United States Court of Appeals For the First Circuit

No. 21-1202

LEGAL SEA FOODS, LLC,

Plaintiff, Appellant,

v.

STRATHMORE INSURANCE CO.,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Nathaniel M. Gorton, U.S. District Judge]

Before

Barron, Chief Judge, Howard, Circuit Judge, and Singal, District Judge.*

Michael S. Levine, with whom Christopher M. Pardo, Nicholas D. Stellakis, Harry L. Manion III, and Hunton Andrews Kurth LLP were on brief, for appellant. Gregory P. Varga, with whom Jonathan E. Small, Linda L. Morkan, and Robinson & Cole LLP were on brief, for appellee. John N. Ellison, Luke E. Debevec, and Reed Smith LLP on brief for amicus curiae United Policyholders. Wm. Gerald McElroy, Jr. and Zelle LLP on brief for amici curiae American Property Casualty Insurance Association and National Association of Mutual Insurance Companies.

* Of the District of Maine, sitting by designation. June 3, 2022 BARRON, Chief Judge. This appeal concerns a suit that

Legal Sea Foods ("Legal") brought under Massachusetts law against

Strathmore Insurance Co. ("Strathmore") following Strathmore's

denial of Legal's request for coverage for losses that it claimed

to have suffered during the COVID-19 pandemic. Legal filed the

suit in the United States District Court for the District of

Massachusetts. The District Court granted Strathmore's motion to

dismiss Legal's claims under Federal Rule of Civil Procedure

12(b)(6). After we heard argument in this case, the Massachusetts

Supreme Judicial Court (the "SJC") decided Verveine Corp. v.

Strathmore Insurance Co.,

(Mass. 2022), which

addressed similar claims to those that Legal brings. Based on the

reasoning in Verveine, we affirm.

I.

We draw the facts from the operative complaint,

accepting them as true for purposes of reviewing the District

Court's dismissal of the complaint under Rule 12(b)(6). Barchock

v. CVS Health Corp.,

(1st Cir. 2018). Legal owns

and operates thirty-four seafood restaurants in five states and

the District of Columbia. It purchased a commercial property

insurance policy from Strathmore effective March 1, 2020 to March

1, 2021 (the "Policy").

Strathmore labeled the Policy "Protecto-Guard" and

marketed it as an "enhanced property coverage endorsement for

- 3 - restaurants." The Policy includes three types of coverage that

this appeal implicates.

The first type is "Building and Personal Property

Coverage." Strathmore "will pay" under this type of coverage "for

direct physical loss of or damage to Covered Property at the

premises described in the Declarations caused by or resulting from

any Covered Cause of Loss." The Policy defines "Covered Property"

to include, in relevant part, the buildings housing Legal's

restaurants and permanently installed machinery and equipment. It

defines "Covered Cause of Loss" to mean "Risks of Direct Physical

Loss."

The second type is "Business Income Coverage."

Strathmore "will pay" under this type of coverage "for the actual

loss of Business Income [Legal] sustain[s] due to the necessary

'suspension' of [its] 'operations' during the 'period of

restoration,'" provided that the "suspension" is "caused by direct

physical loss of or damage to property." The Policy defines

"operations" to mean "business activities occurring at the

described premises." It defines the "period of restoration" to

begin 24 hours "after the time of direct physical loss or damage

for Business Income Coverage" and last until "[t]he date when the

property at the described premises should be repaired, rebuilt or

replaced with reasonable speed and similar quality; or . . . when

business is resumed at a new permanent location."

- 4 - The third type is "Extra Expense Coverage." Such

coverage is provided only if Legal is entitled to "Business Income

Coverage" for that restaurant. Like the first two types of

coverage, this type kicks in only if Legal suffers "direct physical

loss or damage to property."

The Policy also provides a fourth type of coverage --

"Civil Authority Coverage" -- that is not at issue on appeal. To

be eligible for "Civil Authority Coverage," Legal would need to

show, among other requirements, that "a Covered Cause of Loss

cause[d] damage to property other than property at" Legal's

restaurants, and that "[a]ccess to the area immediately

surrounding the damaged property is prohibited by civil authority

as a result of the damage, and the described premises are within

that area but are not more than one mile from the damaged

property."

The Policy includes two relevant exclusions. Under the

"Ordinance or Law" exclusion, Strathmore "will not pay for any

loss or damage caused directly or indirectly by . . . [t]he

enforcement of any ordinance or law . . . [r]egulating the

construction, use or repair of any property." Under the "Acts or

[D]ecisions" exclusion, Strathmore "will not pay for loss or

damages caused by or resulting from . . . [a]cts or decisions,

including the failure to act or decide, of any person, group,

organization, or governmental body," unless those acts or

- 5 - decisions "result[] in a Covered Cause of Loss," in which case

Strathmore "will pay for the loss or damage caused by that Covered

Cause of Loss."

The Policy does not expressly exclude or limit losses

caused by viruses or pandemics. Nor does it include a typical

"Virus Exclusion," a stock policy provision for which Strathmore's

parent company had previously sought regulatory approval in New

York to use in certain policies.1

On March 11, 2020, the World Health Organization

declared that the global outbreak of COVID-19 was a pandemic. The

first case of COVID-19 among Legal's employees and guests of which

Legal is aware developed that same day.

The mechanisms of transmission of the virus that causes

COVID-19, SARS-CoV-2 -- respiratory droplets from infected

individuals that "attach to surfaces" or "carry through" and

"linger in the air" -- made the virus "ubiquitous on surfaces and

in the air." That virus also "attach[ed] to surfaces on and

within . . . insured property and [hung] in the air."

1 That parent company, in its regulatory filings, had expressed that the application of the exclusion would be to "some isolated risks," and anticipated that "exposure [to these risks] is minimal." It saw the Virus Exclusion as "appropriate on occasion," and only for restaurants where "the risk presented with claim history indicative of recent incident and loss control with little remediation," accompanied by "concerns of an on-going nature (cavalier attitude of management regarding implementation of hand washing procedures by food handling staff)."

- 6 - Between March 13 and March 24, the governors of the five

states where Legal owns and operates restaurants and the mayor of

the District of Columbia each ordered in response to the pandemic

the suspension of restaurant table service, restricting restaurant

operations to take-out and delivery only. These and subsequent

orders required Legal either to close its dining rooms or impose

atypically strict capacity limits. They also required Legal to

install protective barriers and partitions before reopening.

Following the discovery of COVID-19 cases at Legal's

restaurants and the issuance of the orders, Legal submitted a claim

under the Policy to Strathmore for coverage for alleged losses.

After a phone call with Legal, Strathmore denied the claim,

apparently without further investigation. Strathmore concluded

that Legal had not shown that it had suffered "direct physical

loss of or damage to property," which each of the types of coverage

discussed above required it to show. Strathmore also cited the

"acts or decisions" exclusion in the Policy.

Strathmore thereafter denied by letter Legal's request

to reconsider the denial of coverage. The letter both restated

Strathmore's earlier reasons for the denial and cited the

"ordinance or law" exclusion as an additional ground for denying

Legal's claim for coverage.

Legal filed suit in the District Court against

Strathmore on May 4, 2020. Legal ultimately filed, with leave

- 7 - from the District Court and over Strathmore's objection, its Second

Amended Complaint. The Second Amended Complaint, which is the

operative complaint, asserts two breach of contract counts: Count

I, which is based on Strathmore's failure to cover Legal's losses

under the Policy's Business Interruption and Extra Expense

Coverages, and Count II, which is based on Strathmore's failure to

compensate Legal's losses under the Policy's Civil Authority

Coverage. Count III asserts a claim under Chapter 93A of the

Massachusetts General Laws based on Strathmore's alleged "unfair

or deceptive acts and practices." Count IV asserts one declaratory

judgment count seeking a declaration that "[t]he Policy covers

[Legal]'s claim; and [n]o Policy exclusion applies to bar or limit

coverage" for that claim.

The District Court granted Strathmore's motion to

dismiss all of Legal's claims under Fed. R. Civ. P. 12(b)(6).

Legal Sea Foods, LLC v. Strathmore Ins. Co.,

,

155 (D. Mass. 2021). As to Count I, it held that Legal was not

entitled to payment under the Business Income and Extra Expense

Coverages because it did not plausibly allege that its losses

resulted from the presence of SARS-CoV-2 at its restaurants and

because the phrase "direct physical loss" for these types of

coverage in the Policy "requires some kind of tangible, material

loss" under Massachusetts law. Id. at 151-52. Because the "virus

does not impact the structural integrity of property in the manner

- 8 - contemplated by the Policy," the District Court determined, the

presence of the virus could not "constitute 'direct physical loss

of or damage to' property." Id. at 152. The District Court noted

that several courts across the country had reached a similar

conclusion in similar cases and found that many of the decisions

Legal put forward in support of its claims "ha[d] subsequently

been distinguished or refuted" or had been "found . . . to be

outliers." Id. at 152-53. The District Court also deemed

"unavailing" Legal's argument that the lack of a Virus Exclusion

in the Policy showed that the Policy was meant to cover pandemic-

related losses. Id. at 153.

The District Court turned to Count II, which concerned

the Civil Authority Coverage. The District Court ruled that Legal

"fail[ed] to identify any specific [o]rder that expressly and

completely prohibited access to any" of Legal's restaurants. Id.

at 154. To the contrary, the District Court explained, Legal

acknowledged that takeout and delivery operations were permissible

in each jurisdiction. Id. Because the District Court determined

that a complete prohibition on access was a prerequisite to Civil

Authority Coverage, it concluded that Count II had to be dismissed,

regardless of whether takeout and delivery service would have been

economically feasible for Legal. Id.

The District Court dismissed Count III, Legal's Chapter

93A claim, on the ground that an insurer does not violate the

- 9 - Chapter "so long as [it] made a good faith determination to deny

coverage." Id. (alteration in original) (quoting Ora Catering,

Inc. v. Northland Ins. Co.,

(D. Mass.

2014)). It dismissed Count IV, the declaratory judgment claim,

because it concluded that Legal had "failed to plead facts

sufficient to demonstrate that it is entitled to coverage under

the Policy."

.

Legal timely appealed.

II.

Legal argues on appeal only that the District Court erred

by granting the motion to dismiss with respect to Count I, which

concerns the Business Income and Extra Expense Coverages, and Count

III, which concerns Chapter 93A, as well as Count IV insofar as it

concerns the claims in Counts I and III. Legal makes no argument

as to the dismissal of its claim for Civil Authority Coverage in

Count II. See United States v. Zannino,

(1st Cir.

1990).

A.

To survive a motion to dismiss for failure to state a

claim under Rule 12(b)(6), "a complaint must provide 'a short and

plain statement of the claim showing that the pleader is entitled

to relief,'" with "enough factual detail to make the asserted claim

'plausible on its face.'" Cardigan Mtn. Sch. v. N.H. Ins. Co.,

(1st Cir. 2015) (quoting Fed. R. Civ. P. 8(a)(2)

- 10 - and Ashcroft v. Iqbal,

(2009)). We credit

neither "conclusory legal allegations,"

(quoting García-

Catalán v. United States,

(1st Cir. 2013)), nor

factual allegations that are "too meager, vague, or conclusory to

remove the possibility of relief from the realm of mere

conjecture," SEC v. Tambone,

(1st Cir. 2010) (en

banc).

In reviewing the grant of a motion to dismiss for failure

to state a claim, "we accept as true all well-pleaded facts alleged

in the complaint and draw all reasonable inferences therefrom in

the [plaintiff]'s favor." Alston v. Spiegel,

, 571

(1st Cir. 2021) (quoting Santiago v. Puerto Rico,

(1st Cir. 2011)). Our review is de novo.

We apply Massachusetts law to interpret the Policy.

Fidelity Co-op. Bank v. Nova Cas. Co.,

(1st Cir.

2013). Under Massachusetts law, we must

construe[] the terms of the policy "de novo under the general rules of contract interpretation." Valley Forge Ins. Co. v. Field,

(1st Cir. 2012) (quoting Brazas Sporting Arms, Inc. v. Am. Empire Surplus Lines Ins. Co.,

(1st Cir. 2000)) (internal quotation marks omitted). First, we look to "the actual language of the policies, given its plain and ordinary meaning."

The burden of demonstrating that an exclusion exists that precludes coverage is on the insurer, and "any ambiguities in the exclusion provision are strictly construed against [said] insurer."

Where "the relevant policy provisions are

- 11 - plainly expressed, those provisions must be enforced according to their terms and interpreted in a manner consistent with what an objectively reasonable insured would expect to be covered." Vicor Corp. v. Vigilant Ins. Co.,

(1st Cir. 2012) (citing City Fuel Corp. v. Nat'l Fire Ins. Co. of Hartford,

,

, 778–79 (Mass. 2006)).

at 36–37 (alterations in original).

B.

Legal contends that it plausibly alleges in Count I that

it suffered "direct physical loss of or damage to covered property"

based on the physical presence of the virus in its restaurants.

We cannot agree in light of Verveine.

There, the owners of three restaurants challenged the

denial of their claims for coverage under their property insurance

policies for losses that the restauranteurs claimed that they

suffered during the COVID-19 pandemic. 184 N.E.3d at 1269-70.

Their claim depended on their showing that they had suffered what

under the policies there at issue would be "direct physical loss

of or damage to" property. Id. at 1269. The SJC held that the

complaint had been properly dismissed under Massachusetts's

equivalent to Rule 12(b)(6). Id. at 1270.

In so ruling, the SJC "conclude[d] that 'direct physical

loss of or damage to' property requires some 'distinct,

demonstrable, physical alteration of the property.'" Id. at 1275

(quoting 10A Steven Plitt et al., Couch on Insurance § 148:46 (3d

- 12 - ed. 2016)). It further explained that "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 or the business must move to a new location." Id.

(citing Sandy Point Dental, P.C. v. Cincinnati Ins. Co.,

, 333 (7th Cir. 2021)). And, finally, the SJC concluded that

"[w]hile saturation, ingraining, or infiltration of a substance

into the materials of a building or persistent pollution of a

premises requiring active remediation efforts is sufficient to

constitute 'direct physical loss of or damage to property,'"

"[e]vanescent presence of a harmful airborne substance that will

quickly dissipate on its own, or surface-level contamination that

can be removed by simple cleaning, does not physically alter or

affect property," and, thus, "is not" likewise sufficient.

at

1276 (citing Kim-Chee LLC v. Phila. Indem. Ins. Co.,

, 160-61 (W.D.N.Y. 2021), aff'd, No. 21-1082 (2d Cir. Jan

28, 2022)).

Based on this interpretation of what constituted "direct

physical loss or damage to" property under the plaintiffs'

policies, the SJC determined that "the suspension of business at

the [plaintiffs'] restaurants was not in any way attributable to

a direct physical effect on the plaintiffs' property that can be

described as loss or damage."

The SJC pointed to "the

restaurants' continuing ability to provide takeout and other

- 13 - services" and the fact that the virus "will quickly dissipate on

its own" or "be removed by simple cleaning."

In this way,

the SJC made clear that it regarded the plaintiffs as having

plausibly alleged that the virus had merely an "evanescent

presence" or caused "surface-level contamination that can be

removed by simple cleaning."

We see no grounds on which Verveine may be distinguished

from this case. True, Verveine did not adopt the "structural

integrity" requirement on which the District Court partially

relied. But, we may affirm the District Court on any ground

manifest in the record, MacDonald v. Town of Eastham,

(1st Cir. 2014), and Verveine did clearly hold that an

allegation of only the "evanescent presence" of the virus or a

type of presence that could be addressed through simple cleaning

requires the legal conclusion that there was no "direct physical

loss of or damage to" property under the policies at issue in that

case, 184 N.E.3d at 1276. That same legal conclusion is equally

applicable here, given that we confront identical policy language

in the relevant respect and that the factual allegations in Legal's

operative complaint allege no more than a presence of the virus

that is evanescent or that results in contamination of surfaces

that may be addressed through simple cleaning.

Legal does attempt to distinguish Verveine by arguing

that the complaint in that case alleged only losses due to

- 14 - governmental closure orders and so did not allege the virus was

present as the basis for concluding the plaintiffs had suffered

direct physical loss of or damage to property. By contrast,

Legal's complaint alleges both losses attributable to governmental

closure orders and losses due to the actual presence of the SARS-

CoV-2 virus at Legal's restaurants. But, Verveine expressly

states that an allegation that the virus was "present" at the

plaintiffs' restaurants "would not affect the outcome" of the case,

id. at 1271 n.7, and explains that "mere 'presence' [of the virus]

does not amount to loss or damage to the property," id. at 1276

(quoting Kim-Chee LLC, 535 F. Supp. 3d at 159), precisely because

the nature of the virus's presence is evanescent and because the

virus's presence may be addressed through simple cleaning.

We do note that Legal's complaint contains specific

allegations regarding how long the virus persists on certain

surfaces in Legal's restaurants or in the air, while the complaint

in Verveine did not, see Complaint at 4, Verveine v. Strathmore

Ins. Co., No. 2084CV01378,

(Mass. Super. Ct. Dec.

21, 2020),

[hereinafter Verveine Complaint]. Legal

alleges that "aerosol droplets" carrying SARS-CoV-2 "can linger in

the air for hours" and "can be pulled into air circulation systems

and spread to other areas in a building." It further alleges that

"SARS-CoV-2 can linger" on surfaces "for up to 28 days, serving as

a vehicle for viral transmission during that timespan."

- 15 - But, we do not understand the former allegation to allege

more than "[e]vanescent presence of a harmful airborne substance

that will quickly dissipate on its own," Verveine, 184 N.E.3d at

1276, as we do not see a reason for concluding that the SJC would

view Legal's allegations concerning the virus's circulation and

hours-long persistence in the air as establishing more than

"[e]vanescent presence." Nor do we understand the latter

allegation to plausibly allege more than "surface-level

contamination that can be removed by simple cleaning," id. Even

if a period of 28 days is too long to be "evanescent," Legal has

not alleged the virus cannot "be removed by simple cleaning," as

it alleges only that it has had to "increase frequency of cleaning"

in its restaurants. Any contention that this "increase[d]

frequency of cleaning" means the virus cannot "be removed by simple

cleaning" because the virus is, as Legal argues, "constantly being

spread and reintroduced" misinterprets Verveine, which, by

invoking the phrase "simple cleaning," was referring to the

intensity of remediation measures that would be required to remove

a droplet. And, we note that the Verveine complaint made similar

allegations. See Verveine Complaint at 4. We thus see nothing in

the allegations in Legal's complaint that would provide a basis

for concluding that Verveine can be distinguished from the case

before us on such a basis.

- 16 - Legal also argues that Verveine is distinguishable

because the SJC noted there that the plaintiffs in that case

alleged that they "continued to inhabit [their] property and use

it for other purposes," while there are no such allegations in

Legal's complaint. But, we do not think that Legal identifies a

true distinction between the complaints. The plaintiffs in

Verveine alleged that they could "use their properties to provide

take-out and delivery services." Verveine Complaint at 6.

Although Legal did not make a similar allegation, its complaint

does make clear that it continued to access its properties. For

example, Legal alleges it has had to "reduce" -- but not eliminate

-- "operational hours," to "institute 'no contact' food hand-off

procedures" but not to cease providing food entirely, and to

"provide personal protective equipment to its employees," who are

presumably on Legal's premises. Thus, we see no way to avoid the

inference that Legal, like the Verveine plaintiffs, suffered only

a "partial loss of use," Verveine, 184 N.E.3d at 1277 (quoting

Sandy Point Dental P.C., 20 F.4th at 334), and thus the conclusion

that Legal has not plausibly alleged that it suffered "direct

physical loss of or damage to" property as Verveine construes such

policy language.

Finally, Legal appeals to the canon that "[a]ny

ambiguities in the language of an insurance contract . . . are

interpreted against the insurer who used them and in favor of the

- 17 - insured," id. at 1272 (omission in original) (quoting Dorchester

Mut. Ins. Co. v. Krusell,

, 738 (Mass. 2020)). It

argues that -- particularly in light of the absence of a "Virus

Exclusion" -- that canon requires a determination that it was

entitled to compensation. But, Verveine acknowledged that same

canon and nonetheless reached the result that it did because it

determined that there was no ambiguity as to whether the virus

caused a "direct physical loss."

. Moreover, Verveine

concluded that the absence of a Virus Exclusion could not cause

rise to a "negative implication that policies that do not contain

the exclusion should cover claims arising from the COVID-19 virus."

.

III.

Legal also challenges the District Court's dismissal of

its claim under Mass. Gen. Laws ch. 93A. The District Court

dismissed that claim for the same reason that it dismissed its

breach of contract claim. Legal Sea Foods, 523 F. Supp. 3d at

154. Legal argues on appeal only that the dismissal should be

reversed for the same reason. So, reviewing de novo, Barchock,

, we affirm the dismissal of the Chapter 93A claim

for the same Verveine-based reasons that we affirm the dismissal

of the breach of contract claim.

IV.

Affirmed. The parties shall bear their own costs.

- 18 -