Huntington Ingalls Indus. v. Ace Am. Ins. Co., 2021-173

Docket Nº2021-173
Citation2022 VT 45
Case DateSeptember 23, 2022
CourtUnited States State Supreme Court of Vermont

2022 VT 45

Huntington Ingalls Industries, Inc. et al.
v.
Ace American Insurance Company et al

No. 2021-173

Supreme Court of Vermont

September 23, 2022


On Appeal from Superior Court, Franklin Unit, Civil Division Robert A. Mello, J.

Erin Miller Heins and Vincent J. Todd of Langrock Sperry &Wool, LLP, Burlington, and Kirk Pasich, Sandra Smith Thayer, Pamela Woods and Christopher Pasich of Pasich LLP, Los Angeles, California, for Plaintiffs-Appellants.

Nolan C. Burkhouse and Megan A. Sigur of Paul Frank + Collins P.C., Burlington, for Defendants-Appellees.

Costantino Suriano of Mound Cotton Wollan &Greengrass LLP, New York, New York, for Defendants-Appellees Starr Surplus Lines Insurance Company, Tokio Marine America Insurance Company, HDI Global SE, and Lancashire Insurance Company (UK) Limited, LIRMA 10205.

Peter Kanaris and Cheryl L. Mondi of Hinshaw &Culbertson LLP, Chicago, Illinois, for Defendant-Appellee Berkshire Hathaway Specialty Insurance Company.

Wayne Glaubinger and Jared Markowitz of Mound Cotton Wollan &Greengrass LLP, New York, New York, for Defendants-Appellees Lex-London and Zurich American Insurance Company.

Brett Ingerman of DLA Piper LLP (US), Baltimore, Maryland, and Brett Solberg of DLA Piper LLP, Houston, Texas, for Defendant-Appellee Interstate Fire and Casualty Co.

Seth V. Jackson, Farmington, Massachusetts, and Matthew Gonzalez, New York, New York, of Zelle LLP, for Defendants-Appellees XL Insurance America and SCOR SE.

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Matthew C. Ferlazzo and Courtney E. Murphy of Hinshaw &Culbertson, LLP, New York, New York, for Defendants-Appellees Lloyd's Underwriter Syndicates (Nos. 1414 ASC, 0510 KLN, 1880 TMKS, 1967 WRB, 0623, 2623, 0033 HIS, 2987 BRIT, 4000 HAM, 1036 COF, 2791 MAP, 1200 AMA), Chubb Global Markets Property LIRMA A2302, Beazley Property Consortium 95892020, Hamilton Insurance DAC, Partner Reinsurance Europe SE, and Houston Casualty Company (UK Branch), LIRMA H5100.

Kristin Gallagher and Eduardo DeMarco of Kennedys, Basking Ridge, New Jersey, for Defendant-Appellee Axis Reinsurance Co.

Aidan M. McCormack of DLA Piper LLP, New York, New York, for Defendant-Appellee Westport Insurance Corporation.

Jonathan M. Freiman, New Haven, Connecticut, and Anjali S. Dalal, New York, New York, of Wiggin and Dana LLP, and John Kavanagh of Steptoe &Johnson LLP, Washington, D.C., for Defendant-Appellee Lloyd's Underwriter Syndicate No. 1221 HIG.

Jeffrey R. Babbin of Wiggin and Dana LLP, New Haven, Connecticut, for Defendant-Appellee Zurich American Insurance Company.

Robert W. Fisher, Atlanta, Georgia, and William Cooney, New York, New York, of Clyde &Co. U.S. LLP, for Defendants-Appellees Ace American Insurance Company, Endurance Assurance Corporation, and Aspen Specialty Insurance Company.

Ritchie E. Berger and Justin B. Barnard of Dinse P.C., Burlington, for Amicus Curiae American Property Casualty Insurance Association.

Marshall Gilinsky of Anderson Kill PC, New York, New York, for Amicus Curiae United Policyholders.

PRESENT: Reiber, C.J., Eaton and Carroll, JJ., and Johnson, J. (Ret.), and Bent, Supr. J. (Ret.), Specially Assigned

EATON, J.

¶ 1. Insured Huntington Ingalls Industries, Inc. and insurer Huntington Ingalls Industries Risk Management LLC seek a declaratory judgment stating there is coverage under a property insurance policy for certain losses incurred by Huntington Ingalls Industries due to the COVID-19 pandemic. The trial court concluded that the complaint did not allege facts that would trigger coverage under the policy and granted judgment on the pleadings in favor of reinsurers. We reverse.

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¶ 2. The following facts are as stated in insured's complaint and accompanying exhibits.[1] 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.

¶ 3. 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, 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.[2]

¶ 4. The policy, titled "Global Property Insurance," contains the following relevant provisions. It insures "[a]ll real and personal property" and "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

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(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.[3]

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."

¶ 5. In what is referred to as the mitigation clause, the policy requires insured to "make every reasonable effort to reduce" business-interruption losses and insures "such necessary and reasonable expenses incurred for the purpose of reducing any loss." It also "covers the costs incurred for actions to temporarily protect or preserve insured property, provided such actions are reasonable and necessary due to actual, or to prevent threatened, insured physical loss or damage to such insured property."

¶ 6. The policy provides that Vermont law governs its construction. Neither the Global Policy nor any of the reinsurance policies defines "direct physical loss or damage to property." The policy does not contain any clause expressly excluding pandemic-related loss or damage. The insurance industry has a standard-form virus exclusion that has been available since 2006, which was not included in any of these insurers' policies.

¶ 7. SARS-CoV-2 is a virus that causes the disease COVID-19. First reported cases were diagnosed in December 2019, and the virus and disease have since spread throughout the world, resulting in a global pandemic. In March 2020, civil authorities across the United States

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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.

¶ 8. On March 19, 2020, the federal government designated sixteen sectors as "Essential Critical Infrastructure" during the pandemic. Insured is part of the Defense Industrial Base, a critical infrastructure sector. In a March 20, 2020, memorandum, the Undersecretary of Defense told the critical infrastructure industry that they "have a special responsibility to maintain [their] normal work schedule" and that they should follow CDC and state and local government guidelines to limit spread of the virus.

¶ 9. Accordingly, insured 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. Insured implemented policies requiring employees who tested positive for COVID-19 to isolate and not return to work until CDC quarantine recommendations were satisfied and employees who had close contacts with someone who tested positive to self-quarantine for fourteen days or until cleared through testing. As a result of the presence of COVID-19, insured's shipyards "were and are not capable of performing their essential functions at their intended capacities."

¶ 10. On March 22, 2020, the first of insured's shipyard employees tested positive for COVID-19. As of September 2020, over 1000 positive tests were reported from insured's shipbuilding facilities. By April 28, 2021, this number increased to over 6000. Employees first experienced symptoms while at work or were present at the shipyard within forty-eight hours

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before first experiencing symptoms. During these times, they were infectious. COVID-19 has been continuously present at the shipyards since March 2020.

¶ 11. The virus is spread to the surrounding air in the form of droplets released when an infected person breathes, coughs, sneezes, or speaks. The infected droplets can travel significant distances and stay in the air for several hours. Gravity causes these droplets to eventually fall on and...

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1 practice notes
  • Insurance Law - Week Of September 30, 2022
    • United States
    • Mondaq United States
    • September 28, 2022
    ...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 suggesti......
2 firm's commentaries
  • California Court Forces Insurer to Play Ball in COVID-19 Insurance Coverage Suit
    • United States
    • LexBlog United States
    • November 21, 2022
    ...where there are allegations that the virus physically altered the property. See, e.g., Huntington Ingalls Indus., Inc. v. Ace Am. Ins. Co., 2022 VT 45, ¶¶ 45-46 (Vt. Sept. 23, 2022) (holding scientific evidence is necessary to assess whether the virus can physically alter property).[2] Alth......
  • Insurance Law - Week Of September 30, 2022
    • United States
    • Mondaq United States
    • September 28, 2022
    ...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 suggesti......

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