Insurance Law - Week Of September 30, 2022

• Published date: 28 September 2022
• Subject Matter: Finance and Banking, Insurance, Financial Services, Insurance Laws and Products
• Law Firm: Morrison Mahoney LLP
• Author: Mr Michael Aylward

PANDEMIC UPDATE

The insurance industry's unbroken streak of COVID appellate victories hit a Vermont-sized pothole last week when the state Supreme Court ruled that an insured had pleaded sufficient facts to satisfy Vermont's minimal standard for avoiding a motion for judgment on the pleadings. In Huntington Ingalls Industries, Inc. v. Ace American Ins. Co., 2022 VT 45 (Vt. Sept. 23, 2022), a divided court ruled 3-2 that allegations that 'fomite' had adhered to building surfaces was enough to refute any suggestion that coverage was 'beyond doubt.' The majority agreed that 'direct physical loss' requires that there be a 'distinct, demonstrated physical alteration' to property but declared that this alteration did not have to be visible to the naked eye and could result from microscopic changes. Further, the court ruled that direct physical loss requires 'destruction or deprivation of property' but that 'deprivation' may occur when property is unusable due to a health hazard. Relying on the New York federal district court's decision in Kim-Chee, the court emphasized the difference between 'persistent' events and contamination that is 'ephemeral or transient.' Applying this standard to the shipyard's pleaded claims, the court found that the defendant insurers had not met Vermont's 'extremely liberal' standard that it was 'beyond doubt that there exists no facts or circumstances that would entitle the claimant to relief.' In particular, citing the recent California and Louisiana appellate rulings in Marina Pacific Hotel and Cajun Conti, the majority accepted the insured's contention that COVID virus particles were not only present at its shipyard but had adhered to property surfaces forming 'fomite' that had 'altered and impaired the functioning of the tangible, material surfaces' of the property. Justices Carroll and Bent dissented, arguing that the alleged presence of "fomite,' even if true, did not physical alter or change the property. The dissent emphasized that COVID affects humans, not property and that Ingalls had not alleged in its suit that it had to repair its property due to the presence of COVID particles, as required for 'direct physical loss.'

The California Court of Appeal has ruled that a trial court erred in refusing to allow a consulting firm to amend its complaint to plead a claim for business interruption coverage for COVID losses. In Tarrar Enterprises v. Associated Ind. Corp., A162975 (Cal. App. Sept. 22, 2022), the First District...