First Circuit Joins Other Circuits in Finding COVID-19-Related Losses Do Not Trigger “Business Interruption Coverage” Under Commercial Property Insurance Policy

In a win for Wiley’s client, the United States Court of Appeals for the First Circuit upheld the grant of an insurer’s motion to dismiss, applying Massachusetts law and finding that economic losses related to the COVID-19 pandemic could not trigger coverage under a commercial property insurance policy. SAS Int’l, Ltd. v. General Star Indem. Co., 2022 WL 1818115 (1st Cir. June 3, 2022). The ruling was the first of its kind by the First Circuit. 

The insured, SAS, owned and leased commercial real estate in Fall River, Massachusetts. Like many businesses, SAS suffered a significant downturn with the onset of the COVID-19 pandemic. SAS alleged that the COVID-19 virus spreads through respiratory droplets and has the ability to linger in the air and on surfaces. SAS claimed that, due to the prevalence of COVID-19, it was “statistically certain” that both the virus and infected persons had been on its premises. SAS sought coverage under its commercial property insurance policy, which included Business Income and Extra Expense Coverage (colloquially referred to as “business interruption coverage”). Business interruption coverage requires the policyholder to show “direct physical loss of or damage to” its property. SAS argued that the loss of the use of its property for its intended purpose, as well as the alleged presence of the virus, was sufficient to show coverage. The United States District Court for the District of Massachusetts disagreed and granted the insurer’s motion to dismiss. The First Circuit affirmed.

The First Circuit adopted the approach established by the Massachusetts Supreme Judicial Court in Verveine Corp. v. Strathmore Insurance Co., 184 N.E.3d 1266 (Mass. 2022), which held that economic losses due to COVID-19 do not constitute “direct physical loss of or damage to” property. The First Circuit reasoned that COVID-19 does not cause direct physical loss because it is “evanescent.” The First Circuit noted that, unlike situations such as noxious odors, COVID-19 can be removed by simple cleaning and does not require the kind of extensive physical remediation as in those instances.