SAS International Ltd. v. General Star Indemnity Co.

United States Court of Appeals
For the First Circuit

No. 21-1219

SAS INTERNATIONAL, LTD.,

Plaintiff, Appellant,

v.

GENERAL STAR INDEMNITY COMPANY,

Defendant, Appellee.

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

[Hon. Richard G. Stearns, U.S. District Judge]

Before

Barron, Chief Judge,
Lynch and Thompson, Circuit Judges.

Eric E. Renner, with whom Renner Law, LLC was on brief, for
appellant.
Benjamin C. Eggert, with whom Joseph W. Gross, Wiley Rein
LLP, William P. Rose, and Melick & Porter, LLP were on brief, for
appellee.
Robert J. Gilbert, with whom Margaret A. Upshaw and Latham &
Watkins, LLP were on brief, for amici curiae Amphenol Corporation
and Lawrence General Hospital.
Laura A. Foggan, with whom Crowell & Moring LLP, Kristin Suga
Heres, and Zelle LLP were on brief, for amicus curiae American
Property Casualty Insurance Association.
June 3, 2022
 BARRON, Chief Judge. SAS International, Ltd. ("SAS"),

seeks coverage in this suit for losses that it claims to have

suffered during the COVID-19 pandemic. The defendant is its

property insurer, General Star Indemnity Company ("General Star").

The United States District Court for the District of Massachusetts

granted General Star's motion to dismiss SAS's complaint under

Federal Rule of Civil Procedure 12(b)(6). Applying Massachusetts

law, we affirm based on the reasoning in the recent ruling by the

Supreme Judicial Court of Massachusetts ("SJC") in Verveine Corp.

v. Strathmore Insurance Co., 184 N.E.3d 1266 (Mass. 2022).

I.

We "draw the facts from the complaint and its

attachments." Lanza v. Fin. Indus. Regul. Auth., 953 F.3d 159,

161 (1st Cir. 2020). SAS owns and leases commercial property in

Fall River, Massachusetts. The World Health Organization declared

on March 11, 2020, that the global outbreak of COVID-19 was a

pandemic.

SAS's premises were, at the time, insured by General

Star under a commercial property insurance policy effective

September 16, 2019 to September 16, 2020 (the "Policy"). Twice

during the summer of 2020, SAS submitted a claim under the Policy

to General Star for its alleged pandemic-related losses pursuant

to the Policy's "Building and Personal Property Coverage,"

- 3 -
"Business Income (and Extra Expense) Coverage," and "Civil

Authority Coverage."

Under the Policy's "Building and Personal Property

Coverage," General Star "will pay for direct physical loss of or

damage to" the buildings that SAS owns "caused by or resulting

from any Covered Cause of Loss," which "means direct physical

loss." The Policy's "Business Income (and Extra Expense) Coverage"

applies when SAS sustains "the actual loss of Business Income . . .

due to the necessary 'suspension' of" SAS's "business activities,"

provided that "[t]he 'suspension' must be caused by direct physical

loss of or damage to property." The Policy's "Civil Authority

Coverage" applies when "[a]ccess to the area immediately

surrounding the damaged property is prohibited by civil authority

as a result of" damages caused by a Covered Cause of Loss -- that

is, by a "direct physical loss" -- and "[t]he action of civil

authority is taken in response to dangerous physical conditions

resulting from the damage or continuation of the Covered Cause of

Loss that caused the damage."

General Star denied the claim by SAS under the Policy.

SAS then filed suit on September 11, 2020, in Massachusetts state

court. General Star timely removed to the District of

Massachusetts based on diversity jurisdiction. SAS filed an

amended complaint, in which it alleged a breach of contract count

based on the three coverage provisions described above. In doing

- 4 -
so, SAS sought a declaration from the court that the Policy covered

its claims pursuant to those coverage provisions and that no

exclusion in the Policy applied to bar or limit coverage for the

claimed pandemic-related losses. General Star thereafter filed a

motion to dismiss under Federal Rule of Civil Procedure 12(b)(6).

The District Court granted General Star's motion to

dismiss all of SAS's claims. SAS Int'l, Ltd. v. Gen. Star Indem.

Co., 520 F. Supp. 3d 140, 141 (D. Mass. 2021). It held that SAS

was not entitled to coverage under the Policy's Business Income

and Extra Expense Coverage or Civil Authority Coverage for the

claimed pandemic-related losses because SAS did not plausibly

allege the "direct physical loss of or damage to" its insured

property that the relevant coverage provisions of the Policy

required SAS to show. Id. at 142, 145.

The District Court explained that those "terms require

some enduring impact to the actual integrity of the property at

issue," and the phrase "direct physical loss of or damage to

property," taken as a whole, "does not encompass transient

phenomena of no lasting effect." Id. at 143. The District Court

determined that the word "physical" modifies both "loss" and

"damage," and that each term, as modified, requires "tangible

damage." Id. at 143-44. Applying this interpretation of the

Policy, the District Court held that COVID-19 and SARS-CoV-2, the

virus that causes it, were not Covered Causes of Loss, because the

- 5 -
virus "does not endure beyond a brief passage of time or a proper

cleaning." Id. at 144. The District Court concluded that its

interpretation was on all fours with Massachusetts law, a leading

treatise, and cases around the country, including cases involving

odors and gaseous contaminants. Id. at 143-146.

"Having found that the phrase 'direct physical loss'

does not encompass a viral infestation," the District Court

concluded that the Policy's "Civil Authority Coverage" also did

not "provide[] an avenue to relief [s]eparate and independent from

the existence of direct physical loss of or damage to SAS's covered

property." Id. at 145 (internal quotation marks omitted) (second

alteration in original). That was so, the District Court

explained, because that type of coverage, like the others, was

"specifically limit[ed] . . . to a 'Covered Cause of Loss' --

namely, a 'direct physical loss.'" Id.

SAS timely appealed.

II.

SAS's appeal focuses solely on General Star's allegedly

wrongful denial of coverage under the Policy's Business Income and

Extra Expense Coverage. "We review de novo an order dismissing a

complaint for failure to state a claim, and we reverse the

dismissal if 'the combined allegations, taken as true . . . state

a plausible, not a merely conceivable, case for relief.'" Lee v.

Conagra Brands, Inc., 958 F.3d 70, 74 (1st Cir. 2020) (alteration

- 6 -
in original) (quoting Sepúlveda-Villarini v. Dep't of Educ., 628

F.3d 25, 29 (1st Cir. 2010)).

Allegations that are "too meager, vague, or conclusory

to remove the possibility of relief from the realm of mere

conjecture," SEC v. Tambone, 597 F.3d 436, 442 (1st Cir. 2010) (en

banc), will not be sufficient to meet that standard, and

"conclusory legal allegations . . . need not be credited,"

Cardigan Mountain Sch. v. N.H. Ins. Co., 787 F.3d 82, 84 (1st Cir.

2015). "In undertaking this review, 'we accept as true all well-

pleaded facts alleged in the complaint and draw all reasonable

inferences therefrom in the pleader's favor.'" Lanza, 953 F.3d at

162 (quoting Nystedt v. Nigro, 700 F.3d 25, 30 (1st Cir. 2012)).

Massachusetts law applies. Fidelity Coop. Bank v. Nova

Cas. Co., 726 F.3d 31, 36 (1st Cir. 2013). It requires that 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 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."

Id. at 36–37 (alteration in original) (first quoting Valley Forge

Ins. Co. v. Field, 670 F.3d 93, 97 (1st Cir. 2012); and then

- 7 -
quoting Vicor Corp. v. Vigilant Ins. Co., 674 F.3d 1, 11 (1st Cir.

2012)).

SAS contends that the District Court erred in granting

the motion to dismiss on its claims pertaining to the Policy's

Business Interruption and Extra Expense Coverage because it has

plausibly alleged that the virus caused "direct physical loss of

and damage to" covered property. Verveine requires, however, that

we conclude otherwise.

That case concerned a suit in Massachusetts state court

under Massachusetts law by the owners of three restaurants. The

owners of the restaurants sought coverage under their property

insurance policies for the "direct physical loss of or damage to"

their property that they claimed to have suffered as a result of

the COVID-19 pandemic. Verveine, 184 N.E.3d at 1269-70.

The SJC explained 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 ed. 2016)),

and 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., 20 F.4th 327, 333 (7th Cir. 2021)). The

SJC further held that "[w]hile saturation, ingraining, or

- 8 -
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. Id. at 1276 (citing Kim-Chee LLC v. Phila. Indem.

Ins. Co., 535 F. Supp. 3d 152, 160-61 (W.D.N.Y. 2021), aff'd, No.

21-1082, 2022 WL 258569 (2d Cir. Jan. 28, 2022)). Based on this

construction of the phrase "direct physical loss of or damage to

property," 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," id., because the virus "will quickly

dissipate on its own" or "be removed by simple cleaning," id.

Verveine did not adopt the "actual integrity"

requirement on which the District Court partially relied. See id.

at 1275. But, we may affirm the District Court on any ground

manifest in the record, MacDonald v. Town of Eastham, 745 F.3d 8,

11 (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

required the legal conclusion that there was no "direct physical

- 9 -
loss of or damage to property" under the policies at issue in that

case, 184 N.E.3d at 1276. Because the relevant policy language

here is the same, and SAS's factual allegations allege no more

than a presence of the virus that is evanescent or may be addressed

through simple cleaning, Verveine's reasoning applies fully here.

SAS is right that its complaint alleges that "smaller

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." SAS is also right that its complaint

alleges that "SARS-CoV-2 can linger" on surfaces "for up to 28

days, serving as a vehicle for viral transmission during that

timespan." And, we note, the complaint at issue in Verveine did

not contain such allegations. See Complaint at 4, Verveine v.

Strathmore Ins. Co., No. 2084CV01378, 2020 WL 11590554 (Mass.

Super. Ct. Dec. 21, 2020).

But, even if the presence of the virus on a surface for

28 days is too long to be deemed "evanescent," SAS makes no

allegation that the virus cannot "be removed by simple cleaning,"

Verveine, 184 N.E.3d at 1276. SAS does argue that its complaint

alleges that the virus is "ubiquitous," "omnipresent and . . .

constantly reintroduced." It then goes on to contend, in that

same vein, that it has alleged that the virus "cannot simply be

removed with disinfectant because it is continually spread and

reintroduced." But, even assuming that SAS has fairly

- 10 -
characterized its complaint, those allegations about the way that

the virus can be spread by individuals entering the premises who

are infected does not constitute an allegation that the virus,

when present, will not "quickly dissipate on its own" within the

meaning of Verveine or cannot be removed from surfaces "by simple

cleaning," Verveine, 184 N.E.3d at 1276. Nor does such an

allegation necessarily allege the sort of "persistent pollution of

a premises requiring active remediation efforts," id., that could

give rise to a "direct physical loss" under Verveine, given that

the SJC, in contrasting "persistent pollution" with "evanescent

presence," cited cases involving ammonia release, gasoline-

infiltrated soil and vapors, and a persistent odor from a

methamphetamine lab, all of which required remediation measures

beyond simple cleaning and would not have naturally and "quickly

dissipate[d]." Id. (citing Gregory Packaging, Inc. v. Travelers

Prop. Cas. Co. of Am., No. 2:12-cv-04418, 2014 WL 6675934 (D.N.J.

Nov. 25, 2014); W. Fire Ins. Co. v. First Presbyterian Church, 437

P.2d 52, 53-55 (Colo. 1968); Farmers Ins. Co. of Or. v. Trutanich,

858 P.2d 1332, 1335 (Or. Ct. App. 1993)).

SAS's amicus does attempt to distinguish Verveine by

noting that the SJC there "favorably cited" the rule that "an

imperceptible but dangerous substance in a building ([such as]

carbon monoxide) constitutes 'direct physical loss or damage to

property,'" (citing Matzner v. Seaco Ins. Co., No. CIV. A. 96-

- 11 -
0498-B, 1998 WL 566658 (Mass. Super. Ct. Aug. 12, 1998)), and the

rule that "undamaged property . . . suffers 'direct physical loss'

when rendered 'unusable and uninhabitable' by the risk of a

physical peril.'" (quoting Murray v. State Farm Fire & Cas. Co.,

509 S.E.2d 1, 17 (W. Va. 1998)). But, in doing so, the SJC in

Verveine explained that the complaint in Verveine itself alleged

that the virus at issue there concerned a substance alleged to

have only an evanescent presence or to be subject to removal by

simple cleaning, which was not true of the allegations in Matzner,

given that those allegations involved losses that were claimed to

have been caused by carbon monoxide that was present in consequence

of a blocked chimney rather than discrete individuals entering the

relevant premises without causing any "direct physical effect on

property." 184 N.E.3d at 1275, 1276 (emphasis in original).

Moreover, the SJC distinguished Murray in Verveine by explaining

that the home in that case -- which was at risk of a rockfall and

had been ordered evacuated by the fire department but was "not

damaged" -- was "'unusable and uninhabitable'" because "no

'rational persons would be content to reside' in" it. Id. at 1277

n.15 (quoting Murray, 509 S.E.2d at 17). That ground of

distinction is equally applicable here, given the nature of the

allegations in SAS's complaint.1

We note in this regard that SAS makes no allegation that it
1

has suffered a complete dispossession of and thus a "direct

- 12 -
 Finally, we are not persuaded by SAS's appeal 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 insured," id. at 1272 (second alteration in

original) (quoting Dorchester Mut. Ins. Co. v. Krusell, 150 N.E.3d

731, 738 (Mass. 2020)). Verveine cited 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." See id. And while SAS does emphasize

that the Policy contains no virus exclusion, Verveine concluded

that the absence of such an exclusion there could not give rise to

a "negative implication that policies that do not contain the

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

Id. at 1277.

III.

Affirmed. The parties shall bear their own costs.

physical loss of" its property. In fact, SAS alleges that
"employees, customers, and mail, parcel and freight delivery
drivers are frequently coming and going in and out of SAS's
property."

- 13 -