COVID-19, Business Interruption Claim Survives Motion for Judgment on the Pleadings in Vermont

The Vermont Supreme Court found that the insured’s complaint alleging business interruption due to COVID-19 could survive the insurer’s motion for judgment on the pleadings. Huntington Ingall’s Industries v. Ace Am. Ins. Co., 2022 Vt. LEXIS 47 (Sept. 23, 2022).

In March 2020, the Undersecretary of Defense told the insured, a military shipbuilding company, that it should follow CDC and state and local government guidelines to limit the spread of the virus. The insured kept the shipyard open but made changes to its operations to comply with CDC guidance and protect employees. Nevertheless, by September 2020, over 1000 positive tests were reported to the insured by its employees. By April 2021, this number increased to over 6000 employees.

When coverage was denied, the insured sued for business interruption. The complaint alleged that 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 included disruption in orderly construction and repair of vessels, schedule impacts in the construction and repair of vessels, expenses incurred to continue as near to normal operations as practicable, loss of profit caused by the change in labor volume, and other time-element losses.

Before any discovery, the insurer filed a motion for judgment on the pleadings. The trial court granted the motion.

On appeal, the Vermont Supreme Court acknowledged the jurisdictional split on how courts had approached the interpretation of similar or identical policy language concerning “direct physical loss or damage to property” in pretrial motions. The court was not bound by these decisions, but would be guided by Vermont law.

The court found that direct physical damage required a distinct, demonstrable, physical change to property. The change need not be visible because alterations at the microscopic level could meet this threshold. Direct physical loss to property required persistent destruction or deprivation, in whole or in part, with a causal nexus to a physical event or condition. Deprivation could occur when property was unusable due to a health hazard. Further, an actual loss had to have occurred and could not be prospective. Moreover, the insured had to show it had been deprived of use of its property.

Further, the deprivation or destruction could be in whole or part. In the business-interruption clause, the policy covered losses “whether total or partial . . . caused by physical loss or damage insured herein.” The policy also stated the period of recovery could cease when repair or replacement of “such part of the property as has been damaged is actually completed.” Deprivation of property had to also be causally linked to a physical event. The plain meaning of “direct physical loss” required an explicit nexus between the purported loss and the physical condition of the insured property. Finally, destruction or deprivation of property had to be persistent.

Therefore, “direct physical damage” required a distinct, demonstrable, physical change to property. “Direct physical loss” meant persistent destruction or deprivation, in whole or in part, with a causal nexus to a physical event or condition.

Here, the complaint alleged the virus causing COVID-19 had been continuously present at the insured’s shipbuilding facilities. Its employees had contracted COVID-19 after being infected at work, and infected persons spread the virus to surfaces. The virsuit could adhere to surfaces. Because of this alteration, the property could not function for its intended purpose and the insured’s business had to operate at a reduced capacity. If the insured could prove such alteration occurred, it could consitute “direct physical damage” even if it was at a microscopic level.

The theory of “direct physical damage” alone was sufficient to reverse, so the court did not reach whether the complaint alleged facts that would entitle the insured to relief under a theory of “direct physical loss.” The case was reversed and remanded for further proceedings consistent with the opinion.

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