Liability Policies With “Virus” Exclusions May Not Protect Businesses From COVID-19 Related Claims

As the incidences of infection exponentially grow, we anticipate that many businesses, particularly service industries, would likely face a surge of claims from clients, members of the public, and their employees for the negligent transmission of COVID-19 or the failure to adequately protect them from contracting COVID-19. In turn, these businesses would look to insurers for coverage for COVID-19 or other communicable infection-related claims.

However, to avoid coverage for claims for the transmission of, or exposure to communicable diseases, many insurers have included a communicable disease or virus exclusion in a standard homeowner policy or commercial general liability policy.  The language and clauses used in those exclusions are key to an understanding of whether coronavirus related losses will be covered under these policies.  

Communicable Disease Exclusions

While knowledge about the spread of COVID-19 is still evolving, there is consensus that COVID-19 is a communicable disease.[1] New York courts have aligned themselves with the majority of jurisdictions in holding that, the communicable disease or analogous exclusions unambiguously preclude coverage, where the insured’s liability “arises out of the transmission of a communicable disease by an insured.” See e.g., Plaza v. General Assur. Co., 244 A.D. 2d 238, 664 N.Y.S.2d 444 (1st Dep’t 1997) (holding that an HIV transmission claim was unambiguously excluded under a homeowner liability policy that excludes coverage for bodily injury arising out of the transmission of a “communicable disease.”). See also Doe v. State Farm Fire & Cas. Co., No. 2015-0136, 2015 WL 11083311, at *1 (N.H. Sept. 21, 2015).  To apply an exclusion that employs the phrase “arise out of”, there needs to be only a minimal causal connection or incidental relationship between the excluded cause and the loss.  Regal Const. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, P.A., 15 N.Y.3d 34, 38 (2010) (“We have interpreted the phrase ‘arising out of’… to mean ‘originating from, incident to, or having connection with.’”).  

“Virus” Exclusions

A “virus or bacteria” exclusion substantially narrows the definition of excluded losses as compared to the communicable disease exclusion.  Because COVID-19 is a “virus,” an exclusion applying to bacteria or fungi may not apply to preclude coverage for COVID-19 related illness.

Second, unlike the “arising out” language in the communicable disease exclusion, an exclusion for “loss due to virus or bacteria” contains the phrase “caused by or resulting from.”  These clauses govern exactly how substantial or sufficient a given causal nexus needs to be, in order to provide or deny coverage.  Courts have consistently interpreted the phrase “caused by” as requiring proximate causation.  In contrast, the degree of causation required under the phrase “resulting from” is not settled.[2] Because exclusions are generally interpreted narrowly in favor of conferring coverage, the court would likely apply the “resulting from” test.

Geographical or Temporal Restriction Clauses

Certain exclusions, particularly “fungi or bacteria” exclusions, often require that the exposure/infection occur “on or within a building or structure” of the insured premises.  Therefore, where a claim lacks a temporal and geographical specificity as to where and when the infection occurred, the insurer may not be able to rely on an exclusion containing such a clause to deny coverage. See e.g.,  Colony Ins. Co. v. Nicholson, No. 10-60042-CIV, 2010 WL 3522138, at *1 (S.D. Fla. Sept. 8, 2010)(holding that insurer of a nail salon owed coverage for an infection related injury because the exclusion only excluded the injury contracted within the salon, and there was an uncertainty as to whether the claimant contracted the infection within the salon, or contracted it “without after being predisposed to such risk by virtue of the salon’s allegedly negligent cutting of her finger.”) The application of a virus exclusion containing a geographical restriction clause is dependent largely upon the facts and circumstances.  For example, for a claimant whose physical mobility is restricted or confined, such as inmates or residents in nursing homes, an exclusion with a restrictive clause may still provide a compelling coverage defense for the insurers.

Anti-Concurrent or Anti-Sequential Clauses

Another relevant language to watch out for is an anti-concurrent or anti-sequential clause that states "regardless of whether any other cause, events, material or product contributed concurrently or in any sequence to such injury or damage."  These clauses, often appearing in mold and fungi exclusions, resolve coverage issues, where two perils, one covered and one excluded, co-exist.  A combination of the anti-concurrent/sequential clause and any of the virus, fungus, mold, and microorganism exclusions will likely preclude coverage for loss, as long as it includes one excluded peril. See e.g., Simonetti v. Selective Ins. Co., 372 N.J. Super. 421 (App. Div. 2004); Hobbs v. US Coastal Ins. Co., Civil Action No. 17-3673, 2018 U.S. Dist. LEXIS  86484, at *708 (D.N.J. May 23, 2019) (rejecting the plaintiff’s argument that the loss was caused by water, not mold, because of the anti-concurrent and anti-sequential clauses, such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.")  New Jersey would follow the majority rule that anti-sequential clauses are enforceable. See Assurance Co. of Am., Inc. v. Jay-Mar, Inc., 38 F. Supp. 2d 349, 354 (D.N.J. 1999) (“[T]here is no violation of public policy when parties to an insurance contract agree that there will be no coverage for loss due to sequential causes even where the first or the last cause is an included cause of loss.”).  With COVID-19 disproportionally affecting people with underlying health conditions, it is conceivable that some people who are exposed to COVID-19 may die even without the effect of COVID-19.  In such scenarios, COVID-19 need not be a proximate cause of such a person's death for this exclusion to apply.

In short, the language and definitions used in these exclusions will be important.  All things considered with traditional homeowner’s and general liability insurance; it may be difficult to secure coverage when these exclusions are included in the policy.  However, as usual with any policy, it all depends on the specific language and definitions used.