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COVID-related losses excluded from ‘physical damage’ coverage

Maryland companies that lost business during the COVID-19 pandemic cannot turn to the “physical loss or damage” coverage provision of their insurance policies for financial relief under state law, a unanimous Maryland Supreme Court ruled Thursday.

In its 7-0 decision, the high court held that the provision covers “tangible, concrete, and material harm to the property” or “deprivation of possession of the property.” The coverage does not apply to the “functional loss” of business operations that resulted when companies were “compelled to close temporarily or alter their operations” to stanch the spread of COVID-19, the court added.

The justices rendered their decision in answer to U.S. District Judge George L. Russell III’s question regarding whether the policies’ “physical loss or damage” provision applies to pandemic-related business losses under Maryland insurance law.

Russell is presiding over Tapestry Inc.’s request for a court order that its insurer pay the remainder of the company’s claim of more than $700 million in lost business during the pandemic, the bulk of which has been unpaid, according to the Supreme Court’s opinion.

Factory Mutual Insurance Co. has countered that Tapestry sustained no physical loss or damage to its business as delineated by the policy, a position now supported by Maryland’s top court.

In responding to Russell, the Supreme Court cited dictionary definitions of “physical” and found its “ordinary meaning” to be something having a “material existence” and not merely a functional use, as Tapestry contended.

“Although the complete destruction or ruin of property can, indeed, constitute a loss of that property, by permanently depriving the owner of any value of it, the temporary loss of functional use of the same thing is different,” Chief Justice Matthew J. Fader wrote for the court. “In other words, Tapestry’s proposed addition of the words ‘functional’ and ‘of use’ to arrive at its preferred interpretation of ‘loss’ transforms the concept and gives it a different meaning than that contained in the language of the policies.”

Neither Deborah B. Baum, an attorney for Tapestry, nor Craig D. Roswell, a lawyer for Factory Mutual, immediately returned telephone messages Friday seeking comment on the high court’s decision.

Baum is with Pillsbury Winthrop Shaw Pittman LLP in Washington. Roswell is with Niles, Barton & Wilmer LLP in Baltimore.

The Supreme Court issued its ruling in Tapestry Inc. v. Factory Mutual Insurance Co., Misc. No. 1, September Term 2022.

The decision was the first by the newly renamed Supreme Court of Maryland, which had been called the Court of Appeals of Maryland until a name-changing amendment to the state constitution went into effect Wednesday.

Tapestry operates 15 stores in Maryland and owns several high-end brands, including Coach, Kate Spade New York and Stuart Weitzman. The Maryland company’s claim is in federal court based on an amount in controversy exceeding $75,000 and its diversity of citizenship with its Rhode Island-based insurer.

The case, pending in U.S. District Court in Baltimore, is docketed as Tapestry Inc. v. Factory Mutual Insurance Co., No. 1:21-cv-01941-GLR.

The issue before the high court had been closely watched by two Maryland companies – Bel Air Auto Auction Inc. and The Cordish Companies Inc. – that challenged to the U.S. Supreme Court rulings that their COVID-compelled closures were not covered by the physical loss or damage provisions of their insurance policies.

In recent weeks, the U.S. Supreme Court denied without comment the companies’ request that the justices hold the 4th U.S. Circuit Court of Appeals’ rulings in abeyance until the Maryland high court answered Russell’s question.

The two cases were docketed at the U.S. Supreme Court as Bel Air Auction Inc. v. Great Northern Insurance Co., No. 22-392, and The Cordish Companies Inc. v. Affiliated FM Insurance Co., No. 22-424.

Bel Air said its losses came from cancellation of its live in-person weekly car auctions and the closure of its on-site restaurant during Gov. Larry Hogan’s stay-at-home and safer-at-home orders between March 2020 and the summer of 2021.

Cordish, which owns the Live Casino & Hotel Maryland in Hanover and about 30 other Maryland properties, said its losses from the governor’s orders exceeded tens of millions of dollars.


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