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The Vermont Supreme Court has kept alive a COVID-19 business interruption loss claim by major shipbuilder against a group of reinsurers.

The state’s high court ruled that the case brought by Huntington Ingalls Industries and its captive insurer should proceed, although the justices stopped short of endorsing Huntington’s claim that the COVID-19 virus caused direct physical loss or damage to its property that should trigger business interruption coverage.

Huntington has argued that the virus “adheres” to surfaces and creates a condition requiring sanitation procedures, redesigning spaces, installing barriers and other mitigation steps, thereby triggering business interruption coverage in a commercial property policy.

The trial court concluded that the complaint did not allege facts that would trigger coverage under the policy and granted judgment on the pleadings in favor of the reinsurers.

But the state Supreme Court by a 3-2 vote has remanded the case back to the trial court. Supreme Court Associate Justice Harold Eaton Jr. wrote that Huntington had managed to meet the state’s low hurdle for pleadings in alleging that the virus “adheres” to surfaces and causes physical damage.

“To be clear, this opinion does not state that what occurred in insured’s shipyards is ‘direct physical loss or damage to property. under the policy,” Eaton wrote. “We merely conclude that insured has alleged enough to survive a Rule 12(c) motion under our extremely liberal pleading standards.”

The ruling sets Vermont apart from other states. State high courts in South Carolina, Iowa, Massachusetts and Wisconsin, as well as all of the regional U.S. Circuit Courts of Appeal, have all ruled that the virus that causes COVID-19 cannot cause a direct physical damage or loss covered by a commercial property insurance policy.

The shipbuilder’s complaint alleges the pandemic caused “direct physical loss or damage to property” when the virus adhered to surfaces for several days and lingered in the air for several hours at the shipbuilding yards. The alleged losses include “disruption in orderly construction and repair of vessels, schedule impacts in the construction and repair of vessels, expenses鈥攊ncluding increased labor and information technology costs鈥攊ncurred to continue as near to normal operations as practicable, loss of profit caused by the change in labor volume, and other time- element losses.”

Reinsurers argue that their policies “unambiguously” require some tangible harm to the property or that the property be physically lost due to an external physical force. They also argue that insured’s mitigation argument is only relevant if coverage under the policy is triggered, which they contend it was not in this case.

The high court found that Huntington had “adequately” alleged that the virus physically altered property in its shipyards when it adhered to surfaces. Moreover, the fact that the insured had to physically alter its property in certain ways “bolsters the argument that a distinct, demonstrable physical alteration occurred and is something that is in need of ‘repair’ to restore business operations.

The Vermont Supreme Court opinion notes that the insured may not be able to prove that its losses stem from “direct physical loss or damage to property” and reinsurers may well be correct that the insured’s losses were not caused by any “direct physical loss or damage to property,” but instead from the risks employees posed to each other or some other non-covered reason. “[H]owever, we cannot agree that this is an “obvious fact” that undermines the various allegations in the complaint, which, at this stage, we must accept as true,” the majority opinion concludes.

Associate Justice Karen R. Carroll, penned the dissent: “As a matter of law, human-generated droplets containing SARS-CoV-2 cannot cause ‘direct physical loss or damage to property’ under this insurance policy. No future litigation can change that reality. While I agree with the majority’s conclusion that the insurance contract term in dispute is unambiguous, I cannot agree that insured’s claim survives beyond the pleadings stage.”

Huntington Ingalls Industries is the country’s largest military shipbuilding company. It employs 42,000 people, the majority of whom work at its shipyards in Virginia and Mississippi.

Topics COVID-19 Vermont