Consistency not a concern for insurers fighting COVID-19 business loss claims, but policyholders can take advantage of divergent coverage positions

Under standard property policies, insurers are broadly claiming that the pollution exclusion applies to bar coverage for losses caused by the COVID-19 pandemic. But the insurer in Essentia Health v. ACE American Insurance Company, which involved a Premises Pollution Liability Portfolio Insurance Policy, made the precise opposite argument. Essentia alleged that COVID-19 was a covered pollution condition, while ACE claimed that COVID-19 did not involve pollution. Essentia Health v. ACE American Insurance Company, No. 21-cv-207 (ECT/LIB) (D. Minn., May 25, 2021). Because Essentia turns the usual COVID-19 arguments upside down, it may provide helpful precedent for policyholders seeking coverage. In particular, ACE argued that a separate limitation on virus coverage demonstrated that insurers recognized the risks from a virus pre-COVID-19, and accordingly chose to limit the coverage for losses from diseases that are transmitted from person to person.

The court agreed with ACE that pollution condition could not include a virus (the opposite claim to that made by insurers relating to COVID generally), particularly when read with an endorsement providing limited coverage for viruses

The court granted ACE’s motion, because Essentia sought coverage only on the ground that COVID-19 was a “pollution condition,” reasoning that “pollution condition … read in conjunction with other provisions of the policy in this case, cannot reasonably be understood to include a virus.”

The court, citing other Minnesota cases and two treatises, discussed how most commercial property and liability policies exclude losses caused by pollution, and that pollution legal liability (PLL) policies and environmental policies were designed to fill the gap created by those exclusions. In this context, it is unsurprising that the PLL policy in Essentia defined “pollution condition” in much the same way as that used in exclusions in standard property policies:

[t]he discharge, dispersal, release, escape, migration, or seepage of any solid, liquid, gaseous or thermal irritant, contaminant, or pollutant, including soil, silt, sedimentation, smoke, soot, vapors, fumes, acids, alkalis, chemicals, electromagnetic fields (EMFs), hazardous substances, hazardous materials, waste materials, “low-level radioactive waste,” “mixed waste,” and medical, red bag, infectious or pathological wastes, on, in, into, or upon land and structures thereupon, the atmosphere, surface water, or groundwater.

Minnesota seemingly takes the minority view; not limiting pollution exclusions to traditional environmental pollutants. However, in Essentia, ACE argued that a pollution condition was limited to traditional environmental pollution, contrary to Minnesota law and arguments made by insurers regarding COVID-19 under standard property policies in states around the country. ACE relied on policy definitions and canons of construction in claiming that the examples of irritants, contaminants and pollutants in the policy meant that a “‘pollution condition’ is limited to pollutants, contaminants and irritants associated with traditional environmental pollution, and that a virus does not fall within that category.”

The court discussed Seifert v. IMT Ins. Co., 495 F. Supp. 3d 747 (D. Minn. 2020), where a federal district court granted the insurer’s motion to dismiss because the policyholder had not alleged physical loss, and a virus exclusion barred coverage, but which in a footnote stated that it would not apply the pollution exclusion because the coronavirus did not fall into the same category as the pollutants listed in that policy. As part of this discussion, the Essentia court highlighted the difference between the interpretation of coverage grants, which are construed liberally, and exclusions, which are construed narrowly, and found that treating Seifert’s statement about the scope of a pollution exclusion as the last word on the scope of an affirmative pollution coverage, would be inappropriate.

The court found that “ACE does not seem to dispute that [the term pollution condition], considered in isolation, could plausibly encompass the coronavirus that causes COVID-19” and:

Given the principle that grants of coverage are construed broadly and exclusions are construed narrowly, it would make little sense to apply the “traditional environmental pollution” limitation to a term appearing in the Policy’s grant of coverage when Minnesota courts have not done so when a similar term appears in pollution   exclusions. It may be reasonable, then, given Minnesota’s interpretation of policies, which includes construing  coverage grants broadly and exclusions narrowly, to understand the definition of “pollution condition”—in isolation—to encompass viruses.

However, the court further found that “[t]his understanding becomes unreasonable when the healthcare amendatory endorsement [in the Ace policy] enters the picture.” That endorsement:

defines “indoor environmental condition” to include “the discharge, dispersal, release, escape, migration or seepage of bacteria . . . or viruses in a building or structure, or the ambient air within such building or structure,” but only if, among other things, the insured seeks “remediation costs” and the bacteria or viruses involved “are not the result of communicability through human-to-human or bodily fluid contact.”

The court reasoned that the endorsement informed the interpretation of “pollution condition” in that policy and, because the endorsement specifically included “viruses” in the definition of “indoor environmental condition,” viruses were not intended to be included in the separate definition of pollution condition.

The ‘limited coverage’ for viruses demonstrates that insurers can limit coverage for diseases spread by human-to-human transfer – and have done so

The court also relied on the principle that courts must interpret policies to give effect to all of their provisions, finding that: “[t]he endorsement provides a narrow form of coverage (‘remediation costs’) for harm caused by certain viruses in a specific location (‘in a building or structure, or the ambient air within such building or structure’). If a virus were a ‘pollution condition,’ those limits would go away.” (citations omitted). The court noted that under the endorsement, policyholders could recover business interruption loss for viruses on or in the land, atmosphere, surface or ground water, and “[i]f the Policy’s coverage for ‘pollution condition[s]’ already provided all of these things, there would be no need for the narrower form of coverage outlined in the Healthcare Amendatory Endorsement.” However, since the coverage specifically carved out viruses transmitted communicably through human contact, it would not include coverage for COVID-19 losses.

This limitation on virus coverage demonstrates that insurers can – and, even before the COVID-19 pandemic occurred, did – limit coverage for losses from diseases that are transmitted from person to person if they wanted. It demonstrates that the insurance industry understood the risks from a virus pre-pandemic, and chose in some policies to address this risk.

A word about reasonable expectations

The court also found that the reasonable-expectations doctrine (that an objectively reasonable expectation of an insured should be honored in interpreting a policy) did not require interpreting the term pollution condition to include viruses. Given that Essentia is a sophisticated business entity, the court reasoned, “the Parties’ decision to use the Healthcare Amendatory Endorsement to vary the Policy language that would otherwise have applied indicates that they considered and bargained for a specific, more limited form of virus coverage.”

ACE’s vacillating arguments regarding whether a virus is a contaminant

Notably, the court refused to consider Essentia’s arguments regarding ACE’s previous contentions to courts and regulators that a virus constitutes a contaminant and/or virus. As outlined in Essentia’s pleadings: (1) ACE argued in Rembrandt Enterprises, Inc. v. Illinois Union Insurance Company, No. 15-2913, ECF No. 210 (D. Minn.), that the avian flu virus was a pollution condition; (2) ACE contended to the Wisconsin Office of the Commissioner of Insurance in a regulatory filing that the term “contaminant” embraces “viral and bacterial contamination;” (3) in other ACE insurance policies, ACE has expressly defined the term “contaminant” as including a virus; and (4) ACE’s proposed renewal of Essentia’s policy sought to add a Communicable, Infectious, or Contagious Diseases Exclusionary Endorsement precluding coverage for loss arising out of viruses. And this is not to mention the various instances in which insurers have refused to provide coverage for COVID-19 losses at least in part on the basis that pollution exclusions bar coverage. Nevertheless, on the grounds a “court interpreting an insurance policy may only consider extrinsic evidence if the policy is ambiguous,” the court held that Essentia’s arguments regarding ACE talking out of both sides of its mouth have “no bearing on ACE’s motion.”

Takeaways

This case presents an interesting instance of an insurer making arguments contrary to those characteristically seen in the context of coverage litigation arising out of COVID-19 losses. Policyholders are typically met with insurers arguing that COVID-19 constitutes a pollutant or contaminant, and that pollution exclusions thus bar coverage for COVID-19 related losses. In this case, however, the insurer argued that COVID-19 does not constitute a pollutant or contaminant to support its argument that COVID-19 losses were not covered by a pollution condition. Although ACE prevailed in this case, the opinion arguably creates a helpful precedent to oppose the usual argument that COVID-19 is a pollutant or contaminant that is barred by pollution exclusions. Moreover, the case demonstrates that the insurance industry was well aware of the risks posed by communicable diseases even before the pandemic and had specific exclusions to deal with that risk, such as the exclusion in this case which specifically referred to viruses spread communicably from person to person.

FCA v. Arch and others – The UK Supreme Court’s final word on business interruption insurance losses in light of the COVID-19 pandemic

The United Kingdom Supreme Court (UKSC) handed down its judgment on 15 January 2021 in The Financial Conduct Authority v. Arch Insurance (UK) Limited and Others. This test case was brought by the FCA on behalf of SME business interruption (BI) policyholders who have suffered financial losses as a result of COVID-19. The High Court judgment was handed down on 15 September 2020, with the special direct appeal to the UKSC taking place on 16 – 19 November 2020. The UKSC decision was largely seen as a victory for policyholders. As commented by Reed Smith partner, Mark Pring, in the Financial Times, “it can be said, without fear of hyperbole, that in principle at least this really is a catastrophic outcome for insurers.”

We have been reporting on these matters closely since March of last year, and have produced several more detailed alerts, which can be found on our Perspectives platform.

The court was asked to consider three broad categories of BI policy wordings, namely:

  • Disease wordings – which provide cover for BI losses sustained in consequence of, following or arising from the occurrence of a notifiable disease within a specific radius of the insured premises (COVID-19 was made a notifiable disease in England and Wales on 5 March 2020);
  • Hybrid wordings – which provide cover for BI losses sustained where restrictions have been imposed on the insured premises in relation to a notifiable disease; and
  • Prevention of access / public authority wordings – which provide cover for BI losses sustained where access to the insured premises has been prevented or hindered as a consequence of authority action/restrictions owing to an emergency in the vicinity of the insured premises.

In this post, we summarise some of the key points of the UKSC’s most recent decision and set out our views on some of the implications of the decision for policyholders (subject always to their individual circumstances).

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Recent pro-policyholder COVID-19 business interruption decisions

The COVID-19 pandemic has caused a wave of business interruption lawsuits, particularly between policyholders and their insurance companies. Initially, the nationwide trend was in favor of insurance companies, but recent decisions confirm that policyholders are gaining traction.

Policyholder arguments gather steam in court

One of the pioneer lawsuits, for example, recently survived a summary judgment motion. In Cajun Conti LLC v. Certain Underwriters at Lloyd’s of London, No. 2020-02558 (La. Civ. Dist. Ct., Orleans Parish, Nov. 4, 2020), the policyholder, a restaurant group, sought a judgment declaring that its insurance company should cover losses related to an order entered by Louisiana’s governor banning gatherings of 250 people or more. This caused the restaurants to operate at 50 percent capacity and cease service by 9 p.m. On November 4, 2020, the Louisiana state court denied the insurance company’s motion for summary judgment after finding the following four issues of material fact:

(1) Whether COVID-19 constitutes direct physical loss or damage;

(2) Whether the policy interests necessitate a more liberal reading of prior case law;

(3) If COVID-19 constituted a physical loss or damage, whether COVID-19 impacts the environment;

(4) In the context of civil authority coverage, whether COVID-19-related damages to property at another location within one mile of any of the restaurants is a covered cause of loss.

Likewise, a Pennsylvania state court overruled the insurance company’s motion to dismiss a tavern’s complaint for business interruption coverage because “at this very early stage, it would be premature for this court [to] resolve the factual determinations put forth by defendant to dismiss plaintiff’s claims.” Taps & Bourbon on Terrace, LLC v. Those Certain Underwriters at Lloyd’s, London, No. 00375 (Pa. Ct. Com. Pl. Phila. Cnty. Oct. 27, 2020) (emphasis added). The complaint alleged that the tavern sustained business losses resulting from “the COVID-19 pandemic and . . . state and local orders mandating that all non-essential businesses be temporarily closed.” The order also recognized that “the law and facts are rapidly evolving in the area of COVID-19-related business losses.”

Interpretation of “physical loss of or damage to” property

One area of law that has developed is the interpretation of the phrase “physical loss of or damage to” property, which is commonly found in policies at issue in COVID-19 business interruption cases. Noting the import of the disjunctive “or” in the phrase “physical loss of or damage to” property, the court in Hill and Stout PLLC v. Mutual of Enumclaw Insurance Company, No. 20-2-07925-1 (Wash. Super. Ct. King Cnty. Nov. 3, 2020) held that the policy provided alternative means for coverage: (1) physical loss of property (the Physical Loss Option) and (2) damage to property (the Damage Option). The Washington state court found the Physical Loss Option ambiguous and, consequently, construed it in favor of the policyholder. Under this interpretation, the court concluded that a dental practice’s alleged inability “to see patients and practice dentistry” sufficed to trigger the Physical Loss Option for coverage under the policy.

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D&O insurance basics (Part 2)

Directors’ and officers’ liability (D&O) insurance protects the personal assets of corporate directors and officers in the event of a lawsuit or other “claim” made against them for, among other things, an alleged breach of their duties in managing the organization.  D&O insurance directly covers individual directors and officers for their defense costs, judgments against them, and settlements when they cannot be indemnified by the company, and also covers the company to the extent it pays defense costs, judgments, and settlements as indemnification.  It may also cover the legal fees and other costs incurred by the company as a result of a securities claim made against the company as an entity.

The first installment of this blog series on D&O insurance addressed several “nuts and bolts” features of D&O insurance, including the key insuring agreements and definitions. This post discusses key exclusions, as well as common policyholder pitfalls, and new issues that are emerging in 2020.

Key D&O exclusions

All D&O insurance policies contain exclusions.  D&O insurance policies are not standardized, however, so the number and wording of the exclusions may vary from policy to policy and insurer to insurer.  Most traditional D&O insurance policies can be expected to contain the following exclusions:

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D&O insurance basics (Part 1)

This is the first of two posts discussing several major aspects of directors’ and officers’ liability (“D&O”) insurance coverage.  Companies approaching a policy renewal deadline, looking to place D&O insurance for the first time, considering increasing the size or structure of an existing D&O insurance program, or otherwise evaluating their overall risk management strategy may find it useful to review some basic features of D&O insurance and potential enhancements.

Why is D&O insurance important?

D&O insurance is an important risk management tool for any company.  It functions as a financial backstop for directors and officers by shielding these individuals from personal liability if the company is unable to indemnify them (usually due to a legal prohibition on indemnification or insolvency).  D&O insurance also adds value to and financial protection for the company by providing coverage for certain claims asserted against the company—most typically, securities claims—and its management.

Coverage basics

D&O policies typically provide coverage in several parts:

  • “Side A” or Insured Person Coverage directly covers Insured Persons—including directors, officers and other individuals defined under the policy—for non-indemnifiable claims made against them.
  • “Side B” or Corporate Reimbursement Coverage reimburses the company for amounts paid by the company as indemnification on behalf of Insured Persons for claims made against the Insured Persons.
  • “Side C” or Entity Securities Coverage applies in the case of securities claims made against the company as an entity.  Some D&O policies issued to private or non-profit companies may provide broader coverage for other types of claims made against the company.
  • Additionally, some policies may include “Inquiry” or “Interview” Coverage or other investigative costs coverage for certain non-routine document requests, interviews, and other pre-claim matters involving Insured Persons.

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COVID-19 event cancellation insurance – good news and bad news

A concert promoter cancels a sold-out show of a world-renowned recording artist, reimbursing millions of dollars in ticket sales as a result.  If the reason for the cancellation was COVID-19, does insurance cover that?

Event Cancellation Insurance Basics

Event cancellation insurance generally provides coverage only when there has been a triggering event under the policy.  Some policies are written, for example, to only cover cancellations caused by rain or bad weather.  Other event cancellation policies are all-risk policies, meaning that coverage may be triggered by any cause that is not specifically excluded.  For all types of event cancellation insurance, the triggering event must have been fortuitous, or outside of the policyholder’s control.

Good News for Policyholders

The good news for policyholders is that many all-risk event cancellation policies do cover cancellations caused by COVID-19 related shut-down orders.  For such policies, a shut-down order should qualify as a fortuitous triggering event.  Across the United States, nearly every jurisdiction has enacted some kind of order that caused the cancellation of large-scale events.

Notes of Caution

Policyholders should be cautious concerning the scope of exclusions in respect of viruses and communicable diseases.  Although these types of exclusions may bar coverage related to COVID-19, it is important to be mindful of variations in the exclusion language used.  Some exclusions apply to only specific named viruses, such as SARS and MERS.  Other exclusions contain carve-outs that may be applicable to COVID-19.

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Join us for an on-demand webinar “What policyholders really need to know about insurance for COVID-19”

Reed Smith Insurance Recovery partners John Shugrue, John Ellison, Amber Finch, Richard Lewis, and Matthew Weaver offer discussion and analysis on key issues relevant to businesses seeking, or evaluating whether to seek, coverage for COVID-19 losses. This webinar is available on demand and you can register here.

Here’s a brief summary of the topics addressed in the webinar:

  • Business interruption coverage and the physical loss/damage trigger (presented by Richard Lewis)

Business interruption insurance provides coverage when physical loss or damage adversely impacts a business, causing it loss.  This insurance covers lost profit and continuing expenses for the period needed to repair or replace damaged property and is designed to do for the business “what the business would have done had there been no loss or damage to property.”  For COVID-19, the key issue for business interruption coverage is: Can the known or suspected presence of a virus cause “physical loss or damage” to property?  For most businesses, it should generally be possible to make the requisite showing of physical loss or damage.

  • Contamination, virus, and microorganism exclusions (presented by John Ellison)

 In commentary, insurance companies have raised a variety of exclusions as potentially barring coverage for COVID-19 related losses.  Some of the exclusions raised include exclusions for virus, bacteria, contaminants, mold, and pollution.  Although there is significant diversity in exclusion wording across property policies, many policies contain standard virus exclusion language promulgated by the Insurance Services Office (ISO).  The ISO made demonstrably false statements to state regulators in seeking approval for this language.  Accordingly, virus exclusions may be vulnerable to challenge.  Additional information about insurers’ misrepresentations concerning virus exclusions is discussed in this article. Additionally, there are available challenges to the other forms of exclusion that insurers are raising that present viable responses to obtaining coverage even when they are asserted by your insurance company.

  • D&O coverage for shareholder claims (presented by John Shugrue)

Directors and officers liability insurance (D&O) coverage typically applies to liability claims made against individual directors for breach of fiduciary duty and to claims made against the business for securities law violations.  Potential claims implicating D&O coverage related to COVID-19 include shareholder claims for alleged failures to plan for, or respond to, the pandemic.

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Pollution exclusion should not preclude coverage for virus-related claims

Faced with mounting claims for insurance coverage as a result of the novel coronavirus (COVID-19) outbreak, commercial insurers are likely to search for any policy provision that they think will enable them to avoid paying virus-related claims.  One provision that insurers ultimately may invoke in an attempt to deny such claims is the so-called “pollution exclusion” – an exclusion that can be found in both commercial general liability (CGL) insurance policies and property insurance policies.  Policyholders should anticipate such an argument and should not walk away from insurance claims just because of it.  Although the exclusion is often broadly worded, there is generally good reason not to read it to preclude coverage for third-party claims and/or first-party losses involving viruses, including COVID-19.

While the exact language of the pollution exclusion may differ from one policy to another, it typically provides that there is no insurance for “bodily injury” and/or “property damage” that “would not have occurred in whole or in part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of ‘pollutants’ at any time.”  Again, while its precise definition can vary among policies, “pollutant” is typically defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste.”

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Are you covered? Cannabis industry must prepare for cyberattacks in 2020

Experian Data Breach Resolution (Experian) has identified its “top data breach trends of 2020,” and the cannabis industry should take note. In its “Data Breach Industry Forecast 2020,” Experian predicts that “we will see many burgeoning industries, such as cannabis retailers, cryptocurrency entities, and even some environmental organizations targeted for cyberattacks as a result of online activism or ‘hacktivism.’”

In recognition of this risk, cannabis retailers as well as other cannabis-related businesses should – in addition to taking other prudent risk-mitigation steps – ensure that they have procured insurance to protect against potential cyber-related losses and claims. While the cyber-insurance market available to cannabis-related businesses is still rather limited, such businesses generally still can – and should – obtain at least some cyber coverage today. Continue Reading

Raccoons as legal roadkill: The Western District of Pennsylvania denies coverage for damage caused by masked bandits

Reviewing philosopher Mark Rowlands’ 2012 work Can Animals Be Moral?, Jessica Pierce wrote in the Notre Dame Philosophical Reviews, “The question, ‘Can animals be moral?’ has suffered the worst kind of philosophical denial: an almost complete lack of interest by ‘serious’ philosophers.”

No longer.  In an effort to apply “general canon[s] of contract interpretation,” the U.S. District Court for the Western District of Pennsylvania – in a recent insurance-coverage opinion of all places – implicitly (if not explicitly) considered this timeless, vexing question and concluded that “[a]nimals do not have conscious agency and are not subject to human law.”

In the honorable pursuit of robust coverage law – really, is there a more noble pursuit? – the court rendered raccoons and their woodland “companions” as nothing more than legal roadkill.  Their demise, however, was not in vain.  The court’s decision serves as a good reminder to all that just because a term used in an insurance policy is not defined does not mean that it is ambiguous.

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