Michael Jordan, the National Basketball Association icon, once said, “get the fundamentals down and the level of everything you do will rise.” His insight here also holds value for insurance lawyers who are facing their own game seven.
Many of the articles published in the last several weeks have not focused on the fundamentals—the insurance 101—but on the graduate-level questions. Those questions are important, but as we prepare to tackle our toughest coverage questions, it is the fundamentals of insurance policy construction that will prove most important. Below are four “fundamentals” and the role they will likely play in the coming months.
Fundamental #1 – Policy Language is Interpreted to Give Each Word Meaning
In addition to focusing on the fundamentals, Jordan focused on every single game. He truly believed that every game mattered.[i] Courts view policy language the same way, as they interpret insurance policies to give every word meaning.[ii]
The fundamental that each word must have meaning is particularly relevant with COVID-19 losses, where business interruption policies are triggered upon “physical loss or damage.” Some insurers are asserting that the loss of use of an insured location does not trigger business interruption coverage because, in loss of use scenarios, there is no actual physical or structural damage.
There is a fundamental problem with that interpretation—if “physical loss” means “physical damage,” then the term “physical loss” adds nothing to the policy and is meaningless. That cannot be. It must be that “physical loss” means something different than “physical damage.” Consistent with that fundamental principle, many courts have found that loss of use, at the very least, constitutes “physical loss.”[iii]
Fundamental #2 – Insurers are Bound by the Policy Language They Draft
Unlike Michael Jordan, insurers don’t get the benefit of the doubt on close calls, and they do not get to underwrite at the point of claims.[iv] Under the so-called “Pan Am principle,” an insurer that had precise exclusionary language available to it, but chose to use less precise language, will have its language construed in favor of the policyholder.[v] Moreover, where a policy does not contain a common exclusion, the non-excluded peril should be covered.[vi]
How does that play out? An insurer seeking to exclude coverage for COVID-19 claims on the basis of a contaminant, microbe, or microorganism exclusion will have an uphill battle when exclusions that are arguably more applicable (e.g., communicable disease or virus exclusions) were available in the marketplace. That is not to say that communicable disease or virus exclusions will bar coverage for every COVID-19 claim—for the reasons mentioned in the next section that is not so—but insurers who bargained for less-applicable exclusions will have a particularly high mountain to climb.
Fundamental #3 – Exclusions are Strictly and Narrowly Construed
The opponents of the Bulls often sent their toughest defender after Jordan, but rarely did that stop him.[vii] Likewise, insurers will cite various exclusions as barring coverage for COVID-19 claims, but no matter the exclusion, it will be strictly and narrowly construed.[viii] That means, for example, that insurers may have a difficult time convincing a court that a microorganism exclusion should bar coverage for COVID-19 losses, especially when, according to some, a virus does not constitute a living organism.[ix]
Insurers may also have a difficult time establishing that ordinary pollution and/or contamination exclusions should bar coverage for COVID-19 losses. Indeed, consistent with the doctrine of strictly and narrowly construing exclusions, the court in National Union Fire Ins. Co. of Pittsburgh, PA v. Burlington Ins. Co., held that a “Total Pollution Exclusion” did not bar coverage for bodily injury claims brought by individuals involved in 9-11 clean-up efforts who alleged “exposure to various toxicants.”[x] The court noted that “New York courts have long held the total pollution exclusion clause to be ambiguous when applied outside the context of lawsuits arising from traditional environmental pollution” (e.g., the dumping of hazardous waste).[xi] And, that “[i]f this sophisticated insurer sought to exclude liability for injuries sustained by workers performing contemplated clean-up activities, it could readily have adopted specific language to that effect.”[xii]
The same principles mean that even generic virus or communicable disease exclusions do not necessarily bar all coverage for COVID-19 losses. Many virus and communicable disease exclusions generally purport to bar coverage for virus or disease-related physical damage occurring at the policyholder’s premises. But, many policyholder’s losses arise from the loss of use of a facility because of the presence of COVID-19 in the community at-large, social anxiety over public health concerns, and/or civil authority measures taken to mitigate the spread of the virus, and not because of the actual physical presence of the virus at their premises. Thus, even policyholders with virus and communicable disease exclusions may still have coverage, especially because those exclusions must be strictly and narrowly construed.
Fundamental #4 – Policy Language Controls, Except When It Doesn’t
Jordan typically focused on the fundamentals, but he was also known as being the greatest “pitch man” of the 1990s, and was featured in some of the most memorable sneaker commercials of all time.[xiii] Courts considering questions of insurance coverage typically start with the language of the policy, but that is not always the case, as there are situations when even plain and unambiguous policy language will not control.
For example, in some jurisdictions, a policyholder’s “reasonable expectations” can trump unambiguous policy language.[xiv] Moreover, in some jurisdictions, extrinsic evidence proffered by the policyholder is admissible to identify latent ambiguities in policies that otherwise appear clear and unambiguous.[xv]
Why is this important? Policyholders may be able to utilize extrinsic evidence—e.g., correspondence from during policy procurement or renewal—to build their case that their COVID-19 losses are covered. The policy is not necessarily the end of the story.
For instance, although the typical virus exclusion states that the insurer “will not pay 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 drafting history of that exclusion explains that the exclusion was designed to eliminate coverage for claims involving “sick buildings” that are actually contaminated by a virus.[xvi] In other words, the virus exclusion was concerned with “physical damage” caused by actual contamination of specific property, but not with “physical loss” caused by, perhaps among other things, the presence of COVID-19 in the community at-large, social anxiety over public health concerns, and/or civil authority measures taken to mitigate the spread of a virus.[xvii]
Conclusion: The Fundamentals Matter
In closing, the fundamentals are as important to pursuing coverage for COVID-19 losses as they are for pursuing NBA championships. And, the fundamentals set out in this article are by no means an exhaustive list; for example, this article does not discuss the doctrine of contra proferentum, which generally provides that ambiguity is construed in favor of the policyholder. Regardless, these fundamentals and others will ultimately decide the tough COVID-19 questions our courts will be deciding over the next several years. As Jordan said, those who get those fundamentals down will rise.
[i] Reflecting Jordan’s focus on every game, the Chicago Bulls won seventy-two of their eighty-two regular season games during the 1995-96 season. During that season, Jordan averaged over thirty points a game.
[ii] Burlington Ins. Co. v. NYC Transit Auth., 29 N.Y.3d 313, 322 (N.Y. 2017) (describing “the rule that requires us to interpret the language in a manner that gives full force and effect to the policy language and does not render a portion of the provision meaningless”); Union Oil Co. v. Int’l Ins. Co., 37 Cal. App. 4th 930, 935 (Cal. Ct. App. 1995) (stating that “an interpretation that gives effect to every clause is preferred over one that would render other policy terms meaningless); Gilbert Texas Const., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex. 2010) (remarking that Texas courts “examine the entire agreement and seek to harmonize and give effect to all provisions so that none will be meaningless”).
[iii] See, e.g., Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., Civ. No. 2:12-cv-04418, 2014 WL 6675934, at *5 (D. N.J. Nov. 25, 2014) (determining that “property can sustain physical loss or damage without experiencing structural damage.”); Manpower Inc. v. Ins. Co. of the State of Pennsylvania, No. 08C0085, 2009 WL 3738099, at *5 (E.D. Wis. Nov. 3, 2009) (“As an initial matter, I reject [the inurer’s] argument that a peril must physically damage property in order to cause a covered loss. As noted, the policy covered physical losses in addition to physical damage, and if a physical loss could not occur without physical damage, then the policy would contain surplus language.”).
COVID-19 can also cause “physical damage” due to, among other things, its ability to attach to surfaces for prolonged periods of time.
[iv] This sentence was crafted by a very bitter fan of the New York Knicks, who beat the Bulls only once in a playoff series during the Jordan era—in 1994, when Jordan was absent to play baseball—and only then, on an admittedly dubious foul call.
[v] See, e.g., Pan Am. World Airways, Inc. v. Aetna Cas. & Sur. Co., 505 F.2d 989, 1000 (2d Cir. 1974); McMillan v. State Mut. Life Assur. Co. of Am., 922 F.2d 1073, 1076-77 (3d Cir. 1990) (“If State Mutual desired to limit its liability under Hazard F of the policy to only those felonious assaults committed during a period identified by the most restrictive understanding of ‘on authorized business,’ it was certainly at liberty to adopt more precise language to accomplish that purpose.”).
[vi] Charter Oak Fire Co. v. Am. Capital Ltd., No. 09-cv-0100, 2017 WL 3315306, at *18 (D. Md. Aug. 3, 2017) (“As shown at trial, there are numerous ways in which insurers typically avoid picking up the liability for a private equity firm’s portfolio companies. Plaintiffs did not include those common exclusions and endorsements, and they cannot remedy that decision through reformation. They are bound by the terms of the policies they wrote.”); 20th Century Ins. Co. v. Schurtz, 112 Cal. Rptr. 2d 547, 551 (Cal. Ct. App. 2001) (“The policy before us, however, contains not a criminal act exclusion but an illegal act exclusion. Had Safeco wanted to exclude criminal acts from coverage, it could have easily done so. Insurers commonly insert an exclusion for criminal acts in their liability policies.”).
[vii] Gary Payton is known as one of the greatest defensive players in NBA history. He was known as “The Glove.” During the 1996 NBA Finals, Payton guarded Jordan and held him to his lowest scoring performance during an NBA Finals—Jordan still averaged over twenty-seven points per game. See supra note 4 and the accompanying text.
[viii] Jordan v. Allstate Ins. Co., 116 Cal. App. 4th 1206, 1214 (Cal. Ct. App. 2004) (“Policy exclusions are strictly construed”); Metalios v. Tower Ins. Co. of New York, 77 A.D.3d 471, 473 (N.Y. App. Div. 2010) (noting that “it is beyond cavil that an insurer seeking to exclude coverage must do so in clear and unmistakable language and any exclusions are given a strict and narrow interpretation”).
[ix] See Nigel Brown & David Bhella, Are Viruses Alive? Microbiology Society (May 10, 2016) (available at https://microbiologysociety.org/publication/past-issues/what-is-life/article/are-viruses-alive-what-is-life.html).
[x] 2018 N.Y. Misc. LEXIS 1503, *10 (N.Y. Sup. Ct. N.Y. Cty. Apr. 27, 2018).
[xi] Id. at *16.
[xii] Id. at *24.
[xiii] See, e.g., 1991 Air Jordan from Nike commercial featuring Spike Lee (noting that although “you can” wear a pair of Air Jordans, “you cannot” dunk like Jordan).
[xiv] See, e.g., UPMC Health Sys. v. Metro. Life Ins. Co., 391 F.3d 497, 504 (3d Cir. 2004) (noting that, under Pennsylvania law, “a reasonable expectation of coverage . . . will prevail over the language of the policy”); Lehrhoff v. Aetna Cas. and Sur. Co., 638 A.2d 889, 893 (N.J. App. Div. 1994) (holding that “reasonable expectations will, in appropriate circumstances, prevail over policy language to the contrary”); Tomlinson v. Combined Underwriters Life Ins. Co., 708 F. Supp. 2d 1284, 1291 (N.D. Okla. 2010) (remarking that, under Oklahoma law, “if the insurer . . . creates a reasonable expectation of coverage in the insured which is not supported by policy language, the expectation will prevail over the language of the policy”).
[xv] See, e.g., Gen. Refractories Co. v. First State Ins. Co., No. 04-3509, 2012 WL 1570879, at *2 (E.D. Pa. May 4, 2012) (denying insurers’ motion for summary judgment based on policy exclusions because the policyholder submitted “extensive extrinsic evidence as to how the insurance industry, insurance policies, and litigants of asbestos-related claims used and regarded the exclusionary terms”); Lymtal Int’l, Inc. v. Chubb Custom Ins. Co., No. 10-cv-0688, 2011 WL 672535, at *2 (W.D. Okla. Feb. 15, 2011) (“allow[ing] the use of extrinsic evidence to identify the existence of a latent ambiguity”); Employers Reinsurance Co. v. Superior Court, 161 Cal. App. 4th 906, 920 (Cal. Ct. App. 2008) (noting that “[e]xtrinsic evidence can be offered not only where it is obvious that a contract term is ambiguous, but also to expose a latent ambiguity”).
[xvi] Insurance Services Office, Inc.’s (“ISO”) July 6, 2006 circular, LI-CF-2006-175, addresses only losses from actual contamination by viruses: Disease-causing agents may render a product impure (change its quality or substance), or enable the spread of disease by their presence on interior building surfaces or the surfaces of personal property. When disease-causing viral or bacterial contamination occurs, potential claims involve the cost of replacement of property (for example, the milk), cost of decontamination (for example, interior building surfaces), and business interruption (time element) losses.
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. In recent years, ISO has filed exclusions to address specific exposures relating to contaminating or harmful substances. Examples are the mold exclusion in property and liability policies and the liability exclusion addressing silica dust. Such exclusions enable elaboration of the specific exposure and thereby can reduce the likelihood of claim disputes and litigation.
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.
[xvii] This “extrinsic evidence” actually supports the plain language argument outlined with Fundamental #3—virus and communicable disease exclusions generally purport to bar coverage for virus or disease-related physical damage occurring at the policyholder’s premises, but, many policyholder’s losses arise from the presence of COVID-19 in the community at-large, social anxiety over public health concerns, and/or civil authority measures taken to mitigate the spread of the virus.
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