Insured’s COVID-19 Claim Survives Motion to Dismiss under Accidental Contamination Coverage

    The insured's COVID-19 claim was dismissed under one policy, but survived a motion to dismiss under a second Restaurant Recovery Policy. Menchies Group, inc. v. Mass Bay Ins Co., 2023 U.S. Dist. LEXIS 153933 (S.D. N.Y. Aug. 31, 2023). 

    Menchies owned and operated frozen yogurt shops throughout the United States. Beginning in March 2020, Menchies alleged that the COVID-19 pandemic impacted its business. First, COVID-19 caused direct physical loss of or damage to its properties by altering their physical conditions so that they were no longer safe to use. Second various governmental orders caused a total or partial prohibition of access to Menchies' properties and a total or partial interruption of its business. Third, Menchies contended that its products were exposed to and contaminated by COVID-19 through employees and guests carrying the virus, making it necessary to destroy significant amounts of products. 

    Two carriers provided coverage to Menchies, but both denied coverage. One policy was issued by Mass Bay Insurance Company and included a Building and Personal Property Coverage Form which provided coverage for "direct physical loss of or damage to the Covered Property." The policy included a general virus exclusion. The second policy was issued by Houston Casualty Company (HCC). This policy included coverage for "Accidental Contamination," which included "any actual accidental or unintentional contamination, impairment or mislabeling of an Insured Product."

    Menchies sued both carriers. Each carrier moved to dismiss.  

    The court found no coverage under the Mass Bay policy. California law applied to the Mass Bay policy. A California appellate court had explained that the mere loss of use of physical property to generate business income, without any other physical impact on the property, did not give rise to coverage for direct physical loss." Inns-by-the-Sea v. Ca. Mut. Ins. Co., 71 Cal. App. 5th 688 (2021). Although Menchies also contended that the COVID-19 virus itself damaged its property, California courts had largely concluded that the physical presence of the COVID-19 virus on covered property did not demonstrate physical loss or damage. Menchies also submitted that it undertook remediation measures such as cleaning, disinfecting or replacing filtration systems in response to the virus and/or government shutdown orders. The court found, however, that the remediation measures did not constitute physical loss or damage under the policy.

    Further, the policy's virus exclusion barred coverage.Because the losses resulted from the COVID-19 virus, the virus exclusion applied and barred Menchies' claim. 

    Turning to the HCC policy, accidental contamination was covered. This included "any actual accidental or unintentional contamination, impairment or mislabeling of an Insured Product, which occurs during or as a result of its production, preparation, manufacture, packaging or distribution . . ." Menchies alleged that its food was accidentally contaminated because COVID-positive emplyess at its stores handled the frozen yogurt toppings. This allegation was sufficient to survive HCC's motion to dismiss.