As everyone knows who lived through the coverage wars over asbestos liability and environmental liability, nationwide coverage issues that significantly affect the economy do not get resolved fast.
For asbestos and environmental claims, the law was in flux for years — even decades — on key coverage issues in many states. New York’s highest court handed down a clarifying decision about the state law on allocation of asbestos claims as recently as 2016, almost 30 years after those issues first arose.
This history shows that the book is far from closed on insurance coverage for business interruption and other losses arising from COVID-19. We have barely started the first chapter.
Since March 2020, more than 1,400 lawsuits have been filed by businesses across the United States seeking coverage for property damage and business interruption due to the pandemic. Business interruption is a form of insurance coverage typically found in first-party property insurance policies. It is designed to do exactly what the words say: provide insurance relief for businesses that incur financial losses when their ordinary operations are interrupted by loss or damage.
Most of the early cases were filed by businesses dependent on foot traffic, such as restaurants, barbershops, spas and the entertainment industry. They alleged they suffered losses from being deprived of ordinary access to their physical locations.
Many of these early cases fared badly. As of Feb. 1, courts had handed down approximately 190 decisions. Slightly more than half were full dismissals with prejudice, granted to insurance companies that argued that coverage could not be found.
The most common ruling was that an airborne virus did not cause “physical loss or damage,” a threshold requirement of most property insurance policies. A close second was the ruling that coverage was barred by one or more exclusions in the policies, such as exclusions for viruses, microorganisms, contamination and even pollution.
The insurance industry touted these early wins as proof-positive that there never has been, or will be, any coverage for losses that arise from COVID-19. But proclamations that such coverage is dead are as “greatly exaggerated” as the reports that Mark Twain famously read of his own death.
First, many of the early cases failed to allege property damage. The insurance industry leaped on this gap as an admission there can be no covered property damage without structural alteration. But policy language and case law is to the contrary. Even the insurance companies themselves have historically recognized invisible, nonstructural harm as covered damage, such as from smoke, fumes from Chinese drywall, methamphetamine fumes, asbestos fibers, ammonia leaks and the insertion of malware on computer systems. The problem in these early cases was not in the substance; it was in the form of the complaints.
Second, most of the dismissals were in cases in which a “virus exclusion” specifically precluded coverage. But, as the developing case law shows, not all exclusions are created equal. While some may preclude coverage in certain circumstances, others do not. The coverage analysis is far from over when a so-called virus exclusion is found.
Third, more than half of the decisions about coverage for COVID-19 arise from only three states: California, Florida and Pennsylvania. Many states have not rendered any decisions on this issue or only one or two. So, the impression that “most courts” have ruled against coverage is grossly misleading. Outside of California, Florida and Pennsylvania, most courts have not.
Fourth, policyholders are learning from experience. In the current round of coverage cases, policyholders consistently allege the existence of property damage under standard-form provisions that provide coverage, separately, for “physical loss or damage.” While insurers contend that the two words mean the same thing, and that being deprived of a property’s functionality is not a “loss,” policyholders — and an increasing number of courts — disagree.
Moreover, even if both sides could be right, that means there is coverage. It is a basic insurance principle that when policy language can be interpreted in diametrically opposed ways, it is ambiguous and a finding of coverage should prevail.
Policyholders and courts also are focusing more carefully on virus exclusions. While virus exclusions will preclude coverage in many cases, not all exclusions containing the word “virus” are created equal. Rulings for the policyholder have been handed down so far in 16 of 122 COVID-19 cases involving such exclusions. Thus, the inclusion of “virus” in an exclusion does not necessarily preclude coverage.
While some policies explicitly bar coverage for pandemics, viruses or any agent that threatens human health, in others the word “virus” is simply tacked on to an exclusion for something else, such as mold, bacteria or pollution. These exclusions do not always stand up to the insurance industry’s heavy burden of proving that an exclusion — that it drafted unilaterally — bars coverage in the circumstances here.
Policyholders have argued that coverage cannot be barred simply by slipping in the word “virus” where it does not belong, and some courts, such as in Urogynecology Specialist of Florida LLC v. Sentinel Ins. Co., Ltd., (Florida. Sept. 24, 2020), have agreed. With respect to an exclusion barring coverage for damage caused by “fungi, wet rot, dry rot, bacteria or virus,” that court found that , “denying coverage for losses stemming from COVID-19 … does not logically align with the grouping of the virus exclusion with other pollutants. such that the Policy necessarily anticipated and intended to deny coverage for these kinds of business losses...”
Moreover, in cases involving policies without virus exclusions, roughly one third of the rulings — 19 out of 59 — have favored coverage.
With the initial round in the rearview mirror, cases seeking coverage for losses from the pandemic are gaining traction. History teaches that you should stay tuned. These are early days, with many twists and turns to come.