Direct Physical Loss in Property Insurance: SARS-CoV-2 Does Not Constitute Coverage

Direct Physical Loss in Property Insurance: SARS-CoV-2 Does Not Constitute Coverage

Introduction

The case of Schleicher and Stebbins Hotels, LLC & a. v. Starr Surplus Lines Insurance Company & a., adjudicated by the Supreme Court of New Hampshire on May 11, 2023, addresses a critical issue in property insurance law: whether the presence of SARS-CoV-2 on or within a property constitutes a "direct physical loss of or damage to property" sufficient to trigger coverage under commercial property insurance policies.

The plaintiffs, a consortium of hotel operators, sought coverage for business interruption losses resulting from the COVID-19 pandemic, asserting that the presence of the virus on their properties met the policy's requirements for coverage. The defendants, a group of surplus lines insurance companies, contended that mere presence of SARS-CoV-2 does not amount to direct physical loss or damage under the policy language.

Summary of the Judgment

The Supreme Court of New Hampshire delivered a nuanced decision addressing three pivotal questions:

  1. Does the presence of SARS-CoV-2 on or in the air at a premises satisfy the requirement of "loss or damage" or "direct physical loss of or damage to property" under the policies?
  2. Do the "mold, mildew & fungus" clause and microorganisms exclusion endorsement unambiguously preclude coverage for the plaintiffs' claimed losses?
  3. Does the pollutants and contaminants exclusion in defendant AXIS' policy unambiguously preclude coverage for the plaintiffs' claimed losses?

The court answered the first question in the negative, holding that the presence of SARS-CoV-2 does not satisfy the "direct physical loss of or damage to property" requirement. The court declined to address the second and third questions, thereby reversing the lower court's order and remanding the case for further proceedings.

Analysis

Precedents Cited

The judgment references several key precedents that shape the interpretation of insurance policies in New Hampshire:

  • Mellin v. Northern Security Insurance Co., 167 N.H. 544 (2015): Established the "distinct and demonstrable alteration" standard for what constitutes a physical loss.
  • Russell v. NGM Ins. Co., 170 N.H. 424 (2017): Emphasized interpreting policy language based on plain and ordinary meaning.
  • Scanlon v. Providence Mutual Fire Insurance Co., 138 N.H. 301 (1994): Highlighted that absence of specific exclusions does not imply coverage.
  • Additional cases such as Western Fire Insurance Co. v. First Presbyterian Church and Yale University v. Cigna Ins. Co. were cited to illustrate examples where contamination affected habitability and thus constituted physical loss.

Legal Reasoning

The court undertook a meticulous analysis of the policy language, emphasizing that coverage under the business interruption and time element coverage provisions requires "direct physical loss of or damage to property." The plaintiffs argued that SARS-CoV-2 presence alters the property’s usability, but the court reasoned that:

  • The policies explicitly require physical loss or damage, which entails tangible changes necessitating repair, rebuilding, or replacement.
  • The mere presence of the virus, which can be mitigated through cleaning or dissipates over time, does not amount to a distinct and demonstrable physical alteration of the property.
  • Unlike the Mellin case, where cat urine caused persistent and significant impairment, SARS-CoV-2 does not fundamentally alter the property's structure or long-term usability.

The court also rejected the plaintiffs' reliance on the absence of virus exclusions in the policies, citing that contract interpretation adheres to policy language rather than inferred terms.

Impact

This judgment sets a significant precedent in New Hampshire, clarifying that the presence of airborne pathogens like SARS-CoV-2 does not automatically translate to a "direct physical loss" within property insurance contexts. Future cases involving business interruptions due to pandemics or similar public health crises will reference this decision to determine the scope of insurance coverage.

Moreover, insurers may be prompted to revise policy language to explicitly address coverage related to biological hazards to avoid ambiguity. Policyholders will need to scrutinize policy terms carefully, especially regarding exclusions and definitions of coverage triggers.

Complex Concepts Simplified

Direct Physical Loss of or Damage to Property

This term refers to tangible changes to property that require physical remediation, such as repairing a broken window or replacing damaged machinery. It excludes abstract or intangible impacts, like loss of business due to decreased patronage without corresponding physical damage.

Time Element Coverage Provisions (ETEC)

These provisions compensate for loss of business income due to interruptions. They are activated only when there's a direct physical loss or damage to property that disrupts business operations, as defined by the policy.

All-Risk Policy

An all-risk policy covers all types of risks unless specifically excluded. However, this does not mean every possible risk is covered; it provides broad coverage to the extent not explicitly excluded by policy terms.

Surplus Lines Insurance

These are specialized insurance policies offered by insurers not licensed in a particular jurisdiction but are admitted to provide coverage for unique or high-risk situations that standard insurers might decline.

Conclusion

The Schleicher and Stebbins Hotels, LLC & a. v. Starr Surplus Lines Insurance Company & a. decision underscores the importance of precise policy language in determining insurance coverage. By ruling that the presence of SARS-CoV-2 does not meet the threshold for "direct physical loss or damage," the court provides clarity for both insurers and policyholders on the extent of coverage during public health emergencies.

This judgment emphasizes that for business interruption claims to succeed under property insurance policies, there must be verifiable, tangible alterations to the property itself, not merely conditions that affect human interaction or business operations indirectly.

As the legal landscape continues to evolve in response to unprecedented challenges like pandemics, this ruling offers a foundational interpretation that will guide future deliberations and policy formulations in the realm of insurance law.

Case Details

Year: 2023
Court: Supreme Court of New Hampshire

Judge(s)

HICKS, J.

Attorney(S)

Rath Young and Pignatelli, P.C., of Concord (Michael S. Lewis and Michael K. O'Neil on the brief), and Anderson Kill, P.C., of New York, New York (Marshall Gilinsky and Ethan W. Middlebrooks on the brief, and Marshall Gilinsky orally), for the plaintiffs. Primmer Piper Eggleston & Cramer PC, of Manchester (Doreen Connor on the brief and orally for all defendants), and Zelle LLP, of Framingham, Massachusetts (Matthew Gonzalez and Seth Jackson on the brief), for defendant Everest Indemnity Insurance Company. Kennedys CMK LLP, of Basking Ridge, New Jersey (Kristin V. Gallagher and Eduardo DeMarco on the brief, and Kristin V. Gallagher orally), and Cullencollimore, PLLC, of Nashua (Kevin G. Collimore on the brief), for defendant AXIS Surplus Insurance Company. Paul Frank + Collins, P.C., of Burlington, Vermont (Megan A. Sigur and Nolan C. Burkhouse on the brief), Robinson & Cole LLP, of Hartford, Connecticut (Wystan M. Ackerman on the brief), and Robins Kaplan LLP, of Los Angeles, California and Boston, Massachusetts (Amy Churan and Matthew P. Cardosi on the brief), for defendants Starr Surplus Lines Insurance Company and Certain Underwriters at Lloyd's and London Companies Subscribing to Policy Number EW0040519. Sulloway & Hollis PLLC, of Concord (Alexander Henlin on the brief), and Dickinson Wright PLLC, of Phoenix, Arizona (Bennett Evan Cooper on the brief), for defendant Evanston Insurance Company. Morrison Mahoney LLP, of Boston, Massachusetts (Michael Aylward on the brief), and Clausen Miller P.C., of Chicago, Illinois (Melinda S. Kollross on the brief), for defendant Hallmark Specialty Insurance Company. Devine Millimet & Branch, P.A., of Manchester (Andrew Dunn and Donald L. Smith on the brief), and Phelps Dunbar LLP, of Tampa, Florida (Patricia McLean and Jay Sever on the brief), for defendant Scottsdale Insurance Company. Vitt & Associates, PLC, of Norwich, Vermont (Geoffrey Vitt and Sarah J. Merlo on the brief), for defendant Mitsui Sumitomo Insurance Company of America. Nixon Peabody LLP, of Manchester (David A. Vicinanzo and James Hatem on the brief), for the American Property Casualty Insurance Association, as amicus curiae. Vrountas, Ayer & Chandler, P.C., of Manchester (Christopher T. Vrountas on the brief), and Hunton Andrews Kurth LLP, of Washington, D.C. (Michael S. Levine on the brief), for the New Hampshire Lodging & Restaurant Association, as amicus curiae. Perez Law, of Medford, Massachusetts (Michael Perez on the brief), for the New Hampshire Medical Society, as amicus curiae. Reed Smith LLP, of Pittsburgh, Pennsylvania (Michael A. Kostiew on the brief), for United Policyholders, as amicus curiae.

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