As reported on this blog, policyholders have long been of the view that the presence of substances like COVID-19 and its causative virus SARS-CoV-2, which render property dangerous or unfit for normal business operations, should be sufficient to trigger coverage under commercial all-risk insurance, as has been the case for more than 60 years.
However, many courts, federal courts in particular, despite decades of pro-policyholder precedent, have embraced the view that “viruses harm people, not [property].” Thirty-one months after the start of the pandemic, the first state high court has gone in a different direction, according greater weight to pro-policyholder precedent.
On September 23, 2022, the Vermont Supreme Court became the first state high court to reject the notion that quintessential issues of fact concerning the effect of a virus on property can somehow be decided without evidence, without experts and without anything more than bare-bones allegations. In Huntington Ingalls Industries, Inc. v. Ace American Insurance Co., No. 2021-173, __ A.3d __, 2022 WL 4396475 (Vt. Sept. 23, 2022), the Court thoroughly analyzed the difference between “direct physical loss” and “direct physical damage” to conclude that the presence of SARS-CoV-2 on property, indeed, may cause “damage” to that property as the term is used in commercial all-risk insurance policies. The Court likewise concluded that the remedial measures taken by the insured to continue its shipbuilding operations, as best it could, are “repairs” under any reasonable meaning of that word.
The Court analyzed the operative policy language, including giving consideration to how similar language has been applied by other courts in the context of COVID-19 and SARS-CoV-2. The court reiterated the plaintiff’s detailed allegations of how SARS-CoV-2 impacted its property, and emphasized that it was not appropriate to resolve factual issues on a motion for judgment on the pleadings. Unlike many of the anti-coverage decisions that have preceded Huntington Ingalls, the Court applied the correct pleading standard explained:
To end this litigation based on the limited information before us, simply because the alleged facts and the inferences therefrom may seem implausible at first based on what we think we know about COVID-19, would be premature. . . . Although the science when fully presented may not support the conclusion that presence of a virus on a surface physically alters that surface in a distinct and demonstrable way, it is not the Court’s role at this stage in the proceedings to test the facts or evidence. We cannot say beyond a doubt that the virus does not physically damage surfaces in the way insured alleges.
Huntington Ingalls, at ¶¶ 45–46 (emphasis added; internal citations and quotation marks omitted).
Huntington Ingalls is one of a string of recent appellate decisions finding it premature to dismiss COVID-19 business-interruption lawsuits without consideration of evidence concerning the presence of the virus and the effect of the virus on insured property, taking proper cognizance of the policyholder’s pleading of disputed fact issues that require resolution only after further proceedings. These decisions present a clear signal that insurers’ early success in COVID-19 business interruption litigation may be coming to an end. See, e.g., Tarrar Enterprises, Inc. v. Assoc. Indem. Corp., ___ Cal. Rptr. 3d ___ (Cal. Ct. App. 2022) (reversing dismissal on demurrer of COVID-19 business interruption lawsuit); Marina Pac. Hotel and Suites, LLC v. Fireman’s Fund Ins. Co., 296 Cal. Rptr. 3d 777 (Cal. Ct. App. 2022) (reversing dismissal of COVID-19 business interruption lawsuit); Cajun Conti LLC v. Certain Underwriters at Lloyd’s, London, 2022 WL 2154863 (La. Ct. App. June 15, 2022) (same); see also Baylor College of Medicine v. XL Ins. Am., Inc., No. 2020-53316-A (Tex. Dist. Ct. Harris Cty. Aug. 31, 2022) (jury verdict awarding $48.5 million in business interruption coverage for COVID-19 losses).