In Tapestry, Inc. v. Factory Mut. Ins. Co., 1:21-cv-01941-GLR (December 15, 2022), the appellee, Tapestry Inc., had purchased two first-person, all-risk commercial property insurance policies from the respondent, Factory Mutual Insurance Company (“FM”). The primary coverages provided under those policies were triggered by "physical loss or damage" to covered property. Tapestry submitted claims to FM under the policies for losses exceeding $700 million resulting from the closures of its stores as a result of COVID-19. FM denied coverage for the bulk of Tapestry's claim. Tapestry sued. Because the resolution of that dispute depended on an interpretation of Maryland law that the Supreme Court of Maryland had not previously provided, the United States District Court certified to the Supreme Court of Maryland the following question of law:
When a first-party, all-risk property insurance policy covers "all risks of physical loss or damage" to insured property from any cause unless excluded, is coverage 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 Maryland Supreme Court held that coverage for “physical loss or damage” is not triggered when a substance such as COVID-19 is physically present in the indoor air and on the physical items on the property, provided that the substance causes neither tangible, concrete, and material harm to the property nor deprivation of possession of the property.
The Court applied contract principles in order to construe the language of insurance policies (at 18-19). The Court considered that the term “physical” refers generally to tangible, concrete things that have a material existence and can be perceived by the senses (at 21). Therefore, the Court held that "physical loss or damage" to covered property must involve tangible, concrete, and material harm to the property or a deprivation of possession of the property (at 23).
Looking at the term "physical loss or damage" in the context of the policy, the Court confirmed that the phrase does not encompass a functional loss of use of the property due to the presence of an external force (at 24-25). The Court noted that the policy referred to “repairing” or “replacing” the insured building or equipment (at 25-27). Finally, the Court noted that the policy also contained a coverage extension for Interruption by Communicable Disease, which applied when the presence of a communicable disease results in a government-ordered or insured-directed restriction on access to an insured location and which did not have a “physical loss or damage" requirement. The juxtaposition of that coverage extension, which specifically contemplated the operation and effects of a communicable disease like COVID-19 on business operations without requiring a trigger of "physical loss or damage," undermined Tapestry's claim to coverage under the head of “physical loss or damage” (at 27-28).
The Court also reviewed caselaw from Maryland state court and other jurisdictions, including Indiana and various Federal Circuits, all of which similarly ruled that “physical loss” requires a physical loss or damage to the insured property (at 40-42).