Lawrence Gen. Hosp. v. Cont'l Cas. Co.

90 F.4th 593

LAWRENCE GENERAL HOSPITAL, Plaintiff, Appellant, v. CONTINENTAL CASUALTY COMPANY, Defendant, Appellee.

No. 23-1286

United States Court of Appeals, First Circuit

January 10, 2024

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Nathaniel M. Gorton, U.S. District Judge]

Roman Martinez, with whom Robert J. Gilbert, Michael Huggins, David A. Barrett, Margaret A. Upshaw, and Latham & Watkins LLP were on brief, for appellant.

Kannon K. Shanmugam, with whom H. Christopher Boehning, Matthew M. Higgins, Brian M. Lipshutz, Kenneth N. Thayer, Paul, Weiss, Rifkind, Wharton & Garrison LLP, and Conn Kavanaugh Rosenthal Peisch & Ford, LLP were on brief, for appellee.

Before Gelpí, Howard, and Rikelman, Circuit Judges.

RIKELMAN, Circuit Judge.

Lawrence General Hospital ("LGH") sued its insurer, Continental Casualty Company, for denying coverage for losses LGH alleges it suffered during the COVID-19 pandemic. Relying on recent decisions rejecting similar claims, the district court granted Continental's motion to dismiss LGH's complaint under Federal Rule of Civil Procedure 12(b)(6). On appeal, LGH contends that the district court misconstrued the critical case law and that the detailed allegations in its complaint are sufficient to state a claim for two different types of coverage under its policy. First, LGH argues that the policy provisions covering "direct physical loss of or damage to property," associated business-interruption losses, and related expenses should apply because the SARS-CoV-2 virus chemically bonded with its property, resulting in physical damage. Second, LGH contends its separately purchased Health Care Endorsement covers losses and costs incurred as a result of complying with government decontamination orders related to COVID-19. Applying Massachusetts state law, we find that LGH failed to state a claim that the SARS-CoV-2 virus caused "direct physical loss of or damage to [its] property." However, because we conclude that LGH was subject to decontamination orders and thus states a claim for coverage under the Health Care Endorsement, we affirm in part, reverse in part, and remand for further proceedings.

I. BACKGROUND

A. Relevant Facts

We "draw the facts from the complaint and its attachments," taking the well-pleaded facts as true and construing all reasonable inferences in LGH's favor. Lanza v. Fin. Indus. Regul. Auth., 953 F.3d 159, 161 (1st Cir. 2020); Barchock v. CVS Health Corp., 886 F.3d 43, 48 (1st Cir. 2018).

1. LGH's Insurance Policy

LGH is a nonprofit community hospital operating in northeastern Massachusetts and southern New Hampshire. It has its main campus at the eponymous Lawrence General Hospital in Lawrence, Massachusetts but also operates various other ambulatory surgery centers, family health centers, outpatient rehabilitation centers, and laboratories in the region. LGH purchased an "all risk" commercial property insurance policy ("the policy") from Continental for the period of October 1, 2019, through October 1, 2020. The policy includes two types of coverage at issue in this appeal.

First, the policy provides broad coverage for "direct physical loss of or damage to property." This coverage includes the value of the lost or damaged property itself, as well as related losses. The "Business Interruption" provision insures against "loss resulting from [the] necessary interruption of [the] business caused by direct physical loss of or damage to covered property" during the time necessary to "rebuild, repair or replace" the property. The "Extra Expense" provision covers "the reasonable and necessary extra expense . . . incurred by the Insured in order to continue as nearly as practicable the normal operation of the Insured's business following direct physical loss of or damage to covered property by perils(s) [sic] insured against." The policy provides primary coverage of up to $563 million for "direct physical loss of or damage to covered property."

Second, LGH purchased an additional Health Care Endorsement, which includes "Disease Contamination Coverage." This coverage is triggered by an "evacuation or decontamination order at a [covered] location by the National Center [sic] for Disease Control, authorized public health official or governmental authority because of the discovery or suspicion of a communicable disease or the threat of the spread of a communicable disease." (Emphasis omitted.) Continental will pay for "direct physical loss of or damage to covered property," a variety of "necessary and reasonable costs," and lost business income "due to the evacuation and decontamination order." Under the Health Care Endorsement, the policy provides coverage of up to $1 million per occurrence. LGH alleges that it was subject to many occurrences triggering coverage under the endorsement.

2. The COVID-19 Pandemic and LGH's Response

During early 2020, in the middle of the policy period, the SARS-CoV-2 virus spread throughout the United States, leading quickly to tens of thousands of cases of COVID-19.¹ The city of Lawrence experienced some of the highest rates of COVID-19 infection in the Commonwealth, and LGH served as the main COVID-19 treatment facility in the region.

In its complaint, LGH alleges that it suffered physical loss of and damage to its property due to the "continuous reintroduction" of SARS-CoV-2 particles. Relying on expert testimony, LGH alleges that through a process called "adsorption" SARS-CoV-2 particles create "an actual [noncovalent] chemical bond" with the surface of the objects they land on, causing structural changes to the objects themselves and making the virus "hard to detach." LGH distinguishes between SARS-CoV-2 particles that are merely "deposited" on an object, "akin to spilled flour," and adsorbed particles which "adhere[ ] to the surface of the adsorbing object and concentrate[ ] there."

However, LGH also alleges that the nature of the bond between SARS-CoV-2 particles and physical objects "varies, often markedly so, depending on the type of object." For example, LGH contends that "the properties of the host surface can affect whether an adhered (deposited, adsorbed, or somewhere in between) viral particle remains stuck to the surface and, if so, whether it retains its infectivity." As for the bond's duration, LGH alleges that some studies have found the SARS-CoV-2 virus remains infectious for seven days on surfaces such as plastic, stainless steel, glass, and wood; other studies have found SARS-CoV-2 may remain infectious on glass and stainless steel for approximately a month under indoor conditions.

As a result of this contamination, LGH alleges that it was forced to undertake a series of remediation efforts including: "enhanced cleaning" using "stronger (and more expensive and time-consuming) cleaning products and techniques"; extensive testing, cleaning, and maintenance of HVAC systems, including replacement of HEPA filters; and sterilization or disposal of items such as "intravenous therapy (IV) poles, medical gas, linens, toilet paper, and food."

3. Alleged Decontamination Orders

Additionally, LGH alleges that it was subject to several government decontamination orders sufficient to trigger the Disease Contamination Coverage provision. On March 11, 2020, the World Health Organization declared the global COVID-19 outbreak a pandemic. Both the federal government and Massachusetts quickly reacted to the news by each declaring a COVID-19 state of emergency.

LGH points to directives from the Massachusetts Department of Public Health (DPH) and Centers for Disease Control (CDC) as representative examples of COVID-19 decontamination orders. On March 15, 2020, DPH issued a memorandum requiring hospitals to postpone or cancel all nonessential, elective invasive procedures until the state of emergency was lifted. "[N]onessential, elective invasive procedures" were defined broadly as "procedures that are scheduled in advance because the procedure does not involve a medical emergency." On May 18, 2020, DPH issued an updated memorandum authorizing hospitals to resume a subset of invasive, elective procedures, including cancer screenings and organ transplants, if the hospitals both met and attested to compliance with specific safety standards outlined in the DPH "Reopen Approach for Acute Care Hospitals guidance." The Reopen Approach required, for example, that hospitals "have an established plan for thorough cleaning and disinfection of all common and procedural areas, including in-between patient encounters in treatment rooms, which may require hiring environmental services staff and reducing patient hours to allow for more frequent cleaning." If a hospital failed to meet the stated safety standards, the Reopen Approach warned that the hospital must "promptly suspend provision of non-emergent Phase 1 services," including "nonessential, elective invasive" surgical procedures. DPH also warned it would "monitor and assess compliance," requiring "remedial action or suspension of [Phase 1] procedures and services as warranted."

On June 8, 2020, DPH issued a new memorandum authorizing hospitals to resume "elective, non-urgent procedures and services," again subject to certain mandatory conditions. These conditions included compliance with the previously stated safety standards, as well as "[o]ngoing compliance with CDC requirements and other public health guidance regarding environmental infection controls," including "thorough cleaning and disinfection of [patient] room[s] and equipment." LGH alleges that, by reference, the June 8 order made mandatory a variety of CDC directives. As an example, LGH cites the CDC's September 2020 publication "Guidance for Cleaning and Disinfecting Public Spaces, Workplaces, Businesses, Schools, and Homes," which included suggestions on using Environmental Protection Agency-approved cleaning products, regularly disinfecting high-touch areas, and ensuring the use of appropriate personal...