By Shawn Rice

Law360 (June 15, 2021, 9:01 PM EDT ) A New Hampshire-based hotel company and its affiliates were granted partial summary judgment in their business interruption suit with insurers when a state judge ruled Tuesday that damage caused by the presence of the coronavirus was a "direct physical loss or damage" to the hotels.

Merrimack County Superior Court Judge John C. Kissinger Jr. held that the coronavirus causes "a distinct and demonstrable alteration" to property, triggering business interruption coverage for Schleicher and Stebbins Hotels LLC and its affiliates, which look to tap into part of a $600 million tower of insurance for losses. 

Judge Kissinger reached his conclusion by turning to the New Hampshire Supreme Court's interpretation in Mellin v. Northern Security Insurance Co. that physical loss doesn't require structural damage but only a showing by a policyholder of a "distinct and demonstrable alteration" of the property.

"Property contaminated with [coronavirus] is 'distinct' from uncontaminated property," he said. "Coming into contact with property exposed to the virus results in a risk of contracting a potentially deadly disease." 

Schleicher and Stebbins and its affiliates filed suit, saying part of a $600 million tower covered by eight insurers should pay for losses from temporarily closing their 23 hotels across New Hampshire, Massachusetts and New Jersey under government shutdown orders to curb the spread of the coronavirus.

Judge Kissinger's Tuesday's order hinged on Mellin, which concerned the impact on property by cat urine odor. Like the cat urine in Mellin, Judge Kissinger said the coronavirus didn't originate from the hotels and can't be seen or touched, but that doesn't change the fact that the virus changed the properties.

The judge explained changes to property don't need to be "perceptible by one of the five senses, be incapable of remediation or result in dispossession." The presence of the coronavirus is detectable, the judge said, as government authorities found the virus to be widespread where the hotels were located.

"In the event an infected guest at one of the hotels were to infect a doorknob, that the doorknob turns in no way lessens the now very different risk that it poses to human health," the judge said, noting whether the hotels were infected can be determined through various means such as laboratory testing.

The judge also ruled that seven of the insurers couldn't avoid coverage under the microorganism exclusion.

But Judge Kissinger granted partial summary judgment to Axis Surplus Insurance Co. in Tuesday's order, holding that its policy excludes coverage for "pollutants or contaminants" such as the coronavirus.

Respiratory ailment COVID-19 is caused by infection with the coronavirus and the policy doesn't cover loss or damage resulting from the dispersal of a virus, according to the judge. Losses from the pandemic's impact to the hotels aren't covered by Axis, Judge Kissinger ruled.

Judge Kissinger's decision is the latest in a recent couple of state court wins for policyholders in their suits for business interruption coverage for losses during the pandemic.

A Rhode Island state judge ruled a Providence strip club sufficiently showed that it is entitled to civil authority coverage despite a virus exclusion. And a Pennsylvania state court judge granted partial summary judgment to a Pittsburgh tavern on its claim for income protection coverage.

Marshall Gilinsky of Anderson Kill PC, counsel to the hoteliers, told Law360, on Tuesday in an emailed statement, that the court got it right. Policyholders pay premiums for business interruption insurance to cover if something happens to property that drives down their revenue, Gilinsky added.

"It does not matter if that something is a giant earthquake that breaks buildings in half, or an invisible virus that renders property unsafe and unusable," he said. "To the policyholder, the effect is the same."

Counsel for the insurance companies didn't immediately respond to requests for comment Tuesday.

The hoteliers are represented by Marshall Gilinsky, Dennis J. Artese, Carrie Maylor DiCanio and Ethan W. Middlebrooks of Anderson Kill PC and Michael S. Lewis and Michael K. O'Neil of Rath Young and Pignatelli PC.

AXIS is represented by Kevin G. Collimore of Cullen Collimore PLLC and Kristin V. Gallagher and Eduardo DeMarco of Kennedys Law.

Certain underwriters at Lloyd's of London and Starr Surplus Lines Insurance Co. are represented by Nolan C. Burkhouse and Megan A. Sigur of Paul Frank + Collins PC and Amy Churan and Kenneth R. Taketa of Robins Kaplan LLP.

Evanston Insurance Co. is represented by Alexander G. Henlin of Sulloway & Hollis PLLC and Timothy M. Strong and Bennett Evan Cooper of Dickinson Wright.

Everest Indemnity Insurance Co. is represented by Doreen F. Connor of Primmer Piper Eggleston & Cramer PC and Matthew Gonzalez, Seth V. Jackson and Jeffrey Gordon of Zelle LLP.

Hallmark Specialty Insurance Co. is represented by Michael F. Aylward and William Schneider of Morrison Mahoney LLP.

Mitsui Sumitomo Insurance Company of America is represented by Geoffrey Judd Vitt and Sarah Merlo of Vitt & Associates PLC and Brian O'Donnell and Maura Smith of Riker Danzig Scherer Hyland & Perretti LLP.

Scottsdale Insurance Co. is represented by Donald Lee Smith and Andrew D. Dunn of Devine Millimet and Jay Russell Sever and Patricia A. McLean of Phelps Dunbar.

The case is Schleicher and Stebbins Hotels LLC et al. v. Starr Surplus Lines Insurance Co. et al., case number 217-2020-CV-00309, in the Merrimack Superior Court in the State of New Hampshire.

--Additional reporting by Daphne Zhang and Hannah Albarazi. Editing by Neil Cohen.

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