Policyholders Cannot Prevail with Pollution Exclusion | Western District of Missouri Grants Motion to Dismiss in Favor of Insurer on Claims of Losses from the COVID-19 PandemicJune 10, 2021 | Joshua Davis and Kelly Sabatés
The Western District of Missouri’s recent ruling in Zwillo provides yet another basis for insurers to deny coverage due to alleged losses incurred purportedly from the COVID-19 pandemic — certain pollution and containment exclusions.
The issue before the Court was whether or not a policyholder met its burden to show it suffered a “direct physical loss of or damage to property" so as to trigger coverage under the policy. The Court granted the insurance company’s motion to dismiss because the policyholder could not prove actual, demonstrable loss of or harm to some portion of the premises itself. The Court found that even if the policyholder could allege direct physical loss or damage as a result of the COVID-19 shutdown orders, the pollution and contamination exclusion would bar coverage because the provision expressly excluded damage or loss of value and even loss of use of property caused by a virus, like COVID-19.
Loss of Use Does Not Amount to Physical Damage
The policyholder in the case owned and operated the Westport Flea Market and Grill in Kansas City, and brought this putative class action against their insurance provider, Lexington Insurance, based on their allegations of wrongful denial of coverage under a commercial property insurance policy. The policyholder alleged that the COVID-19 pandemic interrupted business, which yielded an 80 percent loss of revenue. Essentially, they argued that their loss of the ability to access the physical property constituted “physical loss.” More specifically, they alleged that because the virus can be spread through respiratory droplets that can infect a person, leave the virus on surfaces, and/or remain in aerosols in the air, COVID-19 prevented them from being able to conduct their business. The Court amounted this to “loss of use” rather than the Policy’s coverage of a loss due to physical alteration or damage of the property.
Pollution and Contaminant Exclusion Barred Coverage
More importantly, the Court also reasoned that even if the Policyholder’s claims could fall within “direct physical loss of or damage to property,” the “Pollution and Contaminants Exclusion” ultimately barred coverage. The Exclusion stated the following:
“This Policy does not cover loss or damage caused by, resulting from, contributed to or made worse by actual, alleged or threatened release, discharge, escape or dispersal of CONTAMINANTS or POLLUTANTS, all whether direct or indirect, proximate or remote or in whole or in part caused by, contributed to or aggravated by any physical damage insured by this Policy....
CONTAMINANTS or POLLUTANTS means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste, which after its release can cause or threaten damage to human health or human welfare or causes or threatens damage, deterioration, loss of value, marketability or loss of use to property insured hereunder, including, but not limited to, bacteria, virus, or hazardous substances as listed in the Federal Water, Pollution Control Act, Clean Air Act, Resource Conservation and Recovery Act of 1976, and Toxic Substances Control Act or as designated by the U. S. Environmental Protection Agency. Waste includes materials to be recycled, reconditioned or reclaimed.” (emphasis added.)
The Policyholder argued that the exclusion was inapplicable for five different reasons; however, the Court found that these reasons merely misread the Policy and/or created ambiguity in the plain language. For example, one of the policyholder’s reasons was that the purpose of the exclusion was based on environmental and industrial pollutions. However, the Court applied Missouri precedent that there is no requirement that the insured be in violation of an environmental law for a pollution exclusion to apply because the policy language must be enforced as written. Another reason the policyholder argued was that the risk industry has developed a “virus-specific exclusion” that would preclude coverage; however, the Court did not entertain the argument because the policy, as stated above, expressly excluded damages caused by a virus.
The Court distinguished the recent holdings in the Western District where policyholders survived a motion to dismiss. (Studio 417, Inc. et al., v. The Cincinnati Ins. Co., No. 20-cv-03127, 2020 WL 4692385 (W.D. Mo. Aug. 12, 2020), K.C. Hopps, Ltd. v. The Cincinnati Ins. Co., No. 20-cv-00437, 2020 WL 6483108 (W.D. Mo. Aug. 12, 2020), and Blue Springs Dental Care, LLC et al., v. Owners Ins. Co., No. 20-cv-00383, 2020 WL 5637963 (W.D. Mo. Sept. 21, 2020)). The Court reasoned that the main distinction between this case and Studio 417, K.C. Hopps, and Blue Springs is the pollution and contamination exclusion.
While we have seen cases denying coverage based on the policyholder’s loss from COVID-19 not meeting a policy’s definition direct physical loss of direct physical loss, this case instructs that pollution and contamination exclusions may also bar coverage for COVID-19 claims, depending on the exclusions plain meaning.
A recent ruling from the U.S. District Court for the Eastern District of Michigan has provided more guidance in predicting how COVID-19 related losses and litigation will be handled.
In Turek Enterprises, Inc., d/b/a Alcona Chiropractic v. State Farm Mut. Auto. Ins. Co., et al, the Court ruled that State Farm Mutual Automobile Insurance Co. did not have to cover a chiropractic office’s losses alleged from government-ordered closures due to COVID-19. The Court held that the insured failed to allege physical loss and that the virus exclusion bars coverage.
This class action lawsuit seeking business interruption coverage was denied because the entire case focused on the definition of “direct physical loss;” however, did not demonstrate any “tangible damage to covered property” that was required as a condition precedent to coverage.
The chiropractor sued State Farm in June alleging the insurer wrongfully applied a virus exclusion to deny coverage. The insured argued the virus exclusion did not relate to the claimed losses, which were solely caused by government-closure orders. To support its position, the insured also argued COVID-19 was not present on its property, negating the “virus” related exclusion.
In Judge Ludington’s Order, the Court noted that even if the chiropractor alleged that the government-mandated closures were the cause of loss, “closure orders” were in response to curbing the spread of COVID-19 and the virus that causes it. Accordingly, the chiropractor’s business losses were barred by the policy’s virus exclusion. The chiropractor’s position disregarded “the anti-concurrent causation clause, which extend[ed] the virus exclusion to all losses where a virus is part of the causal chain.”
Plaintiff argued the exclusion applied only to decontamination costs and State Farm misrepresented that provision of the policy. In reviewing the applicable policy, Judge Ludington found that “[b]y its terms, the policy does not limit the virus exclusion to contamination, and plaintiff has failed to show that the virus exclusion is ambiguous.” Furthermore, “[e]ven if defendants misrepresented the purpose and extent of the virus exclusion in 2006, the plain, unambiguous meaning of the virus exclusion today negates coverage.”
In another creative argument, Plaintiff argued it had experienced “tangible” damage because the business was suspended by government closure orders; therefore, the business necessarily incurred ongoing “passive depreciation,” instead of a direct physical loss. The “passive depreciation” damage argued that all business equipment was continuing to lose value based on age and non-use. The Court rebuffed this argument by reasoning “[t]he plain meaning of direct physical loss to covered property requires that there be a loss to covered property, and not just any loss.”Ultimately, counsel and the plaintiff’s bar are both becoming more creative looking for special policy terms which ambiguity could open the door to such an argument as pleaded in this matter. Carriers should be addressing each claim and litigated coverage file on the individual claim’s separate and distinct terms, facts and application. No two COVID-19 claims are the same, and each coverage issue must be individually reviewed in order to fairly and accurately determine coverage and its application.
The U.S. Judicial Panel on Multidistrict Litigation initially ruled centralization was not appropriate for businesses seeking business interruption insurance coverage because of varying policy language. See our post here. At that time, more than 450 cases were pending in Federal Courts—now there are over 700.
While the JPML rejected total centralization, in the same ruling the Panel suggested that the creation of smaller “single-insurer” MDLs could be efficient to centralize those actions. Cases argued against one insurer or insurance group were “more likely to involve insurance policies utilizing the same language, endorsements, and exclusions” that would make sharing common discovery and pretrial motion proceedings more efficient.
Policyholders followed the JPML’s suggestion, as there were 300 lawsuits against The Hartford, Cincinnati Insurance Co., Society Insurance Co., Travelers and various underwriters at Lloyd’s of London that sought centralization into single carrier MDLs. The JPML had to decide whether to create five separate “single-insurer” MDLS to centralize all of the COVID-19 coverage actions against these specific carriers. On October 2, the JPML ruled that centralization was appropriate for cases against Society Insurance Co., but declined to centralize actions against The Hartford, Cincinnati Insurance Co., Travelers, and Lloyd’s of London.
Opponents of Centralization Argued Varying Policy Language and State Law Made MDL Inappropriate.
The insurers argued to the JPML, as they had previously ruled, that the varying policy language would be inappropriate for centralization. More specifically, the insurers argued that business interruption policy language can vary even among the policies issued by the same insurance company.
Additionally, Lloyd’s underwriters argued that the phrase “single-insurer MDL” was a misnomer as they are not the same insurer, but rather forty separate insurance carriers selling various policies to business through the Lloyd’s marketplace.
Policyholders opposing centralization echoed the insurer’s arguments about the policy language and focused their arguments on the differences among states’ laws interpreting the prerequisites for business interruption coverage. For example, the requirement that a business interruption loss stem from a “direct physical loss of or damage to” its property. A group of Chicago-area businesses argued that decisions in Illinois (and some other states) do not require a tangible alteration or damage to a property to be considered direct physical loss.
Proponents of Centralization Argued COVID-19 Pandemic Itself Triggering their Losses Gave Rise to Common Factual Issues.
The policyholders supporting centralization argued that the cases filed against the same or related insurers would give rise to numerous common and overlapping factual questions because they all related to the COVID-19 pandemic. Furthermore, the language of the policy was a standard form used by the respective insurer.
For example, a Florida restaurant argued that Lloyd’s underwriters commonly provided business interruption coverage on standard forms that are approved by the Insurance Services Office; therefore, they shared many common terms and a single court could determine “in one stroke” if the COVID-19 pandemic triggered standard terms in the policies, including the direct physical loss or damage requirement.
The Florida restaurant also addressed the issue of any uncommon questions, e.g., whether or not state and/or municipal civil authority orders prohibited access to covered property. They argued the questions “may turn to some extent on common issues, and the resolution of all common and uncommon questions by one judge will allow the just and expeditious resolution of all actions to the overall benefit of the parties.”
Another group of policyholders added that “the sheer volume of similar cases across the country implicating common issues” made centralization appropriate. They argued that an insurer “consistently utilizes a small subset of template policy forms” and has “uniformly denied” business interruption claims. Furthermore, “[w]hether an insurance policy provides coverage cannot be separated from the factual predicate that gives rise to coverage in the first place. Here, the related actions all share the same or similar triggering events: the losses of business income occasioned by COVID19 and/or related stay-at-home orders.”
The JPML’s Most Important Factor for Centralization was the Geographic Scope of Action
What set Society’s policies apart from the other insurers, were the “defined geographical scope of these actions” implicating the insurance laws of only six states. Judge Chang stated that any potential differences among the cases could be resolved with a number of pretrial techniques including state-specific tracks or a bellwether process.
The JPML emphasized that centralization involving Hartford, Cincinnati, and Travelers would not promote efficient resolution because of the sheer number and geographic scope of the cases. Especially when many of the policyholder plaintiffs “are on the brink of bankruptcy as a result of business lost due to the COVID-19 pandemic and the government closure orders.”
For Lloyd’s underwriters, the JPML said that centralization was not appropriate because it was not a single insurance company but rather a group of several dozen distinct insurers with varying policies. “The inclusion of non-standard and non-common forms and policy language would hinder the ability of the transferee court to organize the litigation and quickly reach the common factual and legal questions,” the JPML wrote.
Nevertheless, the JPML encouraged the insurers to engage in “informal cooperation and coordination” to be efficient and avoid duplication.
Once again, we see creative arguments utilized successfully to support centralization. Regardless of whether or not an insurer uses standard forms, each claim is unique, and insurers must continue to approach all COVID-19 interruption claims, in addition to all claims, thoroughly and cautiously.
About Insurance Law Blog
The BSCR Insurance Blog examines topics and developments of interest to insurance carriers, with a particular focus on Missouri and Kansas law. Learn more about the editor, Angela Higgin Clark, and our Insurance practice.
The Insurance Law Blog is made available by Baker Sterchi Cowden & Rice LLC for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. Your use of this blog site alone creates no attorney client relationship between you and the firm.
Do not include confidential information in comments or other feedback or messages related to the Insurance Law Blog, as these are neither confidential nor secure methods of communicating with attorneys. The Insurance Law Blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.