December 17, 2020

Virus Coverage Ruling Could Turn Scales For Insureds

Posted by Miller Friel

The District Court of Clark County, Nevada, recently handed down a decision with potentially game-changing effects for policyholders seeking coverage for COVID-19 losses.

Gavel in the foreground, with person wearing rubber gloves and scales of justice behind.

Like many other companies, the policyholder there seeks insurance coverage under a commercial property policy for its business interruption losses due to the ongoing pandemic.[1] What sets apart the JGB Vegas Retail Lessee LLC v. Starr Surplus Lines Insurance Co. decision is the court’s disregard of a pollution exclusion that specifically includes the word “virus.”

Even though the insurer listed “virus” as an excluded irritant or contaminant, the court held that the pollution exclusion did not apply, as the intent behind the exclusion was to remove coverage for “traditional environmental and industrial pollution and contamination.”[2]

The decision has major potential consequences for policyholders whose policies have exclusions where insurers managed to similarly slip the word “virus” into places where policyholders wouldn’t otherwise expect to find it.

The presence of coronavirus constitutes a risk of physical loss or damage to covered property.

Commercial policies cover all risks of physical loss or damage to covered property, including business interruption losses and losses caused by closures due to civil or military authority orders. Insurance carriers contend that the presence of coronavirus may not constitute a risk of physical loss or damage to covered property.

However, several courts across the country have held that the presence of the virus itself constitutes a risk of physical loss or damage to covered property sufficient to trigger coverage under commercial property policies.[3]

The policy in JGB Vegas Retail has a pollution and contamination exclusion that specifically lists “virus” as an excluded irritant or contaminant.

A different issue sets apart the Nevada decision: the court’s interpretation of a “pollution and contamination exclusion.”

Many commercial property policies contain exclusions that bar coverage for “the actual or threatened release, discharge, dispersal, migration, or seepage of ‘pollutants’ at an Insured Location.”[4] The policy at issue in JGB Vegas Retail defines “pollutants or contaminants” as:

any solid, liquid, gaseous, or thermal irritant or CONTAMINANT including, but not limited to, smoke, vapor, soot, fumes, acids, alkalis, chemicals, virus, waste (waste includes materials to be recycled, reconditioned, or reclaimed) or hazardous substances.[5]

In COVID-19 cases, insurance carriers often contend that coronavirus is an excluded pollutant, because it is as an irritant or contaminant.

What makes JGB Vegas Retail different is the fact that the pollution exclusion specifically lists “virus” as an excluded pollutant. This is a common insurer tactic: slipping in words where one would not otherwise expect to find them, then ambushing policyholders when they make coverage claims.

When interpreting insurance policies, the plain meaning often controls, so in the insurer’s view, the fact that the pollution exclusion includes the magic word “virus” should end the debate — no coverage for coronavirus-related losses.[6]

The pollution exclusion does not apply because coronavirus is not a traditional environmental or industrial pollutant, despite the presence of the word “virus.”

In the JGB Vegas Retail decision, the court explored the intent behind the pollution exclusion and held that it did not apply. Other courts have held that similarly worded pollution exclusions apply only to instances of traditional environmental and industrial pollution and contamination.[7]

Because the enumerated examples of irritants and contaminants often include only nonliving, inorganic matter, living, organic matter such as bacteria and viruses does not constitute excluded pollutants.[8]

In addition, the court held that because the terms “irritant” and “contaminant” are virtually boundless, interpreting pollution exclusions as broadly as insurers suggest would render the coverage provided by virtually all policies meaningless, for “there is no substance or chemical in existence that would not irritate or damage some person or property.”[9]

The court in JGB Vegas Retail reached the proper conclusion because of the lopsided and unfair nature of how insurance policies are drafted. Far from being negotiated in an evenhanded fashion, insurance policies are contracts of adhesion[10] that are unilaterally drafted by the insurers and offered on a “take it or leave it” basis.[11]

The JGB Vegas Retail decision has tremendous impacts for policyholders with pollution and virus exclusions.

The court’s decision to disregard the word “virus” in the pollution exclusion and refuse to reward the insurer’s chicanery has several impacts, some of which reach far beyond pollution policies.

First, JGB Vegas Retail joins a growing body of law holding that pollution exclusions do not apply to nontraditional irritants or contaminants such as viruses and bacteria.

Second, while the case involves a commercial property policy, many commercial general liability policies have similar or identical pollution exclusions, so the decision also has positive effects for policyholders with other types of liability policies.

Third and finally, JGB Vegas Retail stands as precedent for other courts to upend similar exclusions where insurers managed to slide the word “virus” in places where policyholders would not expect to find it.

This article was also published in Law360.

[1] JGB Vegas Retail Lessee, LLC v. Starr Surplus Lines Ins. Co., No. A-20-816628-B, at 3 (Nev. Dist. Ct. Nov. 30, 2020).

[2] Id. at 5.

[3] See, e.g., Blue Springs Dental Care, LLC v. Owners Ins. Co., No. 20-cv-00383, 2020 WL 5637963 (W.D. Mo. Sept. 21, 2020); Optical Servs. USA/JCI v. Franklin Mut. Ins. Co., No. BER-L-3681-20, 2020 WL 5806576 (N.J. Super. L. Aug. 13, 2020); Studio 417, Inc. v. Cincinnati Ins. Co., No. 20-cv-03127, 2020 WL 4692385, at *2 (W.D. Mo. Aug. 12, 2020).

[4] JGB Vegas Retail, No. A-20-816628-B, at 4.

[5] Id. at 5.

[6] Id.

[7] See, e.g., Keggi v. Northbrook Prop. & Cas. Ins. Co., 13 P.3d 785, 789-90 (Ariz. Ct. App. 2000) (holding that a pollution exclusion did not apply to injuries suffered from drinking bacteria-contaminated water and noting that the exclusion “appears to describe events, places, and activities normally associated with traditional environmental pollution claims”); Century Sur. Co. v. Casino W., Inc., 329 P.3d 614, 616-18 (Nev. 2014) (holding that a pollution exclusion did not apply to injuries caused by carbon monoxide and noting the “significant amount of authority” interpreting the exclusion as only applying to traditional environmental pollution); Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377, 388 (N.Y. 2003) (holding that a pollution exclusion did not apply to injuries from the inhalation of paint or solvent fumes and noting the “environmental implications” of the exclusion).

[8] Keggi, 13 P.3d at 789-90.

[9] Id. at 789; see also Casino W., 329 P.3d at 617 (“Taken at face value, the policy’s definition of a pollutant is broad enough that it could be read to include items such as soap, shampoo, rubbing alcohol, and bleach insofar as these items are capable of reasonably being classified as contaminants or irritants… Such results would be absurd and contrary to any reasonable policyholder’s expectations.”). Pollution exclusions (like all policy exclusions) are interpreted narrowly and against the insurer. Id. at 616. By contrast, coverage provisions are interpreted broadly, so environmental policies (which often cover “pollutants,” including “irritants” and “contaminants,” defined using similar or identical language) should cover losses caused by viruses that cause “direct physical loss or damage” to covered property. See Jemb Realty Corp. v. Greenwich Ins. Co., No. 1:20-cv-08537, ¶ 47 (S.D.N.Y. originally filed Oct. 13, 2020).

[10] See, e.g., McFarland v. Liberty Ins. Corp., 434 P.3d 215, 219 (Idaho 2019) (“Because insurance policies are adhesion contracts not typically subject to negotiation between the parties, ‘all ambiguities in an insurance policy are to be resolved against the insurer…”).

[11] Powell v. Liberty Mut. Fire Ins. Co., 252 P.3d 668, 672 (Nev. 2011) (“Because the insurer is the one to draft the policy, an ambiguity in that policy will be interpreted against the insurer.”).

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