A high-profile lawsuit between Legal Sea Foods and its insurer over business interruption claims came to a close last Friday when a federal judge in Boston threw out the restaurant chain’s case and found in favor of the insurer, saying that Legal did not suffer “direct physical loss of or damage to” its properties due to the pandemic.
The suit, which was filed last May by the chain’s former owner, Roger Berkowitz, argued that Strathmore Insurance Company had wrongfully rejected Legal’s damages claim stemming from the COVID-19 pandemic. Unlike some companies, Legal’s policy did not contain a pandemic exclusion, which insurers have been writing into some business interruption contracts since the SARS outbreak in 2003. Legal said it signed its policy on March 1, 2020, by which time it was widely known that the coronavirus was spreading globally.
In its claim, Legal argued that it had incurred property loss and damages as a result of state mandates that forced its 32 restaurants to close except for take-out and delivery orders. The company said the closures caused “significant adverse impact” on the business, and that the virus had been physically “present” at the restaurants, citing examples of individuals who were known to be infected at the properties. It argued that Strathmore had breached its contract in failing to pay out its insurance claims.
But US District Judge Nathaniel Gorton disagreed, writing that the mere presence of a virus in a facility “does not impact the structural integrity of property.” His decision cited several recent business interruption insurance cases across the country that have been filed in the wake of the government-imposed shutdowns, all of which found for the insurers. In his 16-page decision, Gorton underscored the fact that “the virus is incapable of damaging physical structures because the ‘virus harms human beings, not property.’ “
Legal Sea Foods is “disappointed in Judge Gorton’s ruling,” according to a statement from Hunton Andrews Kurth LLP, the law firm representing the restaurant chain.
“Legal’s case is based on the physical loss and damage caused by the actual presence of COVID-19 in its restaurants, not solely government orders,“ the statement said. “This oversight is just one of several critical errors in the Court’s decision. In addition, like certain other federal courts, this Court jumped to an evidentiary conclusion about how COVID-19 affects property. This issue was not before the Court.”
Legal is considering its options, according to the law firm.
Thomas Hughes, general counsel for Strathmore Insurance Company, said that the company does not comment on pending litigation.
The decision is a blow to restaurant industry advocates, who have been keeping close watch on the case in the hopes that a win for the high-profile chain would sway judges elsewhere.
“It’s very disappointing that an industry that trusted and paid into policies for many, many years finds itself closed out in the cold with the door slammed in its face,” said Bob Luz, the head of the Massachusetts Restaurant Association. “Restaurant operators paid their premiums every year for a policy they bought in good faith, and that sadly is being interpreted totally different than one would think.”
The decision is also likely to be bad news for many of Legal’s vendors who have been left in the lurch after longtime owner Berkowitz sold off the chain late last year to the PPX Hospitality Group, which owns the Smith & Wollensky steakhouses and three Boston-area Strega restaurants. Several vendors filed suit against the chain for unpaid bills after the restaurant business was sold.
Material from prior Globe stories was used in this report.