Can Coverage for COVID-19 Be Excluded?

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Business insurance policies contain exclusions precluding coverage under specified circumstances. Two exclusions potentially relevant to COVID-19 claims are the virus, bacteria or communicable disease and pollution exclusions. In this blog post, we examine these exclusions in the context of coverage issues for COVID-19.

In Amco Insurance Co. v. Swagat Group, LLC, No. 07-3330, 2010 U.S. Dist. LEXIS 4770 (C.D. Ill. Jan. 20, 2010), the court found a bacteria exclusion precluded a hotel’s coverage for a series of underlying lawsuits.  The complaints alleged that guests had died after contracting Legionnaire’s disease from bacteria allegedly in the hotel’s pools and hot tub. The court rejected the broad interpretation of the term “bacteria.”  Instead, the court found that “bacteria” was a “scientific classification,” which covered the bacteria that causes Legionnaire’s disease.

On the contrary, another court found that a bacteria exclusion did not preclude coverage for exposure to Legionnaire’s disease-causing bacteria allegedly present in an outdoor hotel spa. In Westport Insurance Corp. v. VN Hotel Group, LLC, 513 Fed. Appx. 927, 932 (11th Cir. 2013), the court found an outdoor spa would not be considered a “structure.” The policy excluded coverage for bodily injuries caused by “bacteria on or within a building or structure.”

Additionally, in Connors v. Zurich American Insurance Co., 872 N.W.2d 109 (Wis. Ct. App. 2015), although the court denied summary judgment for other reasons, the court found that a standard pollution exclusion would have excluded coverage for a suit by an employee alleging exposure to the bacteria that causes Legionnaire’s disease. The court stated:

It is undisputed that Legionella bacteria in aerosolized water droplets would have been pollutants under the standard pollution exclusion at the time the bacteria allegedly infected Connors, because there is no dispute that: (1) it is uncommon for people to inhale Legionella bacteria in aerosolized water droplets and when these bacteria are inhaled they pose a health hazard; and (2) a reasonable insured would view these mist- or vapor-borne bacteria as pollutants.

Finally, some policies contain a communicable disease exclusion. In Koegler v. Liberty Mutual Insurance Co., 623 F. Supp. 2d 481, 484-85 (S.D.N.Y. 2009), although the court held that the insurer had to defend the insured because of a late disclaimer, the court recognized that an individual alleged to have transmitted the human papillomavirus and herpes virus to his girlfriend and their daughter contractually was not entitled to liability coverage.  The court found that the communicable disease exclusion, which excluded coverage for bodily injuries arising out of the “transmission of a communicable disease, virus, or syndrome,” would have precluded coverage.  The court treated the analysis as a simple matter, stating “[t]he exclusions [we]re couched in plain English, and are not at all difficult to understand.”

Applied to COVID-19, Amco, Westport, Connors, and Koegler bring several takeaways.

First, Amco and Westport suggest that whether a bacteria exclusion precludes coverage for a COVID-19 claim is an issue ripe for coverage disputes. In Amco, the court declined to broadly interpret the term “bacteria.” COVID-19 is a virus and not a disease caused by bacteria. Accordingly, under Amco, a court may be disinclined to broadly interpret a bacteria exclusion to encompass a virus.

Under Westport, however, the issue was the source of transmission, which was alleged to be an outdoor spa at a hotel, and whether that constituted a “structure” as required by the bacteria exclusion. Westport suggests that, if the line between bacteria and virus is removed, then the alleged source of infection is critical. Applied to COVID-19, an infection acquired from the surface of a hotel bathroom may be within a “structure,” whereas an infection from an off-site parking lot payment machine may not be covered.

Second, under Koegler, a communicable disease exclusion, which does not distinguish between bacteria and viruses and specifically mentions viruses, will likely preclude coverage of COVID-19 claims. The Insurance Services Office (ISO) developed an exclusion, titled “Exclusion for Loss Due to Virus or Bacteria” (form CP 01 40 07), in 2006.  It states, in relevant part:  “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”  Additionally, in February 2020, ISO drafted two business income endorsements specifically regarding COVID-19.  If approved, the endorsements would provide limited coverage for a suspension of operations because of closure or quarantine at an insured location under a civil authority order attempting to halt or mitigate the spread of COVID-19.  These endorsements, however, would also exclude coverage for costs due to cleaning or disinfecting property, consumer behavior due to fear of contagion, and expenses attributed to an absence of infected employees or employees suspected of being infected.

Third, under Connors, a standard pollution exclusion may exclude coverage for an illness. That COVID-19 is not caused by bacteria does not influence factors the Connors court applied. In Connors, the court stated that Legionella bacteria would be a pollutant under a standard pollution exclusion because people would experience a health hazard when inhaling aerosol droplets containing the bacteria. COVID-19 can be spread through aerosol droplets.

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