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.”
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.