The last few years have not been particularly kind to the cruise ship industry. In January 2012, thirty-two passengers were killed when the Costa Concordia capsized off the coast of Tuscany after striking a rocky shoal. In February 2013, a fire in the engine room of the Carnival Triumph left the ship’s 4,200 passengers adrift for several days in the Gulf of Mexico with little food, no air conditioning, and a backed-up sewage system. And in January 2014, 684 passengers fell ill aboard the Royal Caribbean’s Explorer of the Seas from an apparent norovirus outbreak. These and other incidents damaged more than just the industry’s public image; they have made a sizeable dent in profits as well. Indeed, the Costa Concordia disaster alone is expected to engender over $1 billion in insurable losses by the time all is said and done.

When a loss is tangible—such as a burnt-out engine room or a breached hull—securing coverage under a typical first-party property insurance policy should be relatively straightforward.  But it is less obvious that coverage is afforded for intangible losses such as norovirus contamination. This is because virtually all property insurance policies predicate coverage on the occurrence of a “direct physical loss” to the insured property, a requirement that has been cited by insurers to deny coverage for losses caused by asbestos, mold, carbon monoxide, and bacteria. Given the large number of cruise ship outbreaks that have been reported in recent years—16 in 2012, 9 in 2013, and at least 8 so far in 2014, according to the Centers for Disease Control and Prevention—the “direct physical loss” provision has the potential to negate sizeable amounts of coverage. And the cruise ship industry is not the only one at risk: businesses in the food, retail, and entertainment sectors could face contamination-related losses as well.

Fortunately, there is good reason to believe that the “direct physical loss” requirement would not preclude coverage in a contamination situation like the one experienced by the Explorer of the Seas. Although norovirus other pathogens are microscopic, they are fundamentally no less “physical” than an engine-room fire or a rocky shoal. Accordingly, the mere fact that a pathogen cannot be seen should pose no obstacle to recovery. This conclusion is supported by substantial caselaw finding coverage for losses with such intangible causes as carbon monoxide, noxious gasoline fumes, and even odors from methamphetamine production. See Matzner v. Seaco Ins. Co., 9 Mass. L. Rptr. 41 (Mass. Supp. 1998); Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52 (Co. 1968); Farmers Inc. Co. of Or. v. Trutanich, 858 P.2d 1332 (Or. Ct. App. 1993).

A more problematic issue is whether property can be considered to be physically damaged even if it has not been structurally altered in any way. This esoteric question is central to whether coverage for contamination-related losses can exist under first-party property insurance policies notwithstanding the “direct physical loss” requirement. Most courts to have considered analogous situations have taken a functionalist approach to the inquiry, determining that property can suffer a “direct physical loss” even in the absence of structural damage so long as the utility of the of the structure is impaired. See Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.E.2d 296, 300 (Minn. Ct. App. 1997) (determining that asbestos contamination triggered coverage because “[d]irect physical loss . . . may exist in the absence of structural damage to the insured property”); Matzner, 9 Mass. L. Rptr. 41 (construing the phrase “direct physical loss” broadly “to include more than tangible damage to the structure of insured property”); Western Fire, 437 P.2d at 55 (holding that a direct physical loss occurred where due to “the accumulation of gasoline . . . the premises became so infiltrated and saturated as to be uninhabitable, making further use of the building highly dangerous”); Farmers, 858 P.2d at 1335 (concluding that a pervasive odor was physical “because it damaged the house”). Similarly, a pathogen may cause “direct physical loss” to a cruise ship simply by virtue of its presence therein, so long as the ship loses value as a result.

There is also some authority for the proposition that in certain limited circumstances, insured property may suffer a “direct physical loss” even where there is no dispute that the cause of the loss was wholly external to the property itself. In the case of Hughes v. Potomac Insurance Co. of the District of Columbia, 18 Cal. Rptr. 650 (Cal. Ct. App. 1962), the value of the insured’s home plummeted when a landslide left it precariously balanced on the edge of a 30-foot cliff. Seizing on the fact that the physical structure of the house remained intact, the insurer denied coverage. The court rejected this opportunistic argument, pointing out the absurdity of the insurer’s contention that a dwelling rendered wholly unusable “has not been ‘damaged’ so long as its paint remains intact and its walls still adhere to one another.” Id. at 655. Hughes arguably weighs in favor of coverage in situations such as the recent closure of Carnival Cruise Lines’ Turks and Caicos port due to the fear—but perhaps not the reality—of contamination.

As illustrated above, the “direct physical loss” requirement is potentially problematic for insureds seeking coverage for intangible losses. Fortunately, many courts have rejected insurer arguments that such losses are insufficiently “direct” or “physical” to trigger coverage. Insurers are entitled to manage risk by limiting coverage grants or excluding certain types of peril, but it is a basic tenet of insurance law that they must do so unambiguously in order to protect the reasonable expectations of the insured. In accordance with this principle, courts have rightly refused insurer invitations to categorically preclude coverage for losses caused by intangible hazards.  While insurers may well argue that the “direct physical loss” requirement bars coverage for contamination-related losses, cruise ship companies and other businesses facing intangible risks can muster persuasive arguments in support their recovery efforts.