Reed Smith Client Alerts

Recently, in Huntington Ingalls Industries Inc. et al. v. Ace American Insurance Co. et al., case number 2021-173, the Vermont Supreme Court reversed the lower court’s decision granting judgment on the pleadings to the reinsurer of Huntington Ingalls Industries, Inc.’s (Huntington) captive insurance company. The court held that the phrase “direct physical loss or damage to property” is unambiguous and that “direct physical damage” can occur even at a microscopic level.

The facts

Huntington is the largest military shipbuilding company in the United States. When the pandemic began, Huntington kept its shipyards open but made changes to its operations to comply with CDC guidance and protect employees. These changes included modifying and staggering work to reduce crowding and achieve social distancing, sanitizing and cleaning at its facilities, and placing physical barriers to restrict virus transmission. Despite these changes, shipyard employees began testing positive for COVID-19. As of September 2020, Huntington had over 1,000 positive employees. By April 28, 2021, this number increased to over 6,000.

Huntington maintained an insurance policy, which insured “[a]ll real and personal property” “against all risks of direct physical loss or damage to property.” In the “business interruption” clause, the policy covers “[l]oss due to the necessary interruption of business conducted by [insured], whether total or partial . . . caused by physical loss or damage insured herein.”

In September 2020, Huntington and its captive insurer sued reinsurers, seeking a declaratory judgment that they are entitled to coverage under the policy for property damage, business interruption, and other losses suffered as a result of SARS-CoV-2, the pandemic, and civil authority orders. The 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. Before discovery commenced, the reinsurers sought complete judgment on the pleadings, arguing that insured had not sufficiently alleged that “direct physical loss or damage to property,” which the trial court granted.