All-Risk Property Insurance—Are Losses/Damage Caused by COVID-19 Covered?

On September 9, 2022, the Supreme Court of Maryland heard arguments from counsel for Tapestry, Inc. (“Plaintiff”) and Factory Mutual Insurance Company (“Defendant”) to determine whether a first-party, all-risk property insurance policy that covers “all risks of physical loss or damage” to insured property from any cause unless excluded, is triggered when a toxic, noxious, or hazardous substance—such as Coronavirus or COVID-19—is physically present in the indoor air of that property; is also present on, adheres to, and can later be dislodged from physical items on the property; and causes a loss, either in whole or in part, of the functional use of the property?

The short answer to the above is no! Read below for the opinion in Tapestry, Inc. v. Factory Mutual Insurance Company to find out why.

Background

Plaintiff owns “modern luxury accessory and lifestyle brands” such as Coach, Kate Spade New York, and Stuart Weitzman, with 15 stores in Maryland.  If you want a fancy purse, look no further!

Given the high-priced merchandise for sale at these stores, it makes sense that Plaintiff obtained a policy with a maximum overall limit of liability per occurrence of $1 billion. Accordingly, Plaintiff obtained an “all-risk” commercial property insurance policy with Defendant.  However, when Plaintiff attempted to collect on said policy (through a $700 million + claim), Defendant denied it on the basis that “COVID-19 does not cause physical loss or damage.” In response, Plaintiff initiated the lawsuit that is the focus of this blog.

Plaintiff alleged in its Complaint that “attempting to remove Coronavirus from surfaces requires unique protocols such as the use of ‘harsh chemicals’ that are not routinely used and which themselves are alleged to have caused additional physical loss or damage to Tapestry’s store. Tapestry asserts that it repaired and remediated its physical space, such as through the removal and disposal of porous materials like clothing, reconfiguring and altering interior spaces of property, and installing physical barriers to create physical distancing. Tapestry suffered massive losses, in the hundreds of millions of dollars, for extensive and costly health and safety protocols and modifications to its stores.”

Argument

Why did the Supreme Court of Maryland determine that COVID-19 did not trigger Plaintiff’s All-Risk Insurance policy?

The court primarily focused on the language within this portion of the policy: “PHYSICAL LOSS OR DAMAGE.” What exactly qualifies as “physical loss or damage?”  From here, the court analyzed the questions similar to how you would analyze any contract. Let’s take ourselves back to 1L year of law school in our contract class.

Based on the “objective theory of contract interpretation,” the court held that unless the language of the contract is ambiguous, we interpret it “based on what a reasonable person in the position of the parties would have understood the language to mean and not ‘the subjective intent of the parties at the time of formation.’” Credible Behav. Health, Inc. v. Johnson, 466 Md. 380, 393 (2019) (quoting Ocean Petroleum, Co. v. Yanek, 416 Md. 74, 86 (2010)); see also JMP Assocs., Inc. v. St. Paul Fire & Marine Ins. Co., 345 Md. 630, 635 (1997) (“The test is what meaning a reasonably prudent layperson would attach to the term.” (quoting Bailer v. Erie Ins. Exch., 344 Md. 515, 521-22 (1997))).

Essentially, when determining what “physical loss or damage” meant, the court focused on its: (1) ordinary meaning; (2) Context; and (3) Application. Lastly, the court looked to precedent on the matter to guide its decision.  After analyzing these factors, the court finally came to its ruling.

Does COVID-19 trigger an all-risk insurance policy?

No, provided the substance causes neither tangible, concrete and material harm to the property nor deprivation of possession of the property.

Don’t just take my word for it. You can access the opinion here: https://mdcourts.gov/data/opinions/coa/2022/1a22m.pdf

Written by associate Michael Divver.