Vermont Did Not Find Coverage

Vermont’s Ruling in Favor of an Insured Seeking Business interruption Coverage due to Covid is a Pyrrhic Victory

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In Huntington Ingalls Industries, Inc. et al. v. Ace American Insurance Company et al, No. 2021-173, 2022 VT 45Supreme Court of Vermont (September 23, 2022) the Supreme Court of Vermont reversed a decision refusing to allow an insured ship builder to recover business interruption losses as a result of government orders dealing with Covid-19 and remanded the case to the trial court to determine if Covid caused direct physical damage to property.

Insured Huntington Ingalls Industries, Inc. and insurer Huntington Ingalls Industries Risk Management LLC survived dismissal of the case seeking coverage under a property insurance policy for certain losses incurred by Huntington Ingalls Industries due to the COVID-19 pandemic.


Insured, Huntington Ingalls Industries, Inc., is the largest military shipbuilding company in the United States and provides professional services to government and industry partners. It employs over 42,000 people, the majority of whom work at its shipyards in Virginia and Mississippi.

In March 2020, insured purchased a property insurance policy (Global Policy) from insurer Huntington Ingalls Industries Risk Management LLC, its captive insurance subsidiary and a Vermont corporation. The policy covers the period of March 15, 2020, to March 15, 2021. That same month the insurer purchased policies from multiple reinsurers to reinsure all its obligations to insured under the Global policy. Each reinsurer participated for a specified percentage of the reinsurance program. Reinsurers’ policies incorporate the Global Policy by reference, stating for example that their liability “shall attach simultaneously with that of [insurer] and shall be subject in all respects to the same risks, terms, conditions, rates, interpretations[,] and waivers” of the underlying policy issued to insured.

The policy, titled “Global Property Insurance,” contains relevant provisions that all real and personal property are insured against all risks of direct physical loss or damage to property. In the “business interruption” clause, it 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.” Recovery under the business-interruption provision is limited to the extent that insured is  (a) wholly or partially unable to produce goods or continue normal business operations or services during the [p]eriod of [r]ecovery; (b) unable to make up lost production within a reasonable period of time . . .; or (c) able to demonstrate a loss or reduction of Net Profit for the services or production prevented, impaired or interrupted.”

The period of recovery begins on “the date of . . . loss or damage” and “[s]hall not exceed such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair, or replace the property that has been destroyed or damaged.” The period of recovery also includes “[s]uch additional length of time to restore [insured’s] business to the condition that would have existed had no loss occurred.” The policy provides that Vermont law governs its construction.


SARS-CoV-2 is a virus that causes the disease COVID-19. In March 2020, civil authorities across the United States began to issue orders requiring certain businesses to close and recommending people stay home to reduce the virus’s spread. Civil orders generally required businesses to adhere to social distancing, employ enhanced sanitization practices on surfaces, and follow recommendations from the Centers for Disease Control and Prevention (CDC) and state health departments. However, they allowed businesses to operate at a level needed to provide essential services.

The insured kept its shipyards open but made changes to its operations to comply with CDC guidance and protect employees.

In September 2020, insured and 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.


The trial court granted reinsurers’ motion for judgment on the pleadings and consequently denied all of insured’s motions. The inquiry below focused on the meaning of “direct physical loss or damage to property” under the policy.

Interpretation of Policy

An insurance policy is construed according to its terms and the evident intent of the parties as expressed in the policy language. Terms in an insurance policy are interpreted according to their plain, ordinary, and popular meaning, and will enforce unambiguous terms as written.

When the Supreme Court of Vermont looks to determine if an insurance policy’s undefined terms have a plain meaning, it frequently refer to dictionary definitions.

First, the phrase “direct physical loss” concludes with “to property” and this is a property insurance policy, thus the analysis is framed with a focus on what is happening to the insured property. The centrality of property to this insurance policy requires that something must occur affecting personal or real property for “direct physical loss or damage to property” to occur.

Although all-risk policies are generally construed in favor of coverage, risk and loss are distinct concepts. The Supreme Court concluded that direct physical damage requires a distinct, demonstrable, physical change to property. When it combined the definitions of “direct,” “physical,” and “damage” provided above, the plain meaning is evident. However, a distinct, demonstrable, physical alteration need not necessarily be visible; alterations at the microscopic level may meet this threshold. The Supreme Court considered Ashland Hosp. Corp. v. Affiliated FM Ins. Co., No. 11-16-DLB-EBA, 2013 WL 4400516, at *4-5 (E.D. Ky. Aug. 14, 2013) the USDC for the Eastern District of Kentucky concluded that disk drives altered on microscopic level due to heat exposure causing decrease in reliability constituted “direct physical loss or damage to insured property.

The definition is consistent with the policy section on the period of recovery, which defines the time for which a business-interruption claim may be made. Insured may make a business-interruption claim under the policy for the period starting with the date of the coverage-triggering event and not exceeding the time needed to “rebuild, repair or replace” the damaged property and such additional time as needed to restore insured’s business to its pre-loss condition.

In order for something intangible to cause a direct physical loss, the cause of the loss must be so persistent as to require intervention, rather than the mere passage of time, to satisfactorily address it.

The insurance policy in this case is unambiguous and must therefore be afforded its plain meaning. The phrase “direct physical loss or damage to property” includes two distinct components, either of which will trigger coverage unless an exclusion applies: “direct physical damage” and “direct physical loss.”

“Direct physical damage” requires a distinct, demonstrable, physical change to property. “Direct physical loss” means persistent destruction or deprivation, in whole or in part, with a causal nexus to a physical event or condition.

Purely economic harm will not meet either of these standards. In applying the plain meaning of the policy language as interpreted in this case, the insured has the burden of proving that the losses it alleges are either “direct physical loss” or “direct physical damage” to property.


Remanding this case and allowing further factual development in the trial court is consistent with the philosophy underlying notice pleading. Although the science when fully presented may not support the conclusion that presence of a virus on a surface physically alters that surface in a distinct and demonstrable way, it is not the Court’s role at this stage in the proceedings to test the facts or evidence.

To be clear, the opinion does not state that what occurred in insured’s shipyards is “direct physical loss or damage to property” under the policy. The Supreme Court merely concluded that insured has alleged enough to survive a motion to dismiss.

The Insured’s complaint contains sufficient allegations to survive a motion for judgment on the pleadings under Vermont’s extremely liberal pleading standards.

Justice Carroll Dissented

“As a matter of law, human-generated droplets containing SARS-CoV-2 cannot cause “direct physical loss or damage to property” under this insurance policy. No future litigation can change that reality. While I agree with the majority’s conclusion that the insurance contract term in dispute is unambiguous, I cannot agree that insured’s claim survives beyond the pleadings stage.” Accordingly, he dissented.


News stories about Vermont giving the first victory to an insured seeking business interruption coverage for losses resulting from Covid 19. The opinion was exceedingly long and dealt with definitions and interpretation of insurance policies, the essence of the decision was that the insureds alleged sufficient facts to avoid a motion to dismiss but must now go to the trial court and produce evidence and science that the virus caused direct physical damage to the property of the insured. Something courts across the country have found that there was no direct physical loss or damage.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at and

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An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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