The Next Pandemic Has Begun to be “Courted”

Whether or not a particular policy contains an explicit exclusion for pandemics or some similar condition, misses the point: there is no federal pandemic backstop, as there is for Terrorism. And, by the way, if you follow the early line from the White House, it may have been purposefully motivated, i.e. terroristic in nature.. This is unproved. Yet the larger problem remains.

Insurers have mounted good defenses, despite the reputational risks.

One exemplar was quoted in the clear and well written Corporate Counsel Newsletter of May 15th, 2020.

“On April 20th, in a declaratory judgment complaint filed by Travelers Casualty Insurance Company of America (“Travelers”) in the United States District Court for the Central District of California (Case No. 2:20-cv-03619) against its insured, Geragos & Geragos (G&G), in which it seeks a declaration that there is no coverage for losses caused by the SARS-CoV-2 virus more commonly known as COVID-19. G&G claimed lost business income and lost rental income stemming from the presence of the virus on its business property, and from the governmental orders that closed down its office and the courts. Travelers denied that there was any coverage for any of G&G’s losses, arguing:

– lost business income is not covered under any policy provision because any suspension of operations was not “caused by direct physical loss of or damage to property at the described premises.”

– the presence of SARS-CoV-2 on a surface would not cause physical damage to that surface.

– lost business income is not covered under the “Civil Authority” provision because the governmental orders were not “due to direct physical loss of or damage to property at locations, other than described premises, that are within 100 miles of the described premises.”

– any closure of the courts in which G&G conducts litigation was the result of governmental actions taken to slow the spread of the COVID-19 Pandemic, not the result of direct physical loss or damage to those properties.

– coverage for all of G&G’s losses are excluded by the policy exclusion 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.” These arguments are the same types of arguments that insurance companies have been making in denying claims, and that they can be expected to assert in response to the many lawsuits being brought by insureds.”

In sum, the insurance company position is that losses resulting from COVID-19 do not constitute “direct physical loss of or damage to property.”

From the plaintiffs’ side the argument is familiar. An exemplar follows, again from the same article: “In a complaint filed in a California federal court (C.D.C. case no. 2:20-cv-03890) by the Simon Wiesenthal Center (SWC) against the Chubb Group of Insurance Companies (Chubb), SWC argued that its business losses stemming from the COVID-19 pandemic are covered under its “all risk” property damage policy because “coronavirus creates a physical impact and loss on property as it alters surfaces, limiting or prohibiting the intended use of property and causing a dangerous property condition.” In support of that conclusion, SWC points to:

– scientific studies, which recognize that the coronavirus causes physical loss and damage, including certain unspecified “scientific studies” that purportedly show that the virus “physically infects and stays on surfaces . . . for up to twenty-eight days.”

– governmental closure orders, which often contain language acknowledging that the closures are due in part due to the virus’ propensity to attach to surfaces, which is a dangerous property condition that causes property loss and damage;

– judicial decisions from some states[3] that have defined physical loss or damage as an alteration to the property, even if invisible to the naked eye or not structural, that prevents the ordinary intended use of the property.

The SWC complaint also emphasizes that its policy does not contain a virus or pandemic exclusion even though such broad exclusions started being used by the insurance industry following the SARS pandemic in 2002-2004. Thus, SWC argues, Chubb clearly knew how to exclude losses from pandemics such as this, but it chose not to do so.

So the beat goes on.

This will wind up in many costly contests in the courts, but in the realm of public opinion, insurers will again be demanding of clients a high degree of legal savvy, policy language appreciation…and rationality.

History teaches that insureds do not reason along with the Wall Street Journal’s editorial board when a disaster hits or even an opportunity to recover from all those years of premium payments.

It is hard for an agent or broker to sell a policy while underlining its limitations. Too often clients prefer perfunctory acceptance of blah, blah, blah… the fine print.

This winds up the stuff of lawsuits and punitive awards from judges living through the same pandemic and owning the same policies with narrow wording.

Litigation may well prove to be the next pandemic. SA