The pandemic has taken the world by storm, U.S. insurers being no exception. As a result of the onslaught of business interruption claims and litigation expenses, insurance companies are revisiting and, in a few instances, rewriting some of the language in their policies. The insurers’ ultimate goal in tweaking the policies is to reduce future exposure associated with pandemic-related claims and to reduce their expenses in defending declinations of coverage.

Following the SARS epidemic in 2003, many insurers began appending a virus or communicable disease exclusionary endorsement to first-party property policies.  In its most common form, that endorsement excludes coverage for injuries that arise out of transmission, actual or alleged, of a communicable disease. However, not all policies in effect at the time the COVID-19 pandemic had that exact endorsement, leading to some inconsistent holdings and concern in the insurance industry.

The diversity of opinion is highlighted by two opinions from the same federal district, the US District Court for the Northern District of Ohio, Eastern Division. Both opinions were issued in early 2021.  In the first, Henderson Road Restaurant v. Zurich American Ins. Co., the court held that Zurich’s policy covered business interruption losses. The court’s opinion is premised on a controversial interpretation that “physical loss or damage to property” includes monetary loss, alone, and that the policyholder’s business losses were caused by government shutdown orders, not COVID-19.  While the policy contained a “microorganism” exclusion related to losses directly or indirectly caused by, contributed to, or aggravated by the presence, growth, proliferation or any activity microorganisms, it did not have a virus/communicable disease exclusionary endorsement.  The policy also did not exclude coverage for government closures due to microorganism outbreaks.

In contrast, in Family Taco, LLC v., Auto Owners Ins. Co., another court in the same federal district held that an Auto Owners’ policy excluded coverage for business interruption losses. The policy contained a virus exclusion which the court interpreted as unambiguously excluding coverage for lost use of property.  The court rejected the policyholder’s argument that the virus exclusion covered the virus, but not the pandemic, reasoning that “you cannot have one without the other”.  The court also found that to the extent the loss arose from executive orders issued by the Governor forcing the policyowner’s business to shut down, the governmental action exclusion precluded coverage for those losses.  The court also rejected the Henderson Road interpretation of “physical loss or damage to property”, instead requiring proof of tangible loss or damage to the property.

Even with policies that contain a viral/communicable disease exclusionary endorsements, insurers have not been completely successful in having courts dismiss COVID-19 business interruption claims.  Two state courts have granted policyholders’ motions for summary judgment and 11 courts have denied insurers’ motions to dismiss even when the insurance policies had some form of viral exclusion.  A similar, but less pronounced trend is discernable in federal courts.

The insurers’ costs of defending these cases and the problems stemming from obtaining inconsistent results are significant.  Over 1,500 COVID-19 coverage actions have been filed to date.  Multiplying that large number by the high cost of litigating each coverage action is enough to convince some insurers to revisit their policy language to prevent future uncertainty and exposure.  Among the modifications insurers are proposing are a specific SARS-related virus and pandemic-related exclusionary endorsement.

When reviewing your existing or proposed renewal policies for coverage, it is always advisable to consult with your insurance agent to discuss products available on the market, as well as your risk manager or counsel familiar with the risks sought to be insured.  As always, our attorneys at our Dallas and Austin offices are here to help and to answer any of your questions.

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