Some property and casualty insurers’ public statements would suggest that virus and contamination exclusions universally bar coverage for claims arising from the coronavirus pandemic. But not all policies contain such exclusions, and not all such exclusions are created equal. Some so-called virus exclusions may fail to capture the coronavirus unambiguously in their litanies of excluded perils; others may apply only to particular coverage grants; and others may contain exceptions allowing for express virus or pandemic coverage grants. In addition, doctrines of regulatory estoppel, principles of public policy, or currently pending legislation may render even the broadest virus exclusions unenforceable as written. At the same time, however, policyholders whose policies lack any virus exclusions may still find that their insurers dispute coronavirus-related coverage by relying on their general pollution or contamination exclusions, even with no specific reference to viruses in their insurance contracts.
While we are still in the early days of coronavirus-related coverage litigation, we explore here some of the arguments that policyholders and insurers have asserted to date regarding the application of virus and pollution exclusions to business interruption insurance claims.
Some—but far from all—commercial property insurance policies contain exclusions for losses caused by viruses. The exact wordings of such exclusions, and their related definitions, vary. Some address viruses specifically, either alone or as one among other causes of loss such as bacteria, fungi, microbes, or microorganisms. Some expressly exclude severe acute respiratory syndrome–associated coronavirus (SARS-CoV) but not SARS-CoV-2. Some exclusions are phrased in terms of “communicable disease” or “pandemic,” sometimes without using the word “virus.” And some may purport to exclude “pollutants” or “contamination” in a form that is expressly defined to include “virus” as a “pollutant” or “contaminant.” In addition, some virus exclusions are framed in anti-concurrent causation language, purporting to apply the exclusion regardless of other causes of loss or whether other causes acted concurrently or in any sequence with the excluded peril.
But not all virus exclusions apply to all losses.
Exceptions to virus exclusions. Commercial property policies with virus exclusions might contain coverage inclusions (often with sub-limits) that either expressly or implicitly negate the virus exclusion.
· Additional coverage for communicable disease. For example, some commercial property policies contain a contamination exclusion defining “contaminant” to include “virus”; however, these policies also contain additional coverage extensions for “communicable disease response” coverage and “interruption by communicable disease” coverage. If the coronavirus was actually present at an insured location and that location is subject to a health authority order, then the policyholder should be entitled to coverage under this endorsement.
Insurers may argue that this coverage extension—which is often sub-limited—provides the exclusive line of coverage for COVID-19-related losses. But many communicable disease coverage grants do not by their terms limit other coverage grants under the policy. Thus, for example, if the pandemic results in lost revenue or extra expense due to a plant shutdown or supply chain disruptions, business interruption or contingent business interruption coverage may not be subject to the communicable disease sub-limits, but only to the policy’s overall limits. Similarly, civil authority coverage might apply separately, to the extent that the cause of damage is deemed to be “of the type insured” and other requirements of that coverage grant are met.
As one case contesting the contamination/virus exclusion illustrates, policy wording is key. In Thor Equities, LLC v. Factory Mutual Insurance Co., Factory Mutual issued a commercial property policy with time element coverage that included “Interruption by Communicable Disease.” According to the complaint, that policy provides coverage for business interruption due to an order regulating communicable disease and also contains a contamination/virus exclusion that defines contamination as a “condition of property” and includes “virus” among the causes of contamination:
[A]ny condition of property due to the actual or suspected presence of any foreign substance, impurity, pollutant, hazardous material, poison, toxin, pathogen or pathogenic organism, bacteria, virus, disease causing or illness causing agent, fungus, mold or mildew.
The insured in Thor Equities alleges that its losses are covered, not excluded, under this policy wording because the communicable disease coverage grant and the contamination exclusion are mutually exclusive:
Thor’s losses are covered under the other coverages and are not excluded by the Contamination Exclusion because the Contamination Exclusion only excludes costs due to contamination, not losses such as Time Element losses, and the Contamination Exclusion cannot apply to anything defined as communicable disease because, as neither the Contamination Exclusion nor the communicable disease coverages reference each other, if the Contamination Exclusion applies to communicable disease the communicable disease coverages are illusory.
Further, the Thor Equities plaintiff alleges, coverage is not confined to the communicable disease extension, which is sub-limited, but extends to all other business interruption losses, because the contamination exclusion “only applies to costs incurred as a direct result of contamination, not costs incurred as a result of other causes.”
Thus, in policies with distinct property damage and time element coverages, separate communicable disease coverage, and a contamination/virus exclusion that is limited to “conditions of property,” this particular virus exclusion may be limited to property damage losses and not preclude coverage for other elements of the claim.
· Additional coverage for fungi, wet rot, dry rot, and microbes (including viruses). In addition to the Factory Mutual policy language at issue in Thor Equities, virus coverage may exist in other forms. For example, some business property policies contain coverage extensions for “fungi, wet rot, dry rot and microbe coverage,” with a definition of “microbes” that expressly includes viruses. This additional coverage applies to property damage and time element losses, and expressly carves out an exception to the policy’s fungi, wet rot, dry rot, and microbe exclusion. Where the virus or microbes are “the direct result of a covered peril”—i.e., all risks other than those that are excluded—property losses and time element losses due to the coronavirus would be covered, though possibly subject to sub-limits.
· Factors other than virus that cause physical loss. When a loss is caused by something other than a virus, the virus exclusion does not apply: This axiomatic argument appears to lie at the heart of the complaints filed by Minor League Baseball (MiLB) teams, alleging “direct physical loss or damage” due to widespread shutdowns that have prevented them from fielding players and playing games. The plaintiffs’ alleged losses include physical loss and loss of use “to the teams’ ballparks or elsewhere caused by the SARS-CoV-2 virus, the governmental response to it, or the MiLB teams’ inability to obtain players.” Only one of these causes of loss is the virus; two are not; therefore, the plaintiffs assert, coverage still applies.
· Civil authority. Some civil authority coverage claims may not be subject to virus exclusions. The recently filed complaint in Williams PLLC v. Cincinnati Insurance Co. asserts, “None of the forms [in the insured’s policy] exclude coverage due to a governmental action intended to reduce the effect of the ongoing global pandemic.” Similarly, in another recently filed complaint, Turek Enterprises alleges:
The Covid-19 virus was not the direct cause of the property damage at issue. The State did not order Plaintiff, or any proposed class member, to suspend its operation because its premises needed to be de-contaminated from the Covid-19 virus. The State issued its Order to ensure the absence of the virus, or persons carrying the virus, from the Plaintiff’s premises. And there is no evidence at all that the virus did enter Plaintiff’s property or that it had to be de-contaminated.
And the Chattanooga MiLB plaintiffs likewise contend that the governmental response to the pandemic is not itself due to “loss or damage caused by or resulting from any virus. . . .”
In sum, under this theory of coverage, the plaintiffs’ losses were directly caused by the actions of a governmental authority, not by the virus. Further, the virus exclusion does not apply to the civil authority coverage because the governmental closure orders do not require cleanup of viral contamination.
In addition, some civil authority coverage grants extend to “imminent loss.” Thus, exclusions that purport to bar coverage for “direct physical loss” or “the actual presence of any . . . virus” might be ineffective to preclude civil authority coverage where government shutdown orders are imposed to avoid or prevent “loss” or “imminent loss,” as opposed to “physical damage.”
Under an “all risk” policy, many courts require the policyholder to demonstrate only that its property has in some way been damaged or lost in order to satisfy its burden of proof. If, as many policyholders contend, the inability to use property constitutes “direct physical loss or damage,” and if the policyholder can demonstrate such a loss, then the burden shifts to the insurer to prove that an excluded peril caused that loss. Contamination and virus exclusions that use the phrase “conditions of property” or the word “actual” will present a more challenging burden of proof for insurers. If the exclusion requires the “actual presence of any . . . virus,” the exclusion may be held inapplicable on its face to government orders that are based on merely suspected or imminent viral presence.
Regulatory estoppel. Some policyholders contend that the virus exclusion itself is simply invalid. For example, in 1 S.A.N.T., Inc. d/b/a Town & Country v. Berkshire Hathaway, Inc., the plaintiffs assert that principles of regulatory estoppel bar insurers from enforcing the virus exclusion.
Regulatory estoppel is “a form of equitable estoppel whereby insurers are prevented, or ‘stopped,’ from asserting an interpretation of an insurance policy provision that is contrary to the insurer’s explanation of that policy provision to state insurance regulators when the insurer originally sought approval of the policy form from the state department of insurance.” Here, the basis for Town & Country’s assertion is that the insurance industry, when seeking approval for the new exclusion from state regulators in 2006, misrepresented its scope as merely clarifying rather than curtailing coverage. The complaint states:
49. In their filings with the various state regulators (including Pennsylvania), on behalf of the insurers, ISO [the Insurance Services Office, Inc.] and AAIS [the American Association of Insurance Services] represented that the adoption of the Virus Exclusion was only meant to “clarify” that coverage for “disease-causing agents” has never been in effect, and was never intended to be included, in the property policies.
. . . .
53. The foregoing assertions by the insurance industry (including Defendant), made to obtain regulatory approval of the Virus Exclusion, were in fact misrepresentations and for this reason, among other public policy concerns, insurers should now be estopped from enforcing the Virus Exclusion to avoid coverage of claims related to the COVID-19 pandemic.
54. In securing approval for the adoption of the virus exclusion by misrepresenting to the state regulators that the virus exclusion would not change the scope of coverage, the insurance industry effectively narrowed the scope of the insuring agreement without a commensurate reduction in premiums charged. Under the doctrine of regulatory estoppel, the court should not permit the insurance industry to benefit from this type of duplicitous conduct before the state regulators.
A key issue in this regulatory estoppel litigation is whether ISO and AAIS did, in fact, misrepresent the coverage the exclusion was meant to “clarify.” The complaint alleges that ISO represented, in a July 6, 2006, “Circular,” that “property policies have not been a source of recovery for losses involving contamination by disease-causing agents” and that policyholders might try to “expand coverage to create sources of recovery for such losses. . . .” AAIS, in its own filing, similarly represented:
Property policies have not been, nor were they intended to be, a source of recovery for loss, cost or expense caused by disease-causing agents. With the possibility of a pandemic, there is concern that claims may result in efforts to expand coverage to create recovery for loss where no coverage was originally intended. . . .
This endorsement clarifies that loss, cost, or expense caused by, resulting from, or relating to any virus, bacterium, or other microorganism that causes disease, illness, or physical distress or that is capable of causing disease, illness, or physical distress is excluded. . . .
But in fact, as the Town & Country complaint asserts, “[b]y 2006, the time of the state applications to approve the Virus Exclusion, courts had repeatedly found that property insurance policies covered claims involving disease-causing agents. . . .”
If the policyholder plaintiffs in Town & Country are correct, and the insurance industry representatives’ 2006 representations to regulators are shown to be false, then the insurers may be barred from asserting that the exclusion applies to bar coverage for claims involving disease-causing agents, such as the coronavirus.
Public policy arguments. In at least one jurisdiction that has not formally adopted the regulatory estoppel doctrine, policyholders have instead relied on a public policy theory to overcome virus exclusions, alleging that their commercial property policies provide coverage for business interruption losses and that “any other construction of the language of the policies [is] void as against public policy. . . .”
These Texas policyholders allege that the exclusion is invalid because the insurers procured the state insurance department’s approval by representing that the exclusion was narrower than these insurers now claim. They seek discovery regarding “the meaning and scope and intended operation of the Virus exclusion,” contending that
[o]n information and belief, Defendant made admissions to insurance regulators that the exclusion was meant to apply only for decontamination costs claims, but not for losses from business interruption and civil authority orders.
The insurers in these cases have moved to dismiss the complaints, including the claims based on the public policy argument. According to one insurer motion, public policy is in the insurers’ favor, not the policyholders’:
To impose liability retroactively for an excluded peril . . . does not serve public policy, but would arbitrarily impose an inequitable burden on State Farm and other insurers to cover a risk that their policies explicitly and unambiguously informed policyholders was not covered and for which the insurers did not charge a premium.
The court has not yet ruled on these motions as of this writing.
Proposed legislation. Even if policyholder litigants’ regulatory estoppel and public policy arguments were to fail in the courts, state and federal legislatures might nonetheless codify their positions, at least for small businesses. Legislation is currently under consideration in several states and in Congress, the effect of which would be to void virus exclusions and force insurers to pay certain claims under some circumstances. None of the bills has yet passed.
Traditional exclusions for “pollutants” or “contaminants” omitting the word “virus.” If a policy lacks a standard-form virus exclusion that is commonly available in the marketplace, many courts would be reluctant to read the word “virus” into another exclusion where it does not appear. Yet, some insurers reportedly have attempted to do just that, arguing that garden variety pollution exclusions, phrased in terms usually reserved for environmental pollution, should apply to viruses, too. Both the case law and the regulatory history of the standard-form virus exclusion suggest that these insurance industry arguments may face stiff headwinds.
In the wake of the SARS pandemic of 2003, the insurance industry, through trade associations such as the ISO and the AAIS, first sought regulatory approval in 2006 to add the virus exclusion (discussed above) to “all risk” commercial property policies because the pollution exclusion did not expressly encompass viruses. The contemporaneous ISO Circular, as discussed above, acknowledged exactly this point—that “viral and bacterial contamination,” which are not mentioned in the standard pollution exclusion, “appear to warrant particular attention at this time.” Thus, because policies with standard pollution exclusions left open the possibility of coverage for viruses, the insurance industry sought regulatory approval to close the door with a specific virus exclusion. Without the virus exclusion, ISO’s commercial property policy’s “physical loss of or damage to” requirement could be met by viral contamination, and the pollution exclusion would not apply.
This is essentially the plaintiffs’ argument in 3 Squares LLC v. Cincinnati Insurance Co., a coverage case involving a policy that contains no virus exclusion, but only a standard exclusion for pollutants. The policyholders’ complaint alleges:
15. Prior to the effective date of the Policies, ISO published and made available for use a standard virus exclusion form.
16. Defendant CIC chose not to include the ISO standard virus exclusion form in the Policies.
17. Other than reference to a computer virus, the Policies include no exclusion that references the word virus.
Given the lack of an express virus exclusion, and allegations that otherwise meet the basic insuring agreement, the plaintiff policyholders seek a declaratory judgment that their claims (and those of class members with typical claims in common) are covered.
Among other defenses, the insurer in 3 Squares is expected to raise its “pollutants” exclusion, which is written on standard ISO Form FM 101 05 16, as a defense to coverage. “Pollutants” is defined as “any solid . . . contaminant,” including “substances which are generally recognized in industry or government to be harmful or toxic.” “Virus” is nowhere mentioned in this definition. Insurers nevertheless can be expected to argue that the coronavirus is a “solid irritant or contaminant” and that it is “harmful to persons,” to support their denials of coverage.
Case law in several states, involving analogous factual situations, supports policyholder arguments that such standard pollution exclusions do not bar coverage for losses caused by or resulting from a virus. In light of the environmental terms in these exclusions (e.g., “release, discharge, escape or dispersal of ‘contaminants or pollutants’”), many courts have confined even “absolute” pollution exclusions to claims involving “traditional” environmental pollution, and have declined to apply them to claims involving, for example, carbon monoxide, paint fumes, local workplace fumes, or ingestion of lead paint. Under this interpretation, a cause that spreads a virus (such as a sneeze) would fall outside the exclusion.
Some courts, however, have held that pollution exclusions encompass both traditional and nontraditional industrial pollution. Given the stakes of pandemic-related coverage, insurers can be expected to argue that traditional pollution exclusions should be extended to the novel coronavirus, even when their policies otherwise lack express virus exclusions.
“Microbe” exclusions. In its public statements regarding COVID-19, at least one insurer, CNA, has referenced its exclusions for “loss or damage caused by microbes, contaminants, or pollutants, among other perils.” A published version of CNA’s “microbe” exclusion applies to the “presence, growth, proliferation, spread or any activity of Fungi, wet rot, dry rot or Microbes.”
In contrast to the “microbe” exclusion at issue in the Thor Equities case discussed above, this version of the CNA exclusion defines “Microbe” without any mention of “virus”:
Any non-fungal microorganism or non-fungal, colony-form organism that causes infection or disease. Microbe includes any spores, mycotoxins, odors, or any other substances, products or byproducts produced by, released by, or arising out of the current or past presence of microbes.
Does the coronavirus that causes COVID-19 qualify as a “microbe” under a definition that is silent about viruses? Though a virus shares some of the characteristics of living things, it is not technically a life form; therefore, it does not fall within the literal scope of the term “organism” or the term “microorganism” in this definition of “microbe.” Most standard dictionaries also define “microbe” to mean a “microorganism,” i.e., a living thing. Nonetheless, due to the unique characteristics of viruses, usage of these terms may vary. For example, the National Institutes of Health, in its HIV/AIDS glossary, says: “Although viruses are not considered living organisms, they are sometimes classified as microorganisms.”
In short, the terms “microbe” and “microorganism” may be deemed ambiguous as applied to viruses. Generally accepted principles of policy interpretation would dictate that if these terms appear in an exclusion, they must be construed narrowly—even if they have enjoyed a broader construction when they appeared elsewhere in a coverage grant. Thus, standard rules of construction could result in differing conclusions as to whether the novel coronavirus falls within the term “microbe” or “microorganism,” depending on whether the term in question appears in a coverage grant or an exclusion.
Coronavirus coverage litigation is in its earliest stages, with interpretation of exclusions and other substantive issues largely undecided. Courts should, of course, apply the rules of insurance contract construction to determine whether and to what extent each virus and pollution exclusion wording, in the context of the policy as a whole, applies to a particular fact pattern. In addition to plain language that unambiguously carves out exceptions allowing coverage in certain circumstances, real-world context—including past drafting and regulatory history and current political considerations—may also play a role in deciding whether or how virus and pollution exclusions should apply to business interruption insurance claims. Regardless of what the insurance industry’s current public statements may suggest, these exclusions appear unlikely to provide insurers with a magic bullet against all coronavirus-related coverage claims in the courts.
