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.