Vermont Supreme Court Brings a Shipbuilder's COVID-19 Coverage Suit Back to the Surface

The Vermont Supreme Court recently issued an opinion reversing the dismissal of insurance claims seeking coverage for damage the insured argued was caused by COVID-19. See Huntington Ingalls Indus., Inc. et al. v. Ace American Ins. Co. et al., No. 2021-173, 2022 VT 45. The September 2022 ruling goes against the majority of cases in other state and federal courts findings that insureds have failed to adequately allege that COVID-19 can cause direct physical damage or loss that is covered by property insurance policies.
 
Huntington Ingalls Industries, the insured in this case, is the largest military shipbuilder in the United States employing more than 42,000 employees. Huntington purchased an “all risk” property insurance policy in March 2020 from its insurance subsidiary, Huntington Ingalls Industries Risk Management, LLC, which in turn purchased policies from multiple reinsurers to cover its obligations. The subject policy covered all real and personal property “against all risks of direct physical loss or damage to property” and contained a business interruption clause covering “loss due to the necessary interruption of business conducted, whether total or partial caused by physical loss or damage insured herein.” Of note, the policy, however, did not include the standard-form virus exclusion that has been available in the insurance industry since 2006.
 
Not long after the insured purchased the policy, the very first COVID-19 case arose among Huntington’s employees. By September 2020, more than 1,000 employees were infected, and by April 2021, more than 6,000 employees were infected. As a result, Huntington sought coverage from the reinsurers under the reinsurance policies for property damages, business interruption, and other losses suffered as a result of COVID-19, but coverage was denied.
 
Following the coverage denial, Huntington filed suit in the Vermont Superior Court seeking declaratory judgment that they were entitled to coverage under its purchased policy. The Superior Court concluded that Huntington failed to allege facts to support a viable claim for coverage and entered judgment on the pleadings in favor of the reinsurers.
 
Plaintiff, Huntington, then appealed the dismissal to the Vermont Supreme Court. The Supreme Court recognized that the key issues to decide were the interpretation of the phrase “direct physical loss or damage to property” and whether plaintiffs’ facts were sufficient to state a claim for physical loss or damage. The Court found that plaintiffs sufficiently alleged a claim that, if ultimately proven before a trier of fact, would demonstrate coverage under the policy.
 
The Vermont Supreme Court’s decision in this matter is not the first in the U.S. to conclude that COVID-19 business interruption lawsuits should not be dismissed without the development of further evidence, but it is the first decision by a state’s highest court. This decision is a reminder that the liberal pleading standard remains alive and well in Vermont. The decision also paves the way for similar COVID-related claims, especially in Vermont, to advance into discovery, expert witness, and summary judgment stages, which leads to the ramping up of litigation costs. However, it still remains unknown whether the insureds will be able to prove that COVID-19 actually caused “direct physical loss or damage to property,” ultimately triggering coverage.