COVID closures not covered by policy

An insurance company’s motion for summary judgment was granted after a federal judge ruled that the insurance policy as written did not cover losses related to closures caused by COVID-19 orders.

The plaintiffs sought nearly $11.5 million in “business interruption losses” stemming from closures in 2020. Their motion for partial summary judgment was denied by the court.

U.S. District Judge Rossie D. Alston Jr. of the Eastern District of Virginia wrote the opinion in Central Laundry LLC v. Illinois Union Insurance Company (VLW 022-3-001) on Jan. 5.

The plaintiffs filed a notice of appeal to the U.S. 4th Circuit Court of Appeals on Jan. 19.

COVID closures

The plaintiffs are a group of owners and operators of several hospitality, hotel and restaurant businesses in Virginia Beach and Norfolk. According to the opinion, the plaintiffs allege that the continued presence of COVID-19 “has and continues to suspend and threaten Plaintiffs’ operations.”

On March 20, 2020, the plaintiffs notified the defendant, Illinois Union Insurance Company, of a claim for “business interruption,” citing a March 17, 2020, notice from then-Gov. Ralph Northam declaring a public health emergency. Northam’s notice also required the plaintiffs to “partially suspend business operations.”

About three weeks later, Illinois Union Insurance Company sent a response letter denying coverage under the policy, stating that the claim “d[id] not involve a ‘pollution condition’ or ‘an indoor environmental condition’” and thus did not trigger coverage for business interruption.

According to the opinion, a “pollution condition” is defined with a list of several categories of potential conditions, mostly related to environmentally-caused conditions such as vapors, fumes, chemicals and “infectious or pathological wastes.”

The policy additionally has a definition for “indoor environmental condition,” defined as “the presence of ‘fungi’ in a building or structure… or the discharge, dispersal, release, escape, migration or seepage of legionella pneumophila,” provided such conditions are not naturally occurring.

On Sept. 18, 2020, the plaintiffs filed their complaint in Virginia Beach Circuit Court, requesting a declaratory judgment of $11,408,899 in “business interruption losses” and $129,554 in “extra expense” and asserting a “bad faith” breach of contract claim. Motions for summary judgment were filed by both sides in the fall of 2021.

Coverage denied

On the claim that COVID-19 qualified as a “pollution condition,” the judge sided with the insurance company, writing that the policy made clear what conditions qualify.

“Reading the Policy as a whole, it is evident that the term ‘pollution condition’ is confined to environmental pollution,” Alston wrote. “A communicable disease caused by a virus simply does not fall within the ambit of language used to define and effect the purpose of the ‘pollution condition’ term in the Policy.”

He added that several references to environmental law in the policy further solidified this point.

On the question of whether COVID-19 counts as an “indoor environmental condition,” Alston again sided with the defendant.

“Given the Policy’s specific references to fungi and a specific strain of bacteria, this Court has every reason to find that leaving out the term ‘virus’ was purposeful,” he noted.

The judge cited several cases from across the country, which all concluded that for insurance coverage purposes COVID-19 does not constitute a “pollutant” or “pollution condition.”

Even if COVID-19 could be included as a pollutant condition, Alston said, the plaintiffs would still need to make the case that the losses incurred were “directly attributable to COVID-19.”

“The cause of Plaintiffs’ remediation costs and business interruption losses must be the presence of COVID-19 at a ‘covered location’ rather than some intervening cause, such as the act of third parties,” he explained.

But the judge concluded that, in fact, it was the act of a third party that led to the losses suffered by the plaintiffs, saying nothing in the complaint from the plaintiffs showed they would have suspended business operations if not for the order from the commonwealth.

Alston added that the plaintiffs did not document a positive COVID-19 case among their employees until June 2020, months after the initial denial of coverage, and that the plaintiffs acknowledged in their initial claim letter that COVID-19 did not exist in their covered locations at the time.

“Despite Plaintiffs’ extensive documentation of its employees’ positive COVID-19 diagnoses at each of the ‘covered locations,’ Plaintiffs’ claim for coverage emanates directly from the suspension of its business and not the infection of its employees,” Alston wrote.

“[T]he suspension of Plaintiffs’ businesses is not directly attributable to COVID-19; rather, the restrictions imposed by the Commonwealth of Virginia on the operations of Plaintiffs’ businesses caused their business interruption.”

The opinion also said the plaintiffs “fail to establish coverage for the claimed remediation costs.” The plaintiffs alleged that they incurred $252,344.66 in remediation costs related to the purchase of sanitizers, cleaners, thermometers, masks and other such items common for businesses operating during the pandemic.

“Yet the restoration of insureds’ normal operations depended entirely on the orders of civil authorities as well as the general sentiments of Plaintiffs’ patrons,” Alston pointed out.

Since the plaintiffs did not show a basis for recovery, Alston said that there were no grounds for a bad faith breach of contract claim against the defendant.

“And even if Plaintiffs had shown a basis for recovery under the Policy, they have not demonstrated a reasonable basis for finding Defendant acted in bad faith when denying coverage to Plaintiff,” Alston added.