How Insurers Failure To Exclude Losses Caused by COVID-19 Impacts Your Coverage

Commentators and lawyers continue to make blanket statements regarding lack of business interruption coverage for losses caused by the novel coronavirus (COVID-19).

They contend that coronavirus-related losses cannot satisfy the “direct physical loss of or damage to [covered] property” language contained in many policies to trigger coverage in the first place. The argument goes on to explain that, based on this clear policy language, coverage for losses caused by COVID-19 is not available, even if a virus-specific exclusion is not part of the policy. But if that were the case, there would have been no need for ISO to issue a separate virus and bacteria exclusion.

In 2006, the Insurance Services Office, Inc. (“ISO”) filed with state regulators a circular introducing a then-new endorsement that contained an exclusion from coverage for “Loss Due to Virus or Bacteria.” This endorsement would provide a broader exclusion than that contained in the standard ISO property policy for “fungus, wet rot, dry rot, and bacteria” or for “pollution.” Specifically, with this exclusion, ISO endeavored to provide no coverage “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.”

The circular in support of the endorsement explained that “viral and bacterial contamination are specific types [of contamination] that appear to warrant particular attention at this point in time.” The circular provided the growth of listeria in milk, legionella and anthrax as some examples of bacterial contamination and described viral contaminants as including rotavirus, SARS, and influenza (such as the avian flu). “Disease-causing agents may render a product impure . . . or enable the spread of disease by their presence on interior building surfaces or the surfaces of personal property,” the circular read.

ISO further stated that “[w]hen disease-causing viral or bacterial contamination occurs, potential claims involve the cost of replacement of property [replacing the damaged property], cost of decontamination [interior surfaces], and business interruption (time element) losses.” The ISO circular further disclosed that it was “presenting an exclusion relating to contamination by disease-causing viruses” because “the specter of pandemic or hitherto unorthodox transmission of infections 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.”

Generally, courts interpret ambiguous standard insurance policies in favor of coverage for the insured. By creating a separate endorsement in an effort to exclude from coverage viruses and bacteria, ISO itself essentially acknowledges that its standard policy could be considered vague or ambiguous as to whether coverage for business-related losses is available as a result of a pandemic such as COVID-19 and that courts could reasonably rule in favor of coverage.

Insurance companies had the ability to strengthen the exclusion from coverage losses caused by viruses. Some companies did so and may have stronger arguments to deny coverage — though the language of the policy, the other provisions, endorsements, and additional coverages do not preclude coverage in all such situations. But not all insurers even did that. Those that failed to do so should expect greater exposure to insurance coverage litigation for business interruption losses caused by COVID-19.