Several decisions and numerous pending motions filed during the last few weeks have transitioned the litigation over COVID-19 Business-Interruption (BI) claims from what seemed like a preliminary event, namely the quarrel over whether COVID-19 contamination is property damage, to what may well turn out to be the main event: the meaning of the various exclusions for pollution, contamination, and microorganisms that insurers have cited when denying claims.
Many BI policies have exclusions for viruses, but also specifically provide coverage for communicable diseases, typically with a relatively low limit. The courts will have to figure out how these specific provisions interact, how the communicable-disease limits apply to broader BI claims, and how virus exclusions apply to general BI coverage, particularly when the policyholder believed it was purchasing coverage for contamination. See Thor v. Factory Mutual, Civ. No. 20 CV-3380, Mot. To Dismiss (S.D.N.Y. Aug 17, 2020). Given the arcane language and structure of many BI policies, the insureds seem to have a good argument that they were confused by all the conflicting language and deserve some type of coverage for BI. But resolving these issues will likely require discovery into the explanations for why the exclusions were added to BI policies as well as a review of prior interpretations of the exclusions in other contexts—this issue does not seem susceptible to a decision on a motion to dismiss.
Starting to address the “meat” of BI claims relating to COVID-19, there has been a recent U.S. decision finding that a partial suspension of operations may be sufficient to trigger Civil Authority coverage, reaching the same conclusion as the recent FCA decision to that effect in the U.K. In Franklin EWC v. The Hartford, Civ. No. 20-cv-04434 (N.D. Cal., Sept. 22, 2020), the court ruled on a motion to dismiss and found that the virus exclusion was clear and defeated any claim by a body-waxing company for BI, even though the complaint adequately alleged property damage. The court also held that the argument that civil authority was the real cause of the damage and surmounted the virus exclusion was “nonsense.” Finally, the court found that the policy’s anti-concurrent cause language meant that an order of a civil authority could not be the “covered cause” of property damage if the virus was a contributing cause thereto. The decision seems to range far from the allegations of the complaint and to ignore the possibilities of discovery and interpretation of the policy language, which was not exactly clear. See also Wilson v. The Hartford, Civ. No. 20-3384 (E.D. Pa. Sept. 30, 2020) (same).
In contrast, a Missouri court seems to have respected the need for discovery; it found that the complaint alleged enough in terms of property damage and suspension of business by an order of civil authority to turn back the motion to dismiss. Blue Springs Dental Care v. Owners Ins., Civ. No. 20-CV-00383 (W.D. Mo. Sept. 21, 2020). In this ruling, the court found that, even though dentists were considered essential businesses for emergency dental care, the cut-back in elective treatments as a result of the stay-at-home orders might constitute enough of a suspension of business to trigger Civil Authority coverage for the resulting losses.
Similarly, in Urogynecology Specialists v. Sentinel Ins., Civ. No. 20-CV-1174 (M.D. Fla. Sept. 24, 2020), the court held that the complaint alleged sufficient property damage and that the virus exclusion was sufficiently ambiguous to allow the plaintiff to defeat a motion to dismiss. The court found that COVID-19 presented a unique set of problems that was both not precisely addressed by the policy’s virus exclusion and distinguishable from the cases cited by the insurer, which addressed more traditional pollution releases and sexually transmitted diseases.
Thus, while at least some courts seem inclined to grant motions to dismiss despite allegations that should surmount those motions, others have allowed similar cases to proceed through discovery and to proper contract interpretation. Courts in the latter category will likely face some or all of the following issues:
- Review of Evidence of Custom and Practice in the Insurance Industry.
- History of Adoption of ISO and Non-Standard Virus Exclusions.
These issues may well be reviewed in carrier specific MDLs. See e.g., Germack v. Dentists Ins., Civ. No 20-CV- 0661 (W.D. Wa. Sept. 18, 2020); Chattanooga Baseball v. Scottsdale Ins., Civ. No. 2:20: CV: 01312 (D. Ariz., Sept. 11, 2020).
- Insurer Concessions in Other Cases.
In Optical Services v. Franklin Mutual, Civ. No. 3681-20 (NJ Berl. Ct. Sept. 27, 2020), an insurer acknowledged that a “contamination” exclusion referring to viruses did not apply because there was no allegation of contamination in the complaint.
- Statements in Insurer Annual Reports.
Carriers such as Chubb and The Hartford have stated in annual reports that they cover pandemic risk. That, too, could be an admission that should be explored in discovery. Even if other carriers’ annual reports do not contain similar admissions, insureds could still argue that the insurers knew about the risk of a pandemic and sold all-risk policies that did not exclude that risk and therefore cover it, citing to public statements like the following in Chubb’s December 2019 Form 10-K: “We have substantial exposure to losses resulting from . . . catastrophic events, including pandemics.” The Hartford’s Form-10K for the 2019 fiscal year similarly stated “[o]ur businesses also have exposure to global or nationally occurring pandemics caused by highly infectious and potentially fatal diseases spread through human, animal or plant populations” and identified “the spread of disease” as a “catastrophe exposure.”
- Interplay Between Virus Exclusions and Provision of Communicable-Disease Coverage.
There are also numerous BI policy forms covering communicable disease events such as the FM form “communicable disease” coverage—and if an insurer can write communicable disease coverage, it also knows how to exclude communicable diseases from coverage. The parties in litigation may need to engage in discovery about those forms and explore why virus exclusions do not mention pandemics and communicable diseases. If such documents were obtained in discovery, they might well show that the carriers did not believe that the exclusions on which they now seek to rely excluded coverage for pandemics like COVID-19. Moreover, there is the question whether the science of COVID-19 affects the meaning of the 2006 virus exclusion. COVID-19 is a disease different from that caused by the SARS-1 virus, the spread of which led to and is covered by the 2006 virus exclusion. Indeed, it appears that, before the 2006 exclusion was added to BI policies, carriers paid out for BI losses caused by SARS-1, including partial losses of business without closures. Consequently, if COVID-19 is different enough from SARS-1, it should not fall under the SARS-1 exclusion and should be covered. See Caribe v. TOPA Ins., Civ. No. 2:20-CV-3570, Brief in Opposition to Mot. to Dismiss (C.D. Cal. Sept. 28, 2020). Discovery on payouts for SARS-1 might prove helpful in interpreting the virus exclusion.
- Civil Authority Coverage.
Determining whether losses from COVID-19 are covered by Civil Authority coverage will raise fact questions such as whether there was damage to property “immediately surrounding the damaged property” within the distance specified by the policies. The parties will need discovery of nearby properties or scientific evidence to establish a presumption of damage to the nearby property.
There will also need to be discovery on the amount of cessation of business as a result of the civil authority orders and the resulting loss of revenue. The question whether partial cessation of business is sufficient to trigger coverage is an important one, and the insurance companies’ history of interpreting Civil Authority coverage clauses should be subject to discovery. It may well be that, prior to the COVID-19 experience, carriers regularly paid out for partial loss of revenue due to such orders. That appears to be what happened in Houston after Katrina and even for SARS-1.
- Efficient Proximate Cause.
The insureds may seek discovery as to how their carriers interpreted multiple clauses in previous situations where civil authority orders closed or partly closed their insureds’ businesses.
It will be interesting to see how the courts apply the rules for motions to dismiss, and whether they allow cases to proceed where there are contested issues of fact necessary to interpret ambiguous policy provisions. The insurance companies seem to want a rush to judgment to eliminate their admitted potential liability, but policyholders should have their day in court. The courts should explore efficiencies in getting to that day, such as carrier-specific MDLs covering the above factual issues. The JPML just set up one such MDL, but has refused numerous other requests for carrier-specific MDLs.
Speed is not the hallmark of our court system. Thus, the Federal and state governments should also continue to explore some type of legislated solution similar to terrorism insurance that keeps the devastated insureds (including numerous nonprofits) alive through at least partial payments that will be reimbursed through future policy payments.