Although the number of declaratory judgment actions seeking coverage for COVID-19 business interruption losses is now nearing 500, relatively few of these cases seek recovery under commercial property policies containing virus exclusions.
Indeed, the virus exclusion (Form CP 01 40 07 06) is a formidable obstacle to coverage for COVID-19 claims. This exclusion was promulgated by the Insurance Services Office in 2006 after the SARS pandemic raised the prospect of virus claims in the United States. It states that there is no coverage “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.” Form CP 01 40 07 06.
Earlier this month, however, a Pittsburgh law firm filed suit in the Western District of Pennsylvania challenging the viability of this exclusion on a theory of “regulatory estoppel,” a doctrine that was recognized twenty years ago in New Jersey (and Pennsylvania to a lesser extent) as a means of nullifying otherwise unambiguous pollution exclusions.
In 1S.A.M.T. Inc. d/b/a Town and Country v. Berkshire Hathaway, Inc., No. 20-2025 (W.D. Pa. June 11, 2020), a banquet and catering company located in New Castle, Pennsylvania, is arguing that its property insurer should be estopped from arguing that the virus exclusion is broader than what ISO and other trade associations explained when this exclusion was promulgated in 2006 following the SARS pandemic. The complaint alleges:
48. In their filings with the various state regulators (including Pennsylvania), on behalf of the insurers, ISO and AAIS represented that the adoption of the Virus Exclusion was only meant to “clarify” that coverage for “disease-causing agents” has never been in effect, and was never intended to be included, in the property policies.
49. Specifically, in its “ISO Circular” dated July 6, 2006 and entitled “New Endorsements Filed to Address Exclusion of Loss Due to Virus or Bacteria,” ISO represented to the state regulatory bodies that:
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 to create sources of recovery for such losses, contrary to policy intent….
51. The foregoing representations made by the insurance industry were false. By 2006, the time of the state applications to approve the Virus Exclusion, courts had repeatedly found that property insurance policies covered claims involving disease-causing agents, and had held on numerous occasions that any condition making it impossible to use property for its intended use constituted “physical loss or damage to such property.”
This argument rests on the Pennsylvania Supreme Court’s ruling twenty years ago in Sunbeam Corp. v. Liberty Mutual Ins. Co., 781 A.2d 1189 (Pa. 2001), in which the court ruled 3–2 (two justices having declined to participate) that lower courts had erred in granting the insurers’ demurrer and dismissing a policyholder’s complaint with prejudice where, in the majority’s view, the insurer had properly pleaded the elements of a claim for estoppel based upon representations concerning the scope of the exclusion that the insurance industry had made to the Pennsylvania Insurance Department in 1970. The supreme court remanded the question back to the trial court to determine if, consistent with these statements to regulators, insurers meant to continue to cover gradual pollution that was not intended by the insured.
Sunbeam relied on Morton International v. General Accident Ins. Co., 134 N.J. 1, 629 A.2d 831 (1993), which is the only other state supreme court decision that has endorsed the “regulatory estoppel” doctrine. In Morton, the New Jersey Supreme Court declared that “sudden,” if given its literal meaning, would limit coverage to “big boom” type polluting events. However, the court ruled that statements made to insurance regulators in 1970 by the Insurance Rating Bureau (ISO’s predecessor) were grossly misleading. In particular, the court focused on IRB’s statement that Coverage for pollution or contamination is not provided in most cases under present policies because the damages can be said to be expected or intended and thus are excluded by the definition of occurrence. The above exclusion clarifies this situation so as to avoid any question of intent.
In light of these statements the Morton court ruled that the insurers are now estopped to additionally argue that the exclusion bars coverage for gradual pollution. Despite the fact that conventional estoppel did not apply since few policyholders had any awareness of these 1970 regulatory filings when they purchased their insurance, the court adopted the theory of “regulatory estoppel” for cases in which state regulators are, in effect, proxies for the insurance-purchasing public.
In misrepresenting the effect of the pollution-exclusion clause to the Department of Insurance, the IRB misled the state’s insurance regulatory authority in its review of the clause, and avoided disapproval of the proposed endorsement as well as a reduction in rates. As a matter of equity and fairness, the insurance industry should be bound by the representations of the IRB, its designated agent, in presenting the pollution-exclusion clause to state regulators.
Although policyholder counsel made aggressive efforts to spread the message of “regulatory estoppel” in the decade after Morton, with the sole exception of Sunbeam, state and federal courts uniformly refused to adopt this theory, whether because extrinsic evidence of intent is admissible where policy language is otherwise unambiguous or because the doctrine of estoppel requires that the party seeking to enforce a contract have relied to his or her detriment on a misstatement by the other contracting party. See, e.g. Federated Mut. Ins. Co. v. Botkin Grain Co., 64 F.3d 537 (10th Cir. 1995); Buell Industries v. Greater New York Mutual Ins. Co., 791 A.2d 489, 259 Conn. 527 (2002); E.I. DuPont v. Allstate Ins. Co., 693 A.2d 1059 (Del. 1997); American States Ins. Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996); Cessna Aircraft Co. v. The Hartford Acc. & Ind. Co., 900 F. Supp. 1489 (D. Kan. 1995); and Anderson v. Minnesota Insurance Guarantee Association, 534 N.W.2d 706 (Minn. 1995).
Indeed, even Sunbeam is not particularly strong precedent. It did not go as far as Morton and was only a 3–2 decision in a case in which two other justices had recused themselves. Furthermore, it has been given limiting effect by the Third Circuit in an unpublished decision. In Hussey Copper, 319 Fed. App’x 507 (3rd Cir. Aug. 23, 2010), the federal court refused to find representations made by ISO to Pennsylvania insurance regulators should estop Royal from asserting the application of an absolute pollution exclusion to products claims. In particular, the court found that the ISO statements, when read in context, showed that ISO consistently represented to regulators that the pollution exclusion would apply to claims like these and were not contrary to Arrowood’s position.
Furthermore, unlike the representations to regulators that were at issue in Morton and Sunbeam, there is no inconsistency between the ISO Statement of Purpose concerning the “virus exclusion” and the positions that insurers are now taking in response to COVID-19 claims. The claim in 1S.A.M.T. that the insurers’ representation that commercial property policies would generally not cover pandemic losses is “false” represents an interpretation of conflicting case law around the country. It was (and remains) the view of property insurers that pandemic losses were never meant to be covered. There is, therefore, no basis for arguing that the insurers are now taking an inconsistent position.
Additionally, this lawsuit fails to note that the ISO Circular stated that ISO had developed this new exclusion because “specific types” of “viral” contamination “warrant[ed] particular attention.” ISO specifically identified SARS, which is caused by a coronavirus, as an example of viral contamination, and stated that “[t]he universe of disease-causing organisms is always in evolution.” While ISO may not have anticipated the scope and devastation of COVID-19, this exclusion certainly anticipated the possibility of this or future pandemics and sought to insulate commercial property insurers from their consequences.
In short, while efforts will certainly be made to liken the 2006 AAIS and ISO documents concerning the virus exclusion to statements that were made to state regulators in the past concerning pollution exclusions, a reasoned assessment confirms that this virus exclusion was, in fact, adopted for the very sort of pandemic that now plagues our world and should survive “regulatory estoppel” assaults.
