The New Hampshire Supreme Court has overturned a trial court that had found for a group of 23 hotels claiming they were entitled to insurance payments for business interruption losses caused by contamination of their properties by COVID-19.
Agreeing with most other state courts that have rejected such claims, the Granite State high court unanimously ruled that the presence of COVID-19 in the air or on surfaces at a premises does not satisfy a requirement under a property insurance policy of “loss or damage” or “direct physical loss of or damage to property.”
In so ruling, the high court rejected the argument that the coronavirus could be likened to cat urine which it said in a 2015 homeowners insurance case might possibly cause physical damage.
The plaintiffs— owners of 23 hotels in New Hampshire, Massachusetts and New Jersey — asserted that the pandemic cost them tens of millions of dollars in lost revenue. They had $600 million of insurance coverage from seven insurers for the policy period from November 1, 2019 to November 1, 2020. Each policy stated, in part, that it “insures against risks of direct physical loss of or damage to property described herein . . . except as hereinafter excluded.”
In June 2020, the hotels filed suit challenging their insurers’ denials of coverage and seeking a declaratory judgment that they were contractually entitled to insurance coverage for their business interruption losses resulting from the COVID-19 pandemic. They sought coverage under the business interruption losses provision and under extension of time element coverage provisions, both of which insure against the loss of business income caused by loss, damage or destruction of property.
A Superior Court judge in June 2021 sided with the hotels. “The court is satisfied that any requirement under the policies of ‘loss or damage’ or ‘direct physical loss of or damage to property’ is met where property is contaminated” by the COVID-19 virus, Merrimack County Superior Court Judge John Kissinger ruled.
The hotels cited a 2015 case (Mellin) where condominium owners sought to recover under their homeowner’s policy after their condominium was affected by a cat urine odor emanating from a unit below. The trial court in that case granted summary judgment to the insurer after finding that the cat urine odor did not satisfy the “physical loss” requirement.
However, the high court vacated that ruling, finding that an insured may suffer a “physical loss” in the absence of structural damage to property. The court held that physical loss may include not only tangible changes to the insured property, but also changes that are perceived by the sense of smell. However, the court stressed, the changes “must be distinct and demonstrable” and evidence that the property became temporarily or permanently unusable or uninhabitable may support a finding that the loss was a physical loss.
Relying on Mellin, the hotels argued that the presence of COVID-19 alters property that is safe and usable into property that is dangerous and unusable. They maintained that the change to their properties was “distinct” because people coming into contact with a property exposed to the virus results in a risk of contracting a deadly disease. Also, they argued that property contaminated is different from property not contaminated. The alteration is “demonstrable” through testing and modeling used to identify where the virus is present, they added.
The trial court agreed with the plaintiffs that the change to the property was “distinct” because it exposed humans to a deadly disease.
The high court declined to apply that “distinct and demonstrable alteration” standard in the COVID business dispute as the hotels wanted. The high court stressed that in Mellin it did not hold that the odor of cat urine in the property was necessarily sufficient to meet that standard. Rather, it remanded the case for the application of that standard.
The high court also cautioned that “the term ‘physical loss’ should not be interpreted overly broadly” and that direct physical loss or damage cannot be interpreted to apply “‘whenever property cannot be used for its intended purpose.'”
The Supreme Court dismissed as “irrelevant” whether the property could become a vector for transmission of a virus posing a risk to human health. The danger of the virus is to people, not to the real property itself, it noted, quoting another court that said COVID-19 “presents a mortal hazard to humans, but little or none to buildings which remain intact and available for use once the human occupants no longer present a health risk to one another.”
The question is not whether the property is distinct from other property, but whether the property itself has changed, according to the opinion.
The court concluded by noting that its finding that the presence of COVID-19 would not satisfy a requirement of “direct physical loss of or damage to property” is consistent with the conclusions of an “overwhelming majority of federal and state courts construing language similar or identical to the language contained in the policies at issue.”
The insurers in the case were Starr Surplus Lines Insurance Co., Certain Underwriters at Lloyd’s, Everest Indemnity Insurance Co., Hallmark Specialty Insurance Co., Evanston Insurance Co., AXIS Surplus Insurance Co., Scottsdale Insurance Co., and Mitsui Sumitomo Insurance Co. of America.
The hotels in the case included Schleicher and Stebbins Hotels, Renspa Place, Chelsea Gateway Property, OS Sudbury, Monsignor Hotel, SXC Alewife Hotel, Lawrenceville, Second Avenue Hotel Lessee, Second Avenue Hotel Owner, Medford Station Hotel, WDC Concord Hotel, Broadway Hotel, Fox Inn, Melnea Hotel, Natick Hotel Lessee, Superior Drive Hotel Owner, Arlington Street Quincy Hotel, Albany Street Hotel Lessee, Albany Street Hotel, Cleveland Circle Hotel Lessee, Cleveland Circle Hotel Owner, Worcester Trumbull Street Hotel, Assembly Hotel Operator, Assembly Row Hotel, Parade Residence Hotel, Portwalk HI, Route 120 Hotel, Vaughn Street Hotel, and FSG Bridgewater Hotel.
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