repair or replace [the] damaged or destroyed” property. The Policy also contains a Health Care Endorsement which provides 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.

During the term of the Policy, the emergence of the COVID-19 pandemic irreparably affected the lives and livelihoods of everybody in this country. Plaintiff 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, e.g. the Centers for Disease Control and Prevention (“CDC”). Those “evacuation” orders applied to everyone other than certain emergency personnel and patients requiring essential care.

LGH further alleges that it was required to incur a variety of 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 SARS-CoV-2 virus at its insured facilities. According to the amended complaint, the virus physically altered its insured property by forming chemical bonds with surfaces and mixing with air particles.

In April, 2020, LGH provided notice of loss to Continental for its damages beginning on March 16, 2020. Continental denied coverage under the Policy in June, 2020, and has not paid any part of LGH's claim.

B. Procedural Background

In March, 2022, plaintiff filed its original complaint in the Massachusetts Superior Court for Suffolk County. Defendant removed the case to federal court on diversity grounds after which LGH filed an amended complaint in this Court in June, 2022. At that time, the Court adopted a briefing schedule suggested by the parties with respect to Continental's motion to dismiss. Defendant moved to dismiss plaintiff's amended complaint in August, 2022, and the parties have since submitted multiple rounds of briefing concerning that motion.

II. Motion to Dismiss
A. Legal Standard

To survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6), the subject pleading must contain sufficient factual matter to state a claim for relief that is actionable as a matter of law and “plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible if, after accepting as true all non-conclusory factual allegations, the court can draw the reasonable inference that the defendant is liable for the misconduct alleged. Ocasio-Hernandez v. Fortuno-Burset, 640 F.3d 1, 12 (1st Cir. 2011).

When rendering that determination, a court may consider certain categories of documents extrinsic to the complaint “without converting a motion to dismiss into a motion for summary judgment.” Freeman v. Town of Hudson, 714 F.3d 29, 36 (1st Cir. 2013) (citing Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993)). For instance, a court may consider documents of undisputed authenticity, official public records, documents central to a plaintiff's claim and documents that were sufficiently referred to in the complaint. Watterson, 987 F.2d at 3.

A court may not disregard properly pled factual allegations in the complaint even if actual proof of those facts is improbable. Ocasio-Hernandez, 640 F.3d at 12. Rather, the court's inquiry must focus on the reasonableness of the inference of liability that the plaintiff is asking the court to draw. Id. at 13.

B. Application

The primary question at issue in the case at bar is whether plaintiff has alleged that it suffered “direct physical loss of or damage to” covered property, which it must do in order to obtain coverage under most of the provisions upon which it relies. A similar question has been answered by many courts across the country during the past two years, including this Court but issues raised by variations of policy language, state law and factual allegations continue to appear.

The parties also dispute whether plaintiff is entitled to coverage under the Disease Contamination Coverage provision mentioned above (i.e. certain damages and expenses resulting from “an evacuation or decontamination order at a [covered] location ....”).

It is undisputed that Massachusetts law applies to the interpretation of the Policy and that the interpretation is a question of law for the court to decide. See Ruggerio Ambulance Serv. v. Nat'l Grange Mut. Ins. Co., 430 Mass. 794, 797, 724 N.E.2d 295, 298 (Mass. 2000). Under Massachusetts law, courts are to

construe an insurance policy under the general rules of contract interpretation, beginning with the actual language of the polic[y], given its plain and ordinary meaning.

Easthampton Congregational Church v. Church Mut. Ins. Co., 916 F.3d 86, 91 (1st Cir. 2019) (quoting AIG Prop. Cas. Co. v. Cosby, 892 F.3d 25, 27 (1st Cir. 2018)). Although ambiguous words or provisions are to be resolved against the insurer, id. at 92,

provisions [that] are plainly and definitely expressed in appropriate language must be enforced in accordance with [the policy's] terms.

High Voltage Eng'g Corp. v. Fed. Ins. Co., 981 F.2d 596, 600 (1st Cir. 1992) (quoting Stankus v. New York Life Ins. Co., 312 Mass. 366, 369, 44 N.E.2d 687, 689 (1942)).

1. Breach of Contract (Count I)
a. Direct Physical Loss of or Direct Physical Damage to Property

Defendant seeks dismissal of plaintiff's claim of breach of contract on grounds that plaintiff has not pled facts which show direct physical loss of or damage to property. The Massachusetts Supreme Judicial Court (“SJC”) and the First Circuit Court of Appeals (“First Circuit”) have both issued instructive decisions on the meaning of “direct physical loss of or damage to property” in the past year. In the first of those cases to be decided, Verveine Corp. v. Strathmore Insurance Company, the SJC held that the phrase refers to a “distinct, demonstrable, physical alteration of the property.” 489 Mass. 534, 542, 184 N.E.3d 1266, 1275 (Mass. 2022) (quoting Couch on Insurance 3d § 148:46 (rev. ed. 2016)).

The SJC then noted that the policy at issue there referred to a period of restoration during which the covered property “should be repaired, rebuilt or replaced[.] The Verveine Court held that the subject 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[.]

Id. at 1275 (citing Sandy Point Dental, P.C. v. Cin. Ins. Co., 20 F.4th 327, 333 (7th Cir. 2021)). In the pending case, the 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.” Id. at 1276. 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. Id. at 1277.

With respect to the presence of a harmful substance in the air, the SJC contrasted

[e]vanescent presence . . . that will quickly dissipate on its own [with] persistent pollution of a premises requiring active remediation efforts[.]

Verveine, 184 N.E.3d at 1276.

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,...

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