Federal Appeals Court Upholds Denial of ITT’s Covid-19 Insurance Claims

Global corporation ITT has again been denied coverage under its “all-risk” policy for business costs and losses it sustained due to Covid-19.

The Second Circuit Court of Appeals has affirmed a ruling by the federal district court for Connecticut that ITT failed to show any “physical damage” or “physical loss or damage,” due to Covid-19 as required to trigger coverage under its Factory Mutual Insurance Co. policy.

ITT, a worldwide manufacturing and technology company serving the aerospace, transportation, energy, communications, and industrial markets, had its business operations interrupted during the Covid-19 pandemic. ITT claimed its FMIC policy should cover its “substantial losses” including losses from or damage to property, time-element losses, extra expenses, expediting costs, logistics costs, and claims preparation expenses – as a result of the “presence of Covid-19 in or near various facilities and at its direct customers’ and supplies’ properties.”

ITT brought an action seeking declaratory relief and alleging breach of contract over FMIC’s alleged improper investigation and refusal to indemnify ITT against “tens of millions” of dollars of losses caused by the Covid-19 pandemic.

However, both the Connecticut federal district and the federal appeals courts have now found that all of the FMIC policy provisions ITT cited as bases for coverage require a showing of “physical damage” or “physical loss or damage” and ITT failed to meet that requirement.

The district court determined that, consistent with the general consensus of federal and state courts, “the plain, ordinary meaning of the phrase ‘physical loss or damage’ . . . unambiguously requires physical damage or physical alteration to property.”

The appeals court agreed, noting that “ITT offers only conclusory assertions that Covid-19 causes a tangible, measurable, and physical change or alteration in property.”

(The Connecticut Supreme Court recently joined this consensus, holding that “in ordinary usage, the phrase ‘direct physical loss of . . . [p]roperty’ clearly and unambiguously means that there must be some physical, tangible alteration to or deprivation of the property that renders it physically unusable or inaccessible.” Conn. Dermatology Grp., PC v. Twin City Fire Ins. Co.)

The Second Circuit appeals court noted that ITT refers to scientific studies explicating the “interaction between spike proteins and ambient airborne particulate matter and common property surfaces, such as metals, wood, plastics, fabrics, and glass” to corroborate its allegations of physical loss or damage. But that was not enough.

“Nowhere, however, does ITT specify a single object or piece of property that required repair or replacement due to exposure to Covid-19. The absence of any such allegation renders implausible ITT’s contention that Covid-19, a disease caused by a virus whose impact on property is indiscernible to the human eye, physically altered ITT’s property to the point of physical damage or loss,” the court stated.

The court also took issue with ITT’s contention that that fact that it had to “physically reconfigure” its facilities and “install physical safety features” to restore the use of its premises is proof that Covid-19 caused “physical loss or damage” to its propert. But the court noted that ITT itself admitted that such measures served to “mitigate communicable disease spread,” not repair damaged property.