287 A.3d 515
Vt.2022Background
- Huntington Ingalls Industries (insured) bought a Global Property Insurance policy (Mar 15, 2020–Mar 15, 2021); insurer purchased reinsurance that incorporated the Global Policy.
- Policy insures “all real and personal property” against “all risks of direct physical loss or damage to property” and provides business-interruption and extra-expense coverages tied to such physical loss/damage; policy governed by Vermont law and contains no virus exclusion.
- During 2020–2021 SARS‑CoV‑2 (COVID‑19) was present at insured’s shipyards; insured alleges the virus “adhered” to surfaces (fomites), lingered in air, reduced operational capacity, and caused remediation and protective measures and related economic losses.
- Insured sued reinsurers for declaratory relief; reinsurers moved for judgment on the pleadings (V.R.C.P. 12(c)) arguing the pleaded facts do not show “direct physical loss or damage.” Trial court granted reinsurers’ 12(c) motion and dismissed; insured appealed.
- Vermont Supreme Court reversed: it held the policy language unambiguous, defined the two distinct phrases (“direct physical damage” and “direct physical loss”), and concluded the complaint plausibly alleged “direct physical damage” (a distinct, demonstrable physical alteration), so dismissal on the pleadings was improper; matter remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Meaning of “direct physical loss or damage to property” | Phrase covers virus adhesion/fomite contamination and loss of use; both damage and loss theories apply | Phrase requires tangible structural alteration or physical deprivation caused by a covered peril; viral presence cannot meet that as a matter of law | Unambiguous phrase. “Direct physical damage” = a distinct, demonstrable physical change to property. “Direct physical loss” = persistent destruction or deprivation (whole or part) causally linked to a physical event or condition. Purely economic harms excluded. |
| Sufficiency of pleadings under Rule 12(c) | Complaint alleges continuous presence of virus, adhesion to surfaces altering/impairing property, and remediation steps—adequate notice and plausible facts | Even under liberal notice pleading, allegations fail to state physical damage as a matter of law | Complaint sufficiently alleged facts that, if proved, could establish “direct physical damage”; 12(c) dismissal was improper and case remanded for factual development. |
| Role of period‑of‑recovery / repair requirement to trigger business‑interruption coverage | Period‑of‑recovery does not redefine the trigger; mitigation/repair allegations suffice to proceed | Business‑interruption/extra‑expense coverage presupposes a need to rebuild, repair, or replace; insured alleged no such repair/replacement | Court did not resolve merits; it noted the period‑of‑recovery language informs interpretation but left factual/contractual disputes (including any repair/rebuild requirement) to the trial court on remand. |
| Coverage for mitigation / extra expenses incurred to protect property | Policy covers reasonable necessary expenses to reduce loss and preserve property even if loss origin novel | Mitigation coverage is dependent on a covered physical loss/damage occurring first | Not reached on merits; because dismissal on trigger issue was reversed, insured may pursue mitigation/extra‑expense claims below; trial court to decide in light of this opinion. |
Key Cases Cited
- Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir. 2021) (represents the majority approach holding COVID‑related losses not covered as direct physical loss/damage as a matter of law)
- Verveine Corp. v. Strathmore Ins. Co., 184 N.E.3d 1266 (Mass. 2022) (holds transient surface contamination or evanescent airborne presence does not satisfy direct physical loss/damage)
- Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002) (adopts definition of physical damage as a distinct, demonstrable, physical alteration)
- Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52 (Colo. 1968) (seminal en banc decision on intangible losses and loss of use tied to physical conditions)
- City of Burlington v. Indem. Ins. Co. of N. Am., 332 F.3d 38 (2d Cir. 2003) (all‑risk policies do not insure all economic loss; a covered peril must trigger a property loss)
- Kim‑Chee LLC v. Philadelphia Indemnity Ins. Co., 535 F. Supp. 3d 152 (W.D.N.Y. 2021) (collects precedent and applies persistence/contamination analysis to COVID‑related coverage disputes)