Insurance policies contain coverage grants and exclusions. Generally, the burden is on the insured in the first instance to prove that the insured’s loss comes within the insurance policy’s coverage grants. If the insured proves that the policy covers the insured’s loss, then the burden shifts to the insurer to prove that a policy exclusion precludes coverage. In a March 2020 blog post, we discussed whether coverage for COVID-19 could be excluded from property insurance policies.
With disputes over coverage for losses arising from COVID-19 business interruption claims raging, two issues have emerged over the presence or absence of policy exclusions for losses arising from virus or bacteria. First, some insureds argue that because a virus exclusion exists, the absence of the exclusion from the policy means that there is coverage. Second, other insureds argue that even if there is a virus exclusion present, it does not preclude coverage for the novel coronavirus pandemic where civil authority stay-at-home orders force businesses to close. In this blog post, we explain why these arguments are mistaken.
In 2006, in the wake of a global SARS outbreak, the Insurance Services Office (“ISO”) developed the virus and bacteria exclusion. ISO Form CP 01 40 07 06, the virus and bacteria exclusion, states:
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.
An ISO circular entitled, “New Endorsements Filed to Address Exclusion of Loss Due to Virus or Bacteria,” accompanied the exclusion. A close look at the circular shows that ISO drafted the virus and bacteria exclusion specifically with a viral pandemic in mind, as the circular states:
While property policies have not been a source of recovery for losses involving contamination by disease-causing agents, the specter of pandemic or hitherto unorthodox transmission of infectious material raises the concern that insurers employing such policies may face claims in which there are efforts to expand coverage and to create sources of recovery for such losses, contrary to policy intent. In light of these concerns, we are presenting an exclusion relating to contamination by disease-causing viruses or bacteria or other disease-causing microorganisms.
(Emphasis added). Notably, the circular makes it clear that there never was an intent to provide coverage in property policies for losses arising from disease-causing agents like the novel coronavirus. Additionally, ISO stated that it developed the new exclusion because “specific types” of “viral” contamination “warrant[ed] particular attention.” ISO specifically identified SARS, which is caused by a coronavirus, as an example of viral contamination, and stated that “[t]he universe of disease-causing organisms is always in evolution.”
The virus and bacteria exclusion is similar to other exclusions like the mold and silica dust exclusions. ISO created those exclusions to address specific exposures because the pollution exclusion, which includes contaminants, was construed narrowly by certain courts. The promulgation of these exclusions does not mean that there was coverage for those exposures previously. The exclusions merely reflect the intent to reduce the likelihood of claim disputes and litigation in the face of efforts to expand coverage contrary to policy intent.
On its face, the virus and bacteria exclusion should preclude coverage for loss or damage allegedly caused by contamination from the novel coronavirus without regard to whether the novel coronavirus has caused a pandemic. Courts generally have interpreted viral and bacterial exclusions as precluding coverage for microorganisms. See Paternostro v. Choice Hotel International Services Corp., No. 13-0662, 2014 U.S. Dist. LEXIS 161157 (E.D. La. Nov. 14, 2014) (bacteria exclusion precluded coverage for exposure to Legionella and Pseudomonas aeruginosa bacteria, which cause Legionnaires’ disease); Clarke v. State Farm Florida Insurance, 123 So. 3d 583 (Fla. Ct. App. 2012) (finding no coverage for transmission of Herpes Simplex Virus due to virus exclusion).
Having said this, the 2006 circular specifically acknowledged that the exclusion was a response to the looming “specter of pandemic,” and the exclusion’s timing is telling, as it was developed shortly after the global SARS outbreak.
The ISO circular should be persuasive to courts, as courts routinely cite ISO circulars when interpreting policy coverages and limitations. For example, in Cypress Point Condominium Association v. Adria Towers, L.L.C., 143 A.3d 273 (N.J. 2016), New Jersey’s Supreme Court evaluated whether a first-party commercial liability policy provided coverage for defective contractor work. The policy contained an exclusion precluding coverage for work performed by the insured, but that exclusion excepted work performed by a subcontractor on the insured’s behalf. In interpreting the scope of the exclusion, the court referred to an ISO circular and stated:
Moreover, the ISO itself addressed the addition of the subcontractor exception in a July 1986 circular, which “confirm[ed] that the 1986 revisions to the standard CGL policy . . . specifically ‘cover[ed] damage caused by faulty workmanship to other parts of work in progress; and damage to, or caused by, a subcontractor’s work after the insured’s operations are completed.’”
Id. at 289. (Internal citations omitted). See also, e.g., O&G Indus., Inc. v. Litchfield Ins. Group, Inc., No. X04HHDCV126069237S, 2017 Conn. Super. LEXIS 379, at *39 (Conn. Sup. Ct. Feb. 6, 2017) (“The court finds persuasive the interpretation of ‘occupy’ put forward by [an] ISO [circular] . . .”); Maryland Casualty Co. v. Reeder, 221 Cal. App. 3d 961, 968 (1990) (“In addition to drafting standard form provisions, the ISO publishes circulars which describe the intent and effect of its standard provisions . . . [t]he presence of the standard provisions in the Maryland policy and the concomitant availability of interpretative literature is of considerable assistance in determining precisely what risks the Maryland policies cover.”).
Besides ISO’s express intent to exclude coverage for pandemics, an argument that a virus exclusion will not preclude coverage for a pandemic should fail for another reason: courts analyzing policy exclusions have concluded that an exclusion for a smaller event can exclude coverage for a larger scale version of the same event. Applied to the novel coronavirus pandemic, a virus exclusion should preclude coverage for claims related to the novel coronavirus, regardless of the scale of the COVID-19 infection.
In Narricot Industries v. Fireman’s Fund Insurance Co., No. 01-4679, 2002 U.S. Dist. LEXIS 19074 (E.D. Pa. Sept. 30, 2002), the court addressed whether losses caused by civil orders issued by local authorities in North Carolina and Virginia in response to Hurricane Floyd came within two insurance policy’s coverage grants. The court granted summary judgment for the insured regarding the North Carolina site, but denied summary judgment for the Virginia site.
The difference between the two policies was their exclusions. Whereas the North Carolina policy did not have a flood exclusion, the Virginia policy excluded coverage for floods but not hurricanes. The court stated there was “no evidence” that “something other than flood” could have caused the property damage that prompted the Virginia civil order. Id. at *18. The Virginia policy also had a concurrent loss causation clause, which excluded loss or damage “regardless of any other cause or event that contributes concurrently or in any sequence to the loss.” Id. at *19. The court interpreted the policy as an “unambiguous [statement] that a combination of hurricane and flood is not a covered cause of loss.”
Narricot suggests that a virus exclusion should preclude coverage for a pandemic because it precludes coverage for the underlying event: the virus. The Narricot policy expressly excluded coverage for the underlying event: a flood. Although a hurricane exacerbated the flood, the Narricot court did not attribute its no coverage finding to the absence of a “hurricane exclusion.” Like the flood, the novel coronavirus is the underlying event of the pandemic. Whereas coverage for an exacerbated flood was precluded by a flood exclusion, coverage for a pandemic, the exacerbated spread of a virus, should be precluded by a virus exclusion.
Virus exclusions should preclude coverage for claims related to the COVID-19 pandemic. The absence of a virus exclusion or a pandemic-specific exclusion, however, should not make a difference. The virus exclusion clearly was intended to preclude coverage for viral contamination, regardless of the scale of infection. Moreover, the development of the virus and bacteria exclusion acknowledges that coverage for these exposures was never provided for under most property policies.