Tapestry, Inc. v. Factory Mutual Insurance Company
Misc. No. 1, September Term, 2022
Supreme Court of Maryland
December 15, 2022
POLICY INTERPRETATION – ALL-RISK PROPERTY INSURANCE – RISKS OR LOSSES COVERED
The United States District Court for the District of Maryland certified a question to the Supreme Court of Maryland.* The Court reformulated the question as follows:
When a first-party, all-risk property insurance policy covers “all risks of physical loss or damage” to insured property from any cause unless excluded, is coverage triggered when a toxic, noxious, or hazardous substance—such as Coronavirus or COVID-19—is physically present in the indoor air of that property; is also present on, adheres to, and can later be dislodged from physical items on the property; and causes a loss, either in whole or in part, of the functional use of the property?
The Court answered the certified question: No, provided the substance causes neither tangible, concrete, and material harm to the property nor deprivation of possession of the property.
*At the time of the certification, the Supreme Court of Maryland was named the Court of Appeals of Maryland. At the November 8, 2022 general election, the voters of Maryland ratified a constitutional amendment changing the name of the Court of Appeals of Maryland to the Supreme Court of Maryland. The name change took effect on December 14, 2022.
TAPESTRY, INC. v. FACTORY MUTUAL INSURANCE COMPANY
Misc. No. 1, September Term, 2022
IN THE SUPREME COURT OF MARYLAND*
Filed: December 15, 2022
United States District Court for the District of Maryland, Case No. 1:21-cv-01941-GLR, Argued: September 9, 2022
Fader, C.J., Watts, Hotten, Booth, Biran, Gould, Eaves, JJ.
Pursuant to the Maryland Uniform Electronic Legal Materials Act (§§ 10-1601 et seq. of the State Government Article) this document is authentic.
2023-06-15 12:13-04:00
Gregory Hilton, Clerk
Opinion by Fader, C.J.
* At the November 8, 2022 general election, the voters of Maryland ratified a constitutional amendment changing the name of the Court of Appeals of Maryland to the Supreme Court of Maryland. The name change took effect on December 14, 2022.
There is nothing this Court can say to describe the gravity of the losses inflicted on the world by the COVID-19 pandemic that has not previously been said. We will not try. It is sufficient for these purposes to note that in addition to the countless other consequences of, and hardships imposed by, the pandemic, many businesses sustained substantial financial losses when they were compelled to close temporarily or alter their operations due to the pandemic and associated governmental orders.
One such business is that of Tapestry, Inc., the appellant. Factory Mutual Insurance Company (“FM“), the appellee, issued
Tapestry submitted claims to FM under the policies for losses exceeding $700 million. After FM denied coverage for the bulk of Tapestry‘s claim, Tapestry sued. In the lawsuit, which is now pending in the United States District Court, Tapestry contends that coverage under the policies is triggered because it suffered “physical loss or damage” both by the presence of Coronavirus in its stores and when those stores had to close for business due to the presence of Coronavirus. In response, FM contends that “physical loss or damage” requires structural alteration or permanent dispossession of property, and that Tapestry suffered neither. Because resolution of that dispute depends on an interpretation of Maryland law we have not previously provided, the United States District Court certified to this Court a question of law, which we have reformulated as follows:2
When a first-party, all-risk property insurance policy covers “all risks of physical loss or damage” to insured property from any cause unless excluded, is coverage triggered when a toxic, noxious, or hazardous substance—such as Coronavirus or COVID-19—is physically present in the indoor air of that property; is also present on, adheres to, and can later be dislodged from physical items on the property; and causes a loss, either in whole or in part, of the functional use of the property?
As we will explain, as applied to the policies at issue, our answer to the certified question is: No, provided the substance causes neither tangible, concrete, and material harm to the property nor deprivation of possession of the property.
BACKGROUND
Pursuant to
The Parties and the Policies
Tapestry owns “modern luxury accessory and lifestyle brands” including Coach, kate spade new york, and Stuart Weitzman. Tapestry operates “over 1,400 stores in the U.S. and internationally, including 15 stores in Maryland.”
FM drafted and issued to Tapestry two “all-risk” commercial property insurance policies: (1) Policy No. 1050294, covering policy period April 4, 2019 through April 3, 2020; and (2) Policy No. 1065667, covering policy period April 4, 2020 through April 3, 2021 (collectively, the “Policies“).3 The Policies, which FM wrote using its FM Global Advantage Time Element Select form, “cover[] property, as described in this Policy, against ALL RISKS OF PHYSICAL LOSS OR DAMAGE, except as hereinafter excluded.” The critical phrase “physical loss or damage” is not defined in the Policies.
As relevant here, the Policies provide two broad categories of coverage: “Property Damage” and “Time Element.”4 Each category is set forth in a separate section of each Policy that contains, among other things, a broad coverage grant, various exclusions, and various additional coverages. Each Policy provides a maximum overall limit of liability per occurrence of $1 billion, applicable to all coverages, with lower sublimits applicable to specified types of coverage.
Property Damage Coverage Provisions
The Policies’ primary Property Damage coverage extends to all of Tapestry‘s real property and certain personal property, subject to exclusions. Two of those exclusions are relevant to our analysis. First, each Policy excludes coverage, “unless otherwise stated,” for, among other things, “interruption of business, except to the extent provided by this Policy” and “loss of market or loss of use.” Second, each Policy excludes, “unless directly resulting from other physical damage not excluded by this Policy . . . contamination, and any cost due to contamination including the inability to use or occupy property or any cost of making property safe or suitable for use or occupancy.”5 As relevant here, the Policies define ”contamination” as “any condition of property due to the actual or suspected presence of any foreign substance, impurity, . . . toxin, pathogen or pathogenic organism, bacteria, virus, disease causing or illness causing agent[.]”
One category of “Additional Coverage” provided in each Policy‘s Property Damage section is “Communicable Disease Response” coverage. Under that coverage grant, “[i]f a location owned, leased or rented by the Insured has the actual not suspected presence of communicable disease” that results in a restriction on access to the location, the Policies will “cover[] the reasonable and necessary costs incurred by the Insured at such location[.]” The Policies define ”communicable disease” as “disease which is [ ] transmissible from human to human by direct or indirect contact with an affected individual or the individual‘s discharges.”
Time Element Coverage Provisions
In each Policy, the primary coverage grant for Time Element losses6 provides
- starting from the time of physical loss or damage of the type insured; and
- ending when with due diligence and dispatch the building and equipment could be:
- repaired or replaced; and
- made ready for operations,
under the same or equivalent physical and operating conditions that existed prior to the damage.
The Time Element coverage section of the Policies includes several “TIME ELEMENT COVERAGE EXTENSIONS” and “ADDITIONAL TIME ELEMENT COVERAGE EXTENSIONS.” One extension in the latter category is the Interruption by Communicable Disease additional coverage extension, which provides that if “a location owned, leased or rented by [Tapestry] has the actual not suspected presence of communicable disease” that results in a restriction on access to the property, the Policies will cover “Actual Loss Sustained and EXTRA EXPENSE incurred by [Tapestry] during the PERIOD OF LIABILITY at such location[.]” The Policies exclude from the Interruption by Communicable Disease coverage extension “loss resulting from” (1) enforcement of a law or ordinance in place before the spread of the communicable disease; and (2) “loss or damage caused by or resulting from terrorism, regardless of any other cause or event[.]” Notably, unlike the primary Time Element coverage, the Interruption by Communicable Disease additional coverage extension is not predicated on the insured property sustaining “physical loss or damage.”
Under each Policy, Interruption by Communicable Disease coverage and Communicable Disease Response coverage are together subject to an aggregate sublimit of liability of $1 million per occurrence (as opposed to the Policy limit of $1 billion per occurrence).
Coronavirus on Tapestry‘s Property
The Certification Order contains the following summary of the allegations contained in the Complaint concerning how
With the support of dozens of peer-reviewed studies, Tapestry alleges in its [Complaint] that Coronavirus/COVID-19 are serious threats rendering objects, surfaces, and areas exposed to them dangerous and fatal. See Ex. A ¶¶ 26, 30, 162. Coronavirus spreads through indoor spaces via respiratory particles expelled by infected individuals (including those who are asymptomatic or pre-symptomatic). Id. ¶¶ 26-28, 32-33. The presence of Coronavirus in the air, through aerosols or droplets, is the virus’ primary transmission vector. Id. ¶¶ 40-41, 43-44. Coronavirus, just like ammonia, physically transforms the content of the air and can remain airborne in respiratory particles for indefinite periods. Id. ¶¶ 33, 35-36, 44. Ventilation systems are particularly significant transmission vectors as studies have found Coronavirus in ceiling vent openings, vent exhaust filters, and ventilation ducts up to 180 feet from an infected individual. Id. ¶¶ 40, 42. As a result, Tapestry alleges that Coronavirus causes the same physical loss or damage to property as that of ammonia, smoke, soot, radon gas, asbestos and other hazardous substances. Id. ¶ 35.
Coronavirus particles can also settle on surfaces that themselves become carriers for the disease (“fomites“). Id. ¶¶ 32, 49, 51, 53, 56. These fomites remain infectious for days after exposure and do not readily dissipate. Id. ¶¶ 31, 51-52, 54-55. Tapestry‘s various stores contain materials—like plastics, glass, metals, and fabrics—that have been documented as Coronavirus fomites. Id. ¶¶ 52 n.57, 59. Even disturbing a fomite—like shaking a contaminated textile such as clothing merchandise—can spread Coronavirus particles and create additional fomites. Id. ¶¶ 52, 59. Indeed, studies have demonstrated that “it is biologically plausible that . . . infectious disease [such as COVID-19] can be transmitted directly through contact with [Coronavirus] contaminated textiles.” Id. ¶ 69.
Removing Coronavirus from air is not possible as a practical matter, and no amount of cleaning will prevent reintroduction of the virus when an infected person enters the space—only shutting down the property prevents the repeated and continuous reintroduction of Coronavirus. Id. ¶¶ 63, 76, 78. Coronavirus cannot be removed from indoor air by surface cleaning, which actually causes virus particles to become airborne. Id. ¶¶ 70, 74-75.
Attempting to remove Coronavirus from surfaces requires unique protocols such as the use of “harsh chemicals” that are not routinely used and which themselves are alleged to have caused additional physical loss or damage to Tapestry‘s stores. Id. ¶¶ 65-68, 71. Indeed, “Coronavirus is ‘much more resilient to cleaning than other respiratory viruses so tested.‘” Id. ¶ 64. Moreover, it is “challenging to accurately determine the efficacy of decontaminating agents and . . . if surface disinfection [is] even effective” given the toxicity of the agents and the microscopic nature of Coronavirus particles. Id. ¶ 66.
Nonetheless, Tapestry asserts that it repaired and remediated its physical space, such as through the removal and disposal of porous materials like clothing, reconfiguring and altering interior spaces of property, and installing physical barriers to create physical distancing. Id. ¶¶ 71-72, 150, 155[,] 227. Tapestry suffered massive losses, in the hundreds of millions of dollars, for extensive and costly health and safety protocols and modifications to its stores. Id. ¶¶ 152, 155, 227.
. . . Tapestry alleges that individuals infected with Coronavirus and COVID-19 were present on its insured properties where they spread the virus. Id. ¶¶ 79-80. . . . This supports the allegation that Coronavirus/COVID-19 was present at Tapestry‘s stores. Id. ¶¶ 80, 99.
Furthermore, Tapestry alleges that a detailed biostatistical analysis demonstrates that it is statistically certain that customers and other individuals who visited its stores contracted and carried Coronavirus before the stores were closed, and during the time when various stores’ operations were severely restricted. Id. ¶¶ 83-91, 94, 96-101.
Due to the presence of Coronavirus/COVID-19 and the effects it had on Tapestry‘s stores (particularly the indoor air), Tapestry closed all of its North American stores beginning on March 18, 2020—prior to the issuance of government orders in many counties where Tapestry operates. Id. ¶¶ 56-60, 78, 119, 122, 127-128, 132, 137-38, 142.
This Litigation
In responses to notices of claims Tapestry provided under both Policies, FM denied coverage under all coverages except the Communicable Disease Response and Interruption by Communicable Disease coverages, neither of which is predicated on “physical loss or
damage” to property. In its denial letters, FM contended that Tapestry could not meet the requirement of other coverages because “the presence of COVID-19 does not cause physical loss or damage.” FM also asserted that coverage was barred by the Contamination Exclusion in the Policies.
Tapestry then initiated this lawsuit in the Circuit Court for Baltimore County. FM removed it to the United States District Court. Tapestry‘s Complaint contains two counts. In Count I, Tapestry seeks a declaratory judgment concerning the respective rights and obligations of the parties under the Policies. Specifically, Tapestry seeks declarations “that the Policies cover the losses it had suffered” and “that FM is responsible for fully and timely paying the Tapestry Claim.” In Count II, Tapestry seeks an award of damages and other relief for FM‘s alleged breaches of contract in denying coverage under the Policies under all coverages other than the Communicable Disease Response and Interruption by Communicable Disease coverages, which are subject to much lower sublimits of liability than the primary coverages.
FM moved to dismiss the Complaint. With its opposition to that motion, Tapestry filed a motion to certify a question of law to this Court. The United States District Court granted the motion and issued the Certification Order.
DISCUSSION
Under the Maryland Uniform Certification of Laws Act,
provision, or statute of this State.”
The question
When a first-party, all-risk property insurance policy covers “all risks of physical loss or damage” to insured property from any cause unless excluded, is coverage triggered when a toxic, noxious, or hazardous substance—such as Coronavirus or COVID-19—is physically present in the indoor air of that property; is also present on, adheres to, and can later be dislodged from physical items on the property; and causes a loss, either in whole or in part, of the functional use of the property?
Notably, the certified question does not concern either (1) the possibility of coverage under the Communicable Disease Response or Interruption by Communicable Disease coverages of the Policies, or (2) the possible application of the Policies’ Contamination Exclusion. As a result, we will not decide those issues. We will, however, discuss those provisions of the Policies to the extent they aid in our interpretation of the key policy term “physical loss or damage.”
THE PHRASE “PHYSICAL LOSS OR DAMAGE” IN THE POLICIES REQUIRES EITHER TANGIBLE, CONCRETE, AND MATERIAL HARM TO THE INSURED PROPERTY OR DEPRIVATION OF POSSESSION OF THE INSURED PROPERTY.
Answering the certified question requires us to construe the language of insurance policies, which we do “according to contract principles,” Md. Cas. Co. v. Blackstone Int‘l
Ltd., 442 Md. 685, 694 (2015), “under the objective theory of contract interpretation,” Plank v. Cherneski, 469 Md. 548, 617 (2020). Under that approach, unless the language of the contract is ambiguous, we interpret it “based on what a reasonable person in the position of the parties would have understood the language to mean and not ‘the subjective intent of the parties at the time of formation.‘” Credible Behav. Health, Inc. v. Johnson, 466 Md. 380, 393 (2019) (quoting Ocean Petroleum, Co. v. Yanek, 416 Md. 74, 86 (2010)); see also JMP Assocs., Inc. v. St. Paul Fire & Marine Ins. Co., 345 Md. 630, 635 (1997) (“The test is what meaning a reasonably prudent layperson would attach to the term.” (quoting Bailer v. Erie Ins. Exch., 344 Md. 515, 521-22 (1997))). “Thus, ‘the written language embodying the terms of an agreement will govern the rights and liabilities of the parties, irrespective of the intent of the parties at the time they entered into the contract.‘” Md. Cas. Co., 442 Md. at 695 (quoting Long v. State, 371 Md. 72, 84 (2002)).
“[A] court interpreting an insurance policy is to examine the instrument as a whole, focusing on the character, purpose, and circumstances surrounding the execution of the contract.” Bailer, 344 Md. at 521; see also Plank, 469 Md. at 617 (“In interpreting a contract provision, we look to the entire language of the agreement, not merely a portion thereof.” (quoting Nova Rsch., Inc. v. Penske Truck Leasing Co., 405 Md. 435, 448 (2008))). If language in an insurance policy is ambiguous when interpreted according to the principles of contract interpretation set forth above, “we construe that language ‘liberally in favor of the insured and against the insurer as drafter of the instrument.‘” Connors v. Gov‘t Emps. Ins. Co., 442 Md. 466, 483 (2015) (quoting Megonnell v. United Servs. Auto. Ass‘n, 368 Md. 633, 655 (2002)). A contract “is ambiguous if, ‘when viewed
from [a] reasonable person perspective, that language is susceptible to more than one meaning.‘” Plank, 469 Md. at 617 (quoting Ocean Petroleum, 416 Md. at 87). However, merely because “a term cannot be precisely defined so as to make clear its application in all varying factual situations does not mean that it is ambiguous.” Allstate Ins. Co. v. Humphrey, 246 Md. 492, 496 (1967).
We begin our analysis by focusing on the ordinary meaning of the terms contained in the key phrase on which the answer to the certified question hinges: “physical loss or damage.” We will then expand our focus to the interpretation of that phrase in the broader context of the Policies as a whole. From those sources, we will derive and apply an interpretation of “physical loss or damage” to the allegations of the Complaint. Finally, we will turn to a review of caselaw from courts interpreting Maryland law and around the country, which we will conclude is overwhelmingly consistent with our own interpretation of “physical loss or damage” and our answer to the certified question.
A. Ordinary Meaning
“Traditionally, to supply contractual language with its ‘ordinary and accepted meanings[,]’ this Court consults the dictionary definition of such terms.” Credible Behav. Health, 466 Md. at 394-95 (quoting Pac. Indem. Co. v. Interstate Fire & Cas. Co., 302 Md. 383, 388 (1985)). The Court looks to dictionary definitions “to identify the common and popular understanding of the words used in the contract as evidence of what a reasonable person in the position of the parties would have understood those terms to mean.” W.F. Gebhardt & Co. v. Am. Eur. Ins. Co., 250 Md. App. 652, 668 (2021). While dictionaries are useful tools, “simply because [a party] can point to several slightly different
dictionary definitions of [a word] does not render that term ambiguous.” Rigby v. Allstate Indem., 225 Md. App. 98, 110 (2015).
We begin with the modifier “physical,” which the New Oxford American Dictionary defines, as relevant here, as “of or relating to things perceived through the senses as opposed to the mind; tangible or concrete.” Physical, New Oxford American Dictionary 1321 (3d ed. 2010); see also 11 Oxford English Dictionary 744 (2d ed. 1989) (“[o]f or pertaining to material nature“; and “pertaining to or connected with matter; material; opposed to psychical, mental, spiritual“). Merriam-Webster defines physical as “having material existence,” “perceptible esp[ecially] through the senses and subject to the laws of nature,” and “of or relating to material things.” Physical, Merriam-Webster‘s Collegiate Dictionary 935 (11th ed. 2014). And Black‘s Law Dictionary similarly defines physical, as relevant here, as “[o]f, relating to, or involving material things; pertaining to real, tangible objects.” Physical, Black‘s Law Dictionary 1386 (11th ed. 2019). Physical thus refers generally to tangible, concrete things that have a material existence and can be perceived by the senses.9
Loss, as relevant here, is defined by the New Oxford American Dictionary as “the fact or process of losing something or someone,”
the failure to keep (a possession, appurtenance, right, quality, faculty, or the like),” Loss, 9 Oxford English Dictionary 37 (2d ed. 1989). Merriam-Webster defines loss in relevant part as “destruction, ruin,” “the act of losing possession,” and “a person or thing or an amount that is lost.” Loss, Merriam-Webster‘s Collegiate Dictionary 736 (11th ed. 2014). And Black‘s Law Dictionary defines the term, again as relevant here, as “[t]he failure to maintain possession of a thing.”10 Loss, Black‘s Law Dictionary 1132 (11th ed. 2019). The New Oxford American Dictionary defines damage, as relevant here, as “physical harm caused to something in such a way as to impair its value, usefulness, or normal function.” Damage, New Oxford American Dictionary 436 (3d ed. 2010); see also 4 Oxford English Dictionary 224 (2d ed. 1989) (“Injury, harm; esp[ecially] physical injury to a thing, such as impairs its value or usefulness.“). Similarly, Merriam-Webster defines damage as “loss or harm resulting from injury to person, property, or reputation.” Damage, Merriam-Webster‘s Collegiate Dictionary 314 (11th ed. 2014).11 In this context, loss thus refers generally to being deprived of possession of something, whether by its disappearance or destruction; whereas damage refers to harm suffered.12
From their dictionary definitions, we thus glean that “physical loss or damage” to covered property must involve tangible, concrete, and material harm to the property or a deprivation of possession of the property.13 That conclusion supports FM‘s position that “physical loss or damage” requires “tangible, physical changes to insured property.”
Tapestry argues that the plain meaning of “physical loss or damage” also embraces, in addition to a loss of possession of property, “a functional loss of use of property due to the presence of an
this,” and then drops a footnote providing a single definition for each of the three terms. The definitions, all from the Oxford English Dictionary and none offering apparent support for Tapestry‘s proposed expansion to “functional loss of use,” are unaccompanied by any analysis or further exposition.
Looking only to the ordinary meaning of the terms in isolation, we would be skeptical of Tapestry‘s unexplained contention that “physical loss” can embrace a “functional loss of use” for the simple reason that losing a thing is conceptually different than losing the functional use of that thing for a period of time. Accord Santo‘s Italian Café, 15 F.4th at 402 (“A loss of use simply is not the same as a physical loss.“). Although the complete destruction or ruin of property can, indeed, constitute a loss of that property, by permanently depriving the owner of any value in it, the temporary loss of functional use of the same thing is different. See, e.g., Terry Black‘s Barbecue, 22 F.4th at 456 (rejecting the contention that a loss of use of property could constitute “direct physical loss” because the relevant policy provision “unambiguously requires a loss of property, not the loss of use of property“). In other words, Tapestry‘s proposed addition of the words “functional” and “of use” to arrive at its preferred interpretation of “loss” transforms the concept and gives it a different meaning than that contained in the language of the Policies.
B. Context
Expanding our analysis to the context provided by other provisions of the Policies demonstrates the validity of our initial skepticism of Tapestry‘s proposed, expansive definition of “physical loss or damage.” Several aspects of the Policies confirm our interpretation of that phrase as not encompassing a functional loss of use of the property.
First, the declarations pages of the Policies state that they cover “property . . . against ALL RISKS OF PHYSICAL LOSS OR DAMAGE” not excluded. In the context of property damage coverage, “physical loss or damage” thus “characterizes what effects the covered causes must have on the property to trigger coverage, not the causes themselves.” Verveine Corp. v. Strathmore Ins. Co., 184 N.E.3d 1266, 1273 (Mass. 2022) (addressing coverage triggered by “direct physical loss of or damage to Covered Property“). The Time Element coverage section then provides coverage for losses incurred by an insured business “directly resulting from physical loss or damage of the type insured.” To be covered, therefore, Time Element loss must be the result of “physical loss or damage” that, in turn, results from a covered (i.e., in an “all risks” policy, not excluded) cause. If “functional loss of use” could itself constitute “physical loss or damage,” as Tapestry contends, then
constitute both a “direct physical loss” under an all-risk property insurance policy and the interruption of business resulting from such a loss).
Second, under the Time Element coverage, the Period of Liability for damage to building and equipment extends from “the time of physical loss or damage of the type insured” to the time when “the building and equipment could be [] repaired or replaced; and [] made ready for operations.” Those concepts make sense under our interpretation of “physical loss”—subject to remedy by replacement—and “physical . . . damage”—subject to remedy by repair or replacement.16 They do not make sense under Tapestry’s definition in that a temporary, functional loss of use of property, without more, is remedied by regaining functional use of the property, not by repair or replacement.17 Accord Terry Black’s Barbecue, 22 F.4th at 456 (“This period [of liability] necessarily contemplates a tangible alteration to the property that requires repair, rebuilding, or replacement.”); Cordish Cos., 573 F. Supp. 3d at 998-99 (“The idea that the property may be ‘repaired or
replaced’ is consistent with the view that the damage contemplated by the Policy must be physical in nature.”).
Third, the Policy contains an additional Time Element coverage extension for Interruption by Communicable Disease, which applies when the presence of a communicable disease results in a government-ordered or insured-directed restriction on access to an insured location. Notably, the Interruption by Communicable Disease coverage extension, unlike the primary Time Element coverage, does not require “physical loss or damage” to covered property and, therefore, is triggered by the
ELEMENT loss . . . directly resulting from the physical loss or damage of the type insured” (emphasis added), Tapestry argues that because the Policies cover some losses caused by communicable diseases, those diseases constitute a risk “of the type insured” that then must come within the scope of that general coverage grant. That argument, however, ignores: (1) the link to “physical loss or damage” that precedes “of the type insured”; and (2) the absence of a requirement of “physical loss or damage” as a prerequisite to the coverages relating to communicable disease.
By contrast, we find no other provisions of the Policies that support Tapestry’s interpretation of “physical loss or damage” as extending to a temporary, functional loss of use of the property.19 Considering that phrase in the context of the Policies as a whole thus confirms our conclusion that that policy language is unambiguous and that a “reasonable person in the position of the parties,” Credible Behav. Health, 466 Md. at 393, would understand “physical loss or damage” to property, as used in the Policies, to require tangible, concrete, and material harm to the property or a deprivation of possession of the property.
Tapestry further contends that we should take into consideration that at the time FM wrote the Policies, more than 80% of property insurance policies included a broad, ISO-drafted20 virus exclusion that FM did not incorporate into its policies. FM responds that the Contamination Exclusion in the Policies performs the same work and that the
absence of an exclusion does not create coverage.21 Ultimately,
C. Application
We understand Tapestry to make three different arguments for why the allegations in the Complaint concerning its losses resulting from the presence of Coronavirus on its property constitute “physical loss or damage” so as to trigger coverage under the primary Property Damage and Time Element coverage grants in the Policies. First, Tapestry contends that the temporary, functional loss of use of covered property itself constitutes
“physical loss or damage.” For the reasons set forth above, we have reached a different conclusion.
Second, Tapestry argues that Coronavirus damaged the air in its covered properties, which constitutes “physical loss or damage.” Specifically, Tapestry contends that respiratory particles expelled by individuals infected with Coronavirus physically alter the composition of the air and can remain airborne for indefinite periods unless removed by a ventilation system, which may itself become a transmission vector by spreading the infected particles through vents. Even if cleaned, removed, or dissipated, such particles are then reintroduced into the air every time a new infected person enters the store.
As an initial matter, Tapestry has not pointed us to any reported decision that supports its contention that damage to the air at a property is covered by a first-party property damage policy. In the Complaint and in its briefing, Tapestry contends that Coronavirus damages the air in the same way that ammonia does, linking its desired outcome in this case to the outcome in Gregory Packaging, Inc. v. Travelers Property Casualty Company, Civ. No. 2:12-cv-04418, 2014 WL 6675934 (D.N.J. Nov. 25, 2014). However, although that unreported decision interpreting New Jersey and Georgia law did conclude that “the ammonia release physically transformed the air” on the property at issue, the court appears to have based its decision that the insured sustained “direct physical loss or damage” on the insured’s functional loss of use of the facility as a result of the contamination, not on damage to the air itself. Id. at *3-6. We are not aware of any reported
decisions that have treated damage to air itself, as opposed to loss or damage to property resulting from air contamination, as property damage.23
Third, Tapestry contends that Coronavirus rested on and adhered to surfaces of property at its stores, which “alter[ed] these objects to become vectors of disease.” Tapestry alleges that when the Coronavirus-infected particles settle on a surface, that surface becomes a “fomite” and may remain infectious for days; moreover, if the fomite is disturbed, those particles may reenter the air and then settle on other property, creating more fomites. Tapestry further contends that removing Coronavirus from surfaces requires harsh chemical cleaning and the effectiveness of such cleaning is unknown because of the toxicity and microscopic nature of the particles.
Tapestry’s allegation that Coronavirus particles “altered” objects like doorknobs and purses into “vectors of disease” by landing on, adhering to, and being subject to becoming dislodged from them does not satisfy the requirement of “physical loss or damage.” Tapestry does not allege that any aspect of its property was either lost or structurally altered by its contact with Coronavirus particles. That particles rested for some period of time on those surfaces and later may have become dislodged and reentered circulation in the air, thus posing a health risk to humans, simply does not constitute damage to property in the absence of a physical or structural alteration of the property. Like Tapestry’s allegations concerning the air in its properties, the combination of a virus’s proximity to property and resulting risk to human health does not constitute “physical loss or damage” to the property.
As to each of the last two points, Tapestry suggests that there are factual disputes raised by the Complaint that should be left for a jury to decide. Tapestry and its amicus United Policyholders contend that in light of the uncertainty surrounding what is still a
relatively new virus as to which the scientific evidence continues to
D. Caselaw
Our interpretation of the policy language and application of that interpretation to Tapestry’s claim is in accord with the overwhelming majority of reported decisions addressing Coronavirus-related insurance claims under first-party commercial property insurance policies. We will begin by discussing reported decisions that have addressed the issue under Maryland law and then discuss caselaw from other jurisdictions.
Applying Maryland law, the Appellate Court of Maryland (at the time named the Court of Special Appeals of Maryland)25 and three different judges of the United States District Court have uniformly rejected Coronavirus-related insurance claims under first-party commercial property insurance policies on grounds consistent with our interpretation.
The most recent of those decisions was our intermediate appellate court’s well-reasoned decision in GPL Enterprise LLC v. Certain Underwriters at Lloyd’s, which addressed many of the same arguments that Tapestry makes here. 254 Md. App. 638 (2022). In GPL Enterprise, the insured sought coverage for an interruption of its restaurant operations during the COVID-19 pandemic under an all-risk, first-party property insurance policy. Id. at 645-46. Unlike here, the insured premised its insurance claim primarily on the effect of government shutdown orders that precluded it from operating normally during the pandemic, limiting it to carry-out services. Id. at 646. Nonetheless, the decision contains an in-depth exploration of the meaning of the policy language “direct physical loss of or damage to Covered Property” and the interpretations courts have given similar language. See id. at 650-62.
The intermediate appellate court concluded in GPL Enterprise that other courts have held “almost unanimously” “that the phrase ‘physical loss of or damage to’ property is unambiguous and that the policies afford no coverage in circumstances such as those of this case.” Id. at 652. The court discussed with approval the United States District Court’s determination in Cordish Cos., 573 F. Supp. 3d at 997-98, that the modifier “physical” unambiguously required a “material alteration to the property” and “damage [that] must affect the good itself[.]” GPL Enter., 254 Md. App. at 652-53. Rejecting the insured’s contention that a loss of use satisfied the requirements of the coverage grant, the court concluded that “[a] loss of use simply is not the same as a physical loss.” Id. at 654 (quoting Santo’s Italian Café, 15 F.4th at 402). As a result, the government shutdown order did not trigger
The court then concluded that, beyond the shutdown order, GPL also failed to “allege[] facts sufficient to establish that the COVID-19 virus somehow physically altered the structure of the restaurant so as to trigger coverage under the policy.” Id. at 654-55. The court joined in the conclusions of other courts, based on the allegations that were before them, that although Coronavirus causes harm to humans, “it does not physically alter structures and therefore does not result in coverable property loss or damage.” Id. at 655 (quoting Cordish Cos., 573 F. Supp. 3d at 1000). After rejecting several other arguments made by the insured there—and also made by Tapestry here—the court affirmed the substance of the circuit court’s ruling in favor of the insurer. Id. at 664.
In three published decisions by different judges applying Maryland law, the United States District Court has reached the same conclusion as our intermediate appellate court concerning the meaning of the key policy language. In each of those decisions, the court interpreted “physical loss or damage” or equivalent language to unambiguously require a structural alteration of property or permanent dispossession. See Cordish Cos., 573 F. Supp. 3d at 997 (“The inclusion of the modifier ‘physical’ in the phrase ‘physical loss or damage’ unambiguously requires some form of material alteration to the property that has experienced ‘loss or damage.’”); Hamilton Jewelry, LLC v. Twin City Fire Ins. Co., Inc., 560 F. Supp. 3d 956, 967 (D. Md. 2021) (“The presence of the words ‘direct’ and ‘physical’ limit the words ‘loss’ and ‘damage’ and unambiguously require that the loss be directly tied to a material alteration to the property itself, or an intrusion onto the insured property.” (quoting Promotional Headwear Int’l v. Cincinnati Ins. Co., 504 F. Supp. 3d 1191, 1201-02 (D. Kan. 2020))); Bel Air Auto Auction, Inc. v. Great N. Ins. Co., 534 F. Supp. 3d
492, 504 (D. Md. 2021) (observing with approval that the “[n]umerous courts [to] have had the opportunity to directly address the meaning of identical ‘direct physical loss or damage’ language . . . have overwhelming[ly] held that the phrase requires tangible, physical losses to property, or, at the very least, permanent dispossession of the property rendered unfit or uninhabitable by physical forces”).
In two of those cases, the courts expressly concluded that contamination by, or the presence of Coronavirus on, an insured’s covered property does not constitute “physical loss or damage.”26 See Cordish Cos., 573 F. Supp. 3d at 999 (“Cordish does not allege that the properties were physically or structurally altered or rendered unusable. Contamination qualifies as physical loss or damage only if it renders the subject property unusable or uninhabitable.”); Bel Air Auto, 534 F. Supp. 3d at 509 (“[E]ven actual presence of the virus would not be sufficient to trigger coverage for physical damage or physical loss to the property[.]” (quoting Uncork & Create LLC v. Cincinnati Ins. Co., 498 F. Supp. 3d 878, 883 (S.D.W. Va. 2020))).
Other appellate courts have addressed Coronavirus-related insurance claims under the same or similar coverage grants. The vast majority of those have come to the same result based on largely similar reasoning. For example, in Uncork & Create LLC v. Cincinnati Insurance Company, the United States Court of Appeals for the Fourth Circuit, applying West Virginia law and similar interpretive principles to those we employ,
concluded that “policy language requiring a ‘physical loss’ or ‘physical damage’ unambiguously covers only losses caused by, or relating to, material destruction or material harm to the covered property.”27 27 F.4th 926, 928 (4th Cir. 2022). The insured contended that its “inability to operate its [business] as intended” as a result of both a government “closure order and the C[OVID]-19 virus” constituted “physical loss” under the policy. Id. at 930. The court disagreed based both on the plain meaning of the terms and the “plain and unambiguous” language of the policy. Id. at 932. As to the latter, the court found especially compelling the policy’s definition of the “period of restoration,” which established the period for which business income losses could be recovered “as the time needed to ‘repair[ ], rebuil[d] or replace[ ]’ property or to locate a new permanent property.” Id. The court concluded that any definition of “‘physical loss’ or ‘physical damage’ that does not require a material alteration to the property would render meaningless this pre-condition to coverage[.]”28 Id.
include the loss of possession of the property. That is because a deprivation of possession of property, unlike a temporary deprivation of functional use of the property, would require “replace[ment]” of that property to resume normal operations. See, e.g., Estes, 23 F.4th at 701 (observing that “the phrase ‘physical loss’ . . . would cover a physical deprivation of property (such as a theft of furniture) that did not damage the property in the slightest”); Verveine Corp., 184 N.E.3d at 1276-77 (observing that “there may be a ‘loss of’ property without damage if it is stolen”). Because it is not presented here, we will leave to a future case a determination as to whether a temporary loss of possession of property would qualify as “physical loss or damage,” or whether any such loss of possession must be permanent.
Based on that definition, and because “neither the [governmental] closure order nor the C[OVID]-19 virus caused present or impending material destruction or material harm that physically altered the covered property requiring repairs or replacement so that they could be used as intended[,]” the court held that the policy did not provide business income loss coverage for the insured’s COVID-19-related losses. Id. at 933. As a result, after noting that its conclusion was “consistent with the unanimous decisions by our sister circuits,” the court affirmed the trial court’s dismissal of the insured’s complaint seeking coverage. Id. at 933-34 (citing federal circuit court cases applying the laws of Texas, New York, Ohio, Illinois, Iowa, California, Oklahoma, and Georgia).
2021) (holding that policy provisions requiring “direct physical loss or damage” or “physical damage” “do not extend to mere loss of use of a premises, where there has been no physical damage to such premises; those terms instead require actual physical loss of or damage to the insured’s property”); Goodwill Indus. of Cent. Oklahoma, Inc. v. Philadelphia Indem. Ins. Co., 21 F.4th 704, 708, 710 (10th Cir. 2021) (concluding that coverage trigger requiring “direct physical loss of or damage to property” “unambiguously covered only losses stemming from physical alteration or tangible dispossession of property”); Sandy Point Dental, P.C. v. Cincinnati Ins. Co., 20 F.4th 327, 333 (7th Cir. 2021) (“The Policy is replete with textual clues that reinforce the conclusion that ‘direct physical loss’ requires a physical alteration to property.”); Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885, 892 (9th Cir. 2021) (affirming dismissal of coverage complaint where insured did not identify either a physical alteration of the property or permanent dispossession of the property); Santo’s Italian Café, 15 F.4th at 400, 401 (affirming ruling upholding denial of coverage because “[t]he restaurant has not been tangibly destroyed, whether in part or in full. And the owner has not been tangibly or concretely deprived of any of it.”); Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141, 1144 (8th Cir. 2021) (interpreting similar policy language as requiring that “there must be some physicality to the loss or damage of property—e.g., a physical alteration, physical contamination, or physical destruction[,]” and, in the absence of such allegations, affirming dismissal of coverage complaint); Indiana Repertory Theatre v. Cincinnati Cas. Co., 180 N.E.3d 403, 410 (Ind. Ct. App. 2022) (finding that the insured “did not suffer physical loss or physical damage under the language of the Policy because the premises
covered . . . was not destroyed or altered in a physical way that would require restoration or relocation”); and Verveine Corp., 184 N.E.3d at 1275 (concluding, based on both plain meaning and the policy’s definition of the “period of restoration,” that the policy term “direct physical loss of or damage to” property requires physical alteration; and that “[t]he allegations in the [insured’s] complaint do not support recovery under this definition”).
Tapestry argues that many of these cases are distinguishable, most prominently because many of the insureds did not allege the actual presence of Coronavirus on their properties or otherwise relied primarily on the effect of governmental shutdown orders, rather than the presence of Coronavirus itself, to support their claims. As an initial matter, although that is true of some of those cases, it is by no means true of all of them. See, e.g., Verveine Corp., 184 N.E.3d at 1276 (“Even accepting the plaintiffs’ premise that the suspension of their business was caused by the ‘presence’ of the virus on surfaces and in the air at the restaurants . . ., mere ‘presence’ does not amount to loss or damage to the property.”). Moreover, even where that distinction applies, it does not undermine the persuasiveness of the analysis contained in those decisions in interpreting
Tapestry points our attention to three relatively recent appellate decisions that have reached a contrary conclusion. In Cajun Conti LLC v. Certain Underwriters at Lloyd’s London, a split intermediate appellate court in Louisiana concluded that “physical loss or
damage,” as used in an all-risk, first-party commercial insurance policy, was susceptible to more than one reasonable meaning and so had to be interpreted in favor of the insured. *5-6 (La. App. Ct. June 15, 2022). Two dissenting judges on the five-judge panel concluded that the policy language unambiguously required a physical alteration to the property.29 Id., ___ So. 3d at ___ (Belsome, J., dissenting). In Marina Pacific Hotel and Suites, LLC v. Fireman’s Fund Insurance Company, 81 Cal. App. 5th 96, 108-09 (2022), a California intermediate appellate court concluded that an insured had sufficiently alleged physical damage to property to survive a motion to dismiss when it alleged that Coronavirus particles “not only live[] on surfaces but also bond[] to surfaces through physicochemical reactions involving cells and surface proteins, which transform the physical condition of the property.” And in Huntington Ingalls Industries, Inc. v. ACE American Insurance Company, a split Supreme Court of Vermont held that although “direct physical damage” “requires a distinct, demonstrable, physical change to property,” the insured’s allegations that Coronavirus “can ‘adhere’ to surfaces, transforming the surface into a fomite,” were sufficient to “allege
that the virus physically altered property” under Vermont’s “‘extremely liberal’ notice pleading standards.” No. 2021-173, 287 A.3d 515, 2022 WL 4396475, at *11-12 (Vt. Sept. 23, 2022). Two dissenting justices, based on a review of the policy’s provisions and the insured’s allegations, concluded, “[a]s a matter of law, [that] human-generated droplets containing [Coronavirus] cannot cause ‘direct physical loss or damage to property’ under this insurance policy.” Id. at *14 (Carroll, J., dissenting).
Setting aside differences in the underlying policies and allegations at issue in those three cases,30 we are ultimately persuaded
Tapestry also relies on a number of decisions, many unreported, from other jurisdictions involving other hazardous substances, such as ammonia, asbestos, gaseous fumes, smoke, and cat urine. Some of those cases are distinguishable on one or more
grounds, including that: (1) some involved the physical alteration of property;31 (2) others involved hazards that rendered the property “practically useless for anything,” Santo’s Italian Café, 15 F.4th at 405, as opposed to just for the insured’s intended purpose;32 or (3) contained different policy language, see TRAVCO Ins. Co. v. Ward, 715 F. Supp. 2d 699, 709 (E.D. Va. 2010) (noting that the “Policy . . . define[d] ‘Property Damage’ to include ‘loss of use of tangible property’”), aff’d, 504 F. App’x 251 (4th Cir. 2013). Those features do not distinguish all the cases.33 However,
distinguishable, we find the analyses in those cases unpersuasive, at least as applied to the Policies and the allegations of the Complaint, for the reasons already discussed.
Finally, Tapestry also claims support from this Court’s recent decision in Berry v. Queen, 469 Md. 674 (2020). In Berry, the Court confronted “whether the phrase ‘damage to property’ . . . in the uninsured motorist statute[] requires an insurer to reimburse loss of use damages, such as rental car costs, to an insured.” Id. at 679. We held that it did. Id. at 685. Notably, however, the question was raised in the context of unquestioned physical damage to an automobile that required repair. Id. at 683. As the United States District Court correctly observed, Berry does not stand for the proposition “that a policyholder could make an uninsured motorist claim for rental car coverage every time it suffered a ‘loss of use’ of a vehicle untethered to physical damage to that vehicle.” Bel Air Auto, 534 F. Supp. 3d at 504.
CONCLUSION34
The certified question posed to this Court, as we have reformulated it, is:
When a first-party, all-risk property insurance policy covers “all risks of physical loss or damage” to insured property from any cause unless excluded, is coverage triggered when a toxic, noxious, or hazardous substance—such as Coronavirus or COVID-19—is physically present in the indoor air of that property; is also present on, adheres to, and can later be dislodged from physical items on the property; and causes a loss, either in whole or in part, of the functional use of the property?
For the reasons set forth in this opinion, our answer is: No, provided the substance causes neither tangible, concrete, and material harm to the property nor deprivation of possession of the property.
CERTIFIED QUESTION OF LAW ANSWERED AS SET FORTH ABOVE. COSTS TO BE DIVIDED EQUALLY BETWEEN THE PARTIES.
Notes
When a first-party, all-risk property insurance policy covers “all risks of physical loss or damage” to insured property from any cause unless excluded, is coverage triggered when a toxic, noxious, or hazardous substance—such as Coronavirus or COVID-19—that is physically present in the indoor air of that property damages the property or causes loss, either in whole or in part, of the functional use of the property?Certification Order Certifying a Question of Law to the Maryland Court of Appeals (“Certification Order“) at 1. As phrased, the question seems to presuppose that Coronavirus “damages the property.” However, as reflected in the parties’ briefing and as confirmed by their counsel at oral argument, the intent of the parties—and, they and we believe, the United States District Court—is not to presuppose that Coronavirus has caused “physical loss or damage” as that phrase is used in the FM policies. Instead, the intent is to have this Court address whether, under Maryland law, the allegations in Tapestry‘s first amended complaint concerning the operation and effect of Coronavirus on its stores and business constitute “physical loss or damage” such as to trigger coverage under FM‘s policies. Our reformulation of the certified question is designed to reflect that.
Tapestry makes one other argument tied to the existence of the related Communicable Disease Response and Interruption by Communicable Disease coverage extensions. Observing that the general Time Element coverage grant applies to “TIME