The Vermont Supreme Court’s revival of Huntington Ingalls Industries Inc.’s lawsuit seeking Covid-19-related insurance coverage offers a glimmer of hope to other companies that saw business drop during the pandemic.
The recent ruling out of the Green Mountain State is the first state high court decision allowing an insured business to bring in experts to testify that the virus injured its properties, as required for coverage under the insurance policy. The ruling opens the door for scientific discovery on whether the coronavirus damages property—a significant step for lawsuits over pandemic-related business losses, which have been largely been decided in favor of insurers.
“We are inclined to allow experts and evidence to come in to evaluate the validity of insured’s novel legal argument before dismissing this case,” Justice Harold Eaton wrote. “We cannot say ‘beyond doubt’ that the virus does not physically damage surfaces in the way insured alleges.”
Most pandemic business interruption lawsuits haven’t survived insurers’ motions to dismiss. Federal appellate courts and six state supreme courts—Iowa, Massachusetts, Oklahoma, South Carolina, Washington, and Wisconsin—have upheld lower court rulings in favor of carriers.
Several of those courts found that coronavirus doesn’t cause the kind of property damage required by insurance policies because the virus can be easily wiped off a surface by disinfectant.
“The Vermont decision lays out a path for analytical framework on how other courts could proceed, especially regarding early motions to dismiss the case,” said Peter Kochenburger, an insurance law professor at the University of Connecticut. “A complicated insurance policy requires scientific evidence on a relatively recent phenomenon such as Covid-19.”
Off to Discovery
The Huntington Ingalls case is now headed to discovery, unless the two sides settle. The shipbuilder has alleged that its Covid-19-positive employees spread droplets on property surfaces and, as a result, it had to reduce operations, disrupting vessel construction and repair.
The Vermont high court found plausible Huntington Ingalls’ allegation that the virus damages property in a way that strips it of its intended functionality.
The court did not say that the virus damages property or that Huntington Ingalls should receive coverage, merely that the shipbuilder should have a chance to prove its argument, said Reed Smith partner John Ellison.
“That’s what businesses have been asking for all along, since the start of the pandemic,” he said.
Attorneys for insurance companies involved in the case, including
Trial vs. Settlement
Danny Hernandez, a spokesperson for Huntington Ingalls, said the shipbuilder expects the case to move to “discovery and trial” at the Vermont Superior Court.
If the case goes to trial, a jury may be more likely to show sympathy to companies and find that insurers are on the hook for pandemic losses. In August, a Texas state court jury issued a $12.5 million verdict against Lloyd’s of London, finding the insurer should pay for Baylor College of Medicine’s pandemic business interruption losses.
Celeste Koeleveld, a Clifford Chance partner, said it’s unclear whether Huntington Ingalls’ case will go to trial, but that the ruling opens the door for potential settlement discussions.
“Once you open up to discovery, it changes the litigation ballgame, and the risks increase for the insurance companies,” she said.
Impact on Other States
Although the Vermont Supreme Court ruling is not binding for other state high courts that are weighing in on the same issue, it provides guidance from a persuasive authority, insurance and legal experts say.
“It certainly raises questions and makes judges think that there might be another way to look at this insurance language that they need to be open to,” said Koeleveld. The attorney said she has already seen policyholders asking the Nevada Supreme Court to look at the Vermont decision.
Most Covid-19 insurance lawsuits that were dismissed fell short of alleging that the virus was constant on an insured’s premise, according to experts. Huntington Ingalls set itself apart by alleging instead that the virus was continuously present on its properties, with its staff contracting and spreading Covid-19 all the time.
“There is life left in the better-pleaded Covid business interruption claims now that the action has shifted decisively to the state courts,” said Tom Baker, a professor from the University of Pennsylvania Carey Law School. “Supreme Courts in Iowa and Washington and, possibly, Oklahoma would be open to better-pleaded claims than the ones they decided.”