With the spread of COVID-19 to the U.S., many insurers are preparing for possible COVID-19 related first party property claims by reviewing what coverages and exclusions might be applicable to such claims. While any claim is dependent on the specific terms of the policy issued to each insured, insurance companies should consider certain coverages and exclusions as a checklist. Partners Karen Karabinos and Eric Mull will address a coverage provision or exclusion each day. Today’s focus is on the Virus and Bacteria Exclusion.
Property insurance policies contain exclusions precluding coverage under certain circumstances. One exclusion potentially relevant to COVID-19 claims is the Virus and Bacteria Exclusion.
In the early 2000’s, following an outbreak of the severe acute respiratory syndrome (“SARS”) many U.S. insurance carriers added an exclusion to commercial property policies. The exclusion, ISO form COP 01 40 07 06, “Exclusion for Loss Due to Virus or Bacteria,” specifically excludes coverage for losses caused by a virus. The exclusion goes on to specifically state that it applies, among other things, to “business income,” i.e., business interruption. At that time, the drafters of the ISO form set forth their concerns as follows:
Although building and personal property could arguably become contaminated (often temporarily) by such viruses and bacteria, the nature of the property itself would have a bearing on whether there is actual property damage. An allegation of property damage may be a point of disagreement in a particular case. In addition, pollution exclusions are at times narrowly applied by certain courts.
While property policies have not been a source of recovery for losses involving contamination by disease-causing agents, the specter of pandemic or hitherto unorthodox transmission of infectious 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.
In light of these concerns, we are presenting an exclusion relating to contamination by disease-causing viruses or bacteria or other disease-causing microorganisms.
In application, the exclusion precludes coverage for damages “caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” For example, in Koegler v. Liberty Mutual Ins. Co., 623 F. Supp. 2d 481, 484-85 (S.D. N.Y. 2009), the court noted that the communicable disease exclusion, which excluded coverage for bodily injury arising out of the “transmission of a communicable disease, virus, or syndrome,” precluded coverage for an individual alleged to have transmitted the human papillomavirus and herpes virus. In support, the court asserted that “the exclusions [we]re couched in plain English, and are not at all difficult to understand.”
Fast-forward to the current COVID-19 pandemic, on March 17, 2020, the Georgia Insurance Commissioner, John King, issued Bulletin 20-EX-3 addressing Business Interruption Insurance and COVID-19.
Concerning virus and disease, the Bulletin provides:
Viruses and disease are typically not an insured peril unless added by endorsement. Most polices generally exclude loss caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease.
Standard business interruption policies typically exclude viruses and bacteria and/or communicable disease. However, in response to past outbreaks, some insurers developed specialty insurance to respond.
The Georgia Department of Insurance became aware that in early February 2020, Insurance Services Office, Inc. developed two new endorsement forms relating to business interruption insurance and COVID-19. These forms provide coverage for actual loss of business income and extra expenses caused by a government order closing the insured’s premises or quarantining all or part of the premises and from government suspension of some modes of public transportation. If dependent properties are included in the coverage, such as a supplier’s or customer’s premises, then the coverage applies to the dependent property as well.
Based on the reasoning in Koegler and ISO’s stated purpose for the Virus Exclusion, such an exclusion will likely preclude coverage of COVID-19 claims. Further, it appears from the Georgia Insurance Commissioner’s March 17, 2020 Bulletin that the Georgia’s Insurance Commissioner supports such an analysis in Georgia that COVID-19 is not a covered peril unless specifically added by endorsement.