Court: Military shipbuilder can move forward with COVID suit against insurer
Huntington Ingalls, according to the Supreme Court of Vermont, suffered “direct physical damage” because employees infected with COVID had been physically present at the facilities and unintentionally spread the virus to employees who were not ill.
Huntington Ingalls Industries (Huntington Ingalls), the largest military shipwright in the United States, purchased a commercial property policy from a captive subsidiary, Huntington Ingalls Industries Risk Management LLC, in March 2020; the insurer, in turn, obtained multiple reinsurance policies for that property policy, one of which was Ace American.
That same month, state officials began issuing business closure mandates in response to the rapid spread of COVID-19 (COVID). Huntington Ingalls comes under the umbrella of the “Defense Industrial Base,” one of the sixteen “Essential Critical Infrastructure” sectors designated by the federal government to remain open during what would become the COVID-19 pandemic. The federal government also ordered the sixteen “essential” sectors to follow guidelines issued by national and state health authorities to minimize the spread of COVID.
Huntington Ingalls complied with the order, implementing protocols for social distancing, enhanced cleaning and sanitizing practices, and return-to-work procedures for employees who tested positive for or were exposed to COVID. By the end of April 2021, however, more than 6,000 Huntington Ingalls employees had tested positive for COVID. Huntington Ingalls argued that droplets from COVID-positive employees adhered to surfaces inside the shipyard and infected other employees who also touched those surfaces.
Huntington Ingalls sought coverage for losses related to the pandemic, alleging that “the virus adhered to surfaces for several days and lingered in the air for several hours at the shipbuilding yards.” The reinsurers filed for summary judgment, saying Huntington Ingalls “had not sufficiently alleged that ‘direct physical loss or damage to property’ had occurred.” The trial court found that, rather than the alleged property loss, Huntington Ingalls had suffered a loss of income because it was able to maintain business operations, albeit on a lower scale. The reinsurers’ motion for judgment on the pleadings was granted, and Huntington Ingalls appealed.
The Supreme Court of Vermont focused on the meaning of “direct physical loss or damage to property,” which was not defined in the policy. In “giv[ing] meaning to each word in [that] essential phrase,” the court separated “direct physical loss” from “direct physical damage” and analyzed each piece individually. Direct physical loss, according to the court, meant there had to be “persistent destruction or deprivation, in whole or in part, with a causal nexus to a physical event or condition. Direct physical damage, on the other hand, “require[d] a distinct, demonstrable, physical change to property.” Either scenario would trigger a coverage situation, but neither could be satisfied if the nature of the damages was only economic.
Huntington Ingalls, the court said, had suffered “direct physical damage” because employees infected with COVID had been physically present at the facilities, who unintentionally spread the virus when the virus “adhered to surfaces” that were touched by employees who were not ill. At the direction of the federal government and state authorities, Huntington Ingalls made changes “that involve[d] physical alterations to its insured locations” in order to combat the spread of COVID, which in turn meant the insured locations could not “function for [their] intended purpose[s].”
These facts, according to the court, made allegations sufficient to defeat a motion for judgment on the pleadings; as the complaint needed to allege either “direct physical damage” or “direct physical loss,” but not both, to defeat the judgment on the pleadings, the court did not debate whether there had been “direct physical loss.” The trial court’s decision was reversed and sent back to the lower courts. The dissent argued that, though physical changes to Huntington Ingalls’s property had been made, “the policy [did] not cover risks of direct physical loss or damage that do not require insured to rebuild, repair, or replace its property.”
The justices of the Supreme Court of Vermont, however, emphasized that their decision to send the case back did not mean Huntington Ingalls had actually suffered “direct physical damage,” only that the company’s complaint had “alleged enough to survive a Rule 12(c) motion [for judgment on the pleadings] under [Vermont’s] extremely liberal pleading standards.”
Click here for further analysis of whether COVID-19 can cause physical loss or damage.
Editor’s Note: A “judgment on the pleadings” means that the court judge only looks at the complaint filed by the plaintiff against the defendant and the defendant’s answer to that complaint, and nothing else, before deciding whether the case should proceed to the next stage. The trial court judge in this case said the complaint didn’t succeed, but the Supreme high court made clear, their decision was not a determination that Huntington Ingalls had suffered a covered loss under their property policy. Rather, the Huntington Ingalls complaint had alleged enough facts that it was inappropriate to decide whether their loss was or was not covered without further argument. There have been many cases alleging that COVID-19 caused property damage and that the commercial property policies should provide coverage. Most cases have found for the insurers on the basis that there was no actual physical damage to property that caused the property to need to be repaired, reconstructed or replaced. Click here to read about the thoughts of an attorney who filed an amicus curiae brief in support of Huntington Ingalls.