Menchies Group v. Massachusetts Bay Insurance Company <b><font color="red">Case…

Background

Menchies Group, Inc. sued Massachusetts Bay Insurance Company, doing business as Hanover Insurance Company, and Houston Casualty Company for insurance payments related to COVID-19 losses. Menchies sought damages for breach of contract and declaratory relief. The case was originally filed in Texas state court, removed to the Southern District of Texas, and then transferred to the Southern District of New York.

Menchies had an “All Risk Policy” from Massachusetts Bay covering property losses, business income, and extra expenses tied to “direct physical loss of or damage to” covered property. That policy also contained a virus exclusion and a limited food-contamination provision. Menchies separately had a “Restaurant Recovery Policy” from Houston Casualty covering losses caused by accidental contamination of food products.

Menchies alleged that COVID-19 and related government orders prevented or limited use of its frozen-yogurt shops, that the virus altered the physical condition of its properties, and that employees and customers carrying the virus contaminated food toppings. The insurers denied Menchies’ claims. Both defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient and plausible claim.

Massachusetts Bay’s Policy

The court applied California law to interpret the Massachusetts Bay policy. It held that Menchies did not plausibly allege “direct physical loss of or damage to” its property.

First, the alleged loss of use caused by government orders or the virus was not enough. The court explained that California law requires a physical alteration of property, not merely an inability to use property or resulting economic harm.

Second, even assuming the virus was present on Menchies’ properties, the court held that the virus’s presence alone did not establish physical loss or damage. The court rejected Menchies’ reliance on a California decision that had allowed similar allegations to proceed under California’s state-court pleading standard, because federal court applies the federal plausibility standard.

Third, the cleaning, disinfecting, and air-filtration measures Menchies allegedly undertook did not constitute physical loss or damage. The court noted that Menchies alleged these measures made the property safe for its intended use rather than damaging it.

The court also held that the Massachusetts Bay policy’s virus exclusion independently barred coverage. Menchies alleged that COVID-19 caused its losses, and the court concluded that the exclusion covered losses caused by or resulting from the virus, including losses associated with government shutdown orders.

The court separately rejected coverage under the policy’s food-contamination provision. That provision required, among other things, a bacterial microorganism, discovery of food contamination by a governmental authority, and a government-ordered closure resulting from that discovery. Menchies alleged contamination by a virus and did not allege those required circumstances.

The court therefore granted Massachusetts Bay’s motion to dismiss.

Houston Casualty’s Policy

The court applied New York law to interpret Houston Casualty’s policy. Unlike the Massachusetts Bay policy, the Houston Casualty policy did not require property damage or a government-ordered closure. It covered losses caused by accidental contamination, impairment, or mislabeling of insured food products when consumption or use resulted in, or would result in, identifiable physical symptoms of illness, disease, bodily injury, or death.

Menchies alleged that COVID-19-positive employees and customers handled yogurt toppings at numerous locations, contaminating the products, and that COVID-19 could cause sickness or death. Drawing reasonable inferences in Menchies’ favor, the court held that these allegations were sufficient to state a claim for coverage. The court therefore denied Houston Casualty’s motion to dismiss the breach-of-contract claim.

The court dismissed Menchies’ separate declaratory-judgment claim against Houston Casualty because a request for a declaration is not an independent cause of action. The court stated that Menchies could still seek declaratory relief as part of its remaining claim.

Disposition

The court granted Massachusetts Bay’s motion to dismiss. It granted in part and denied in part Houston Casualty’s motion to dismiss: the breach-of-contract claim against Houston Casualty remained, while the separate declaratory-judgment claim was dismissed. The court also denied Menchies’ motion for oral argument and requested that the clerk terminate the specified docket entries.