Legal Sea Foods Restaurant Sues Over Business Losses Under Policy Issued March 1

A popular seafood restaurant chain that has been shuttered by the coronavirus and restrictions on dining has gone to court to get its insurer to pay for its business interruption losses. It believes its insurer is obligated in part because its policy does not contain an exclusion for pandemics, even though it was issued on March 1, 2020 when the coronavirus was already raging.

The suit was filed by Legal Sea Foods, which owns and operates 34 restaurants in Massachusetts, the District of Columbia, New Jersey, Pennsylvania, Rhode Island and Virginia. It is one of several lawsuits filed by other small businesses including restaurants, casinos, a dive shop and a wig boutique seeking payment for business interruption losses under policies that insurers say were not meant to cover viruses.

The suit was filed against Strathmore Insurance, a unit of Greater New York Insurance Cos. (GNY), which twice declined a claim by Legal Sea Foods.

The Strathmore policy insures against “all risks of loss of or damage to property and ensuing business interruption and extra expense, unless specifically excluded or limited in the policy.” It provides business income and extra expense coverage, subject to a blanket limit of $94,852,397.

The restaurant chain seeks a declaration from the court that the policy covers its claim and no exclusion applies to bar or limit coverage for its claim.

Legal Sea Foods forwards the argument that the coronavirus damaged its property by citing various studies that the virus is detectable from three hours to three days or even longer on various surfaces such as copper, stainless steel, plastic and cardboard — all of which are used in its food preparation and service.

It also cites recent findings by the Centers for Disease Control regarding outbreaks on three cruise ships that caused more than 800 confirmed cases and 10 deaths. COVID-19 was identified on a variety of surfaces in cabins of both symptomatic and asymptomatic infected passengers up to 17 days after cabins were vacated.

Virus Raged

The restaurant argues that in early March when the policy was being discussed, Strathmore had knowledge that businesses in China, Italy and elsewhere in the world were being shuttered because of COVID-19. Yet, Strathmore sold this insurance policy to Legal Sea Foods without any of the virus or pandemic exclusions that are in use throughout the insurance industry.

Just weeks after the policy was issued, Legal Sea Foods closed its doors in response to “myriad civil authority orders issued because of the physical loss of or damage to property caused by COVID-19 and the dangerous conditions associated with that damage.”

But, the restaurant alleges, Strathmore “refused to honor its contractual promises under the insurance policy and denied coverage for Legal Sea Foods’ substantial financial losses.”

While Strathmore’s parent, GNY Insurance, told Insurance Journal it does not comment on pending litigation, the court documents include the claim denial letters setting forth its position.

Legal Sea Foods says that its “inability to use its insured premises to operate its business due to COVID-19 is sufficient to trigger business income and related coverages” and that in its denial Strathmore “improperly relies on certain policy exclusions that do not apply to Legal Sea Foods’ claim” including ordinance or law.

Business Loss

Furthermore, Legal Sea Foods argues that the closure of its restaurants was covered because it was in response to orders by civil authorities including the city of Boston and the state of Massachusetts banning on-premises dining and allowing take-out service only. The civil orders and the transmission of COVID-19 have had a “devastating” effect on Legal Sea Foods’ business, according to the complaint, since it is no longer permitted to operate its dining rooms and is restricted to carry out or delivery services, which the firm says is not feasible for Legal.

Consequently, Legal Sea Foods says it has suffered direct physical loss of or damage to its property caused by COVID-19.

Strathmore rejects that position. “While we appreciate that the Governor’s restriction of restaurant sales to take-out and delivery has had a financial impact on restaurants throughout the state, it did not prohibit access to any Legal Sea Foods premises insured by Strathmore. If, as your recent letter suggests, Legal Sea Foods shuttered some or all of its restaurants, that appears to have been the result of a business decision, rather than any government closure order,” the insurer wrote in denying the claim.

The insurer also claims that financial loss due to an on-premises dining ban is excluded by the policy’s ordinance or law provision that provides that it will not pay for loss caused directly or indirectly by the enforcement of any ordinance or law regulating the use of any property.

In its denial, Strathmore insisted that Legal Sea Foods had not suffered any direct physical loss or damage to property as required. It did suffer some food spoilage, however even that is not covered because it was not caused by a change in temperature caused by a mechanical breakdown or by refrigerant contamination.

Among its terms, the policy says it will cover the actual loss of business income Legal Sea Foods sustains due to the necessary suspension of its operations, where the suspension is caused by direct physical loss of or damage to Legal Sea Foods property; extra expenses to avoid or minimize the suspension of its business; and the actual loss of business income and necessary extra expense caused by an action of civil authority that prohibits access to Legal Sea Foods’ property.

Legal Sea Foods stresses that the policy does not contain either a virus or a pandemic exclusion even though Strathmore had the “opportunity to use standard insurance industry forms or language to specifically exclude virus losses like those resulting from COVID-19 from coverage” but it did not to do so.

“Strathmore made this decision despite the existence and globally visible impact of COVID-19 at the time the policy became effective,” the complaint alleges.

Legal Sea Food says that COVID-19 and the resulting governmental orders continue to cause it losses that “present an existential threat to a family business decades in the making and the loss of employment for Legal Sea Foods’ employees, including the 3,100 employees in Massachusetts, and the fishermen on whom Legal Sea Foods relies for the freshest inventory.”

The complaint, Legal Sea Foods LLC v. Strathmore Insurance Co., was filed May 4 in U.S. District Court in Boston.