Communicable Diseases and the CGL Policy
How could disease outbreaks impact commercial property and general liability insurance? The CGL policy will typically address a disease pandemic under three areas of exclusion within the policy: (1) Bodily Injury Exclusion; (2) Business Interruption Exclusion; and (3) the Pollutant Exclusion. Courts throughout the country treat these exclusions very differently and therefore counsel should be consulted to assist the claims unit and potentially underwriting in applying the policy to a coverage request under the policy.
The standard commercial general liability policy includes “disease” under its definition of bodily injury. Barring any coverage-altering endorsements (and depending on the state and the specific terms of the policy), it would appear that there is a debate as to coverage if an insured is found liable for accidentally helping spread a disease; for example, if a music venue did not take adequate precautions to halt the spread of an infectious disease on its premises. McMahon, Lucian, "Commercial insurance, diseases, epidemics." Insurance Information Institute, The Triple-I Blog. April 12, 2017. But just as with commercial property policies, liability policies often include pollution exclusions. How pollution is defined – and how broadly a court will interpret the scope of the exclusion – will all impact whether liability arising out of a disease outbreak is covered or not. Id. A policy may also include exclusions for any liability arising out of communicable diseases, just like the exclusions found in personal liability insurance policies. Id.
Bodily Injury Exclusion
Many commercial liability policies use the words "bodily injury". This term appears in most commercial auto, general liability, and commercial umbrella policies. Many policies contain the same definition as the standard ISO Commercial General Liability (CGL) policy. The CGL states that bodily injury means "bodily injury, sickness, or disease sustained by a person, including death resulting from any of these at any time." Bodily injury includes illness and disease as well as physical injury. It also includes death if death results from bodily injury, sickness, or disease. Death that results from unexplained causes does not usually qualify. Bonner, Marianne, "The Definition of Bodily Injury." The Balance Small Business. January 27, 2019. Many commercial umbrella policies contain a broader definition of bodily injury than the ISO CGL. In these policies, bodily injury is likely to include some type of psychological injury such as mental anguish. Nevertheless, most umbrellas limit coverage to mental injuries that result from physical injuries. Id.
Business Interruption Exclusion
Besides the tragic loss of life, epidemics can also take a tremendous economic toll. Supply chains are disrupted. Businesses lose both employees and customers to sickness. Quarantines are enforced. Commercial property policies often include business interruption coverage, which pays out lost income and extra expenses incurred from a covered loss to the insured property. The question is whether a disease outbreak which leads to a business interruption would constitute an occurrence under the policy. Most property policies require some kind of property damage to occur that results in income loss. Sick employees probably don’t count as property damage. The interplay between the policy language and the event is always relevant in interpreting casualty policies.
Is a disease a “pollutant”? Surprisingly, whether a disease outbreak can cause property damage is actually up for debate. Some have argued that the mere presence of a disease on the covered property could be a direct physical loss. But even if that were true, many commercial property policies include pollution or contamination exclusions, which can include viruses, bacteria, and diseases. In that case, any physical damage caused by a disease would not be covered. (That being said, how courts interpret a pollution exclusion varies significantly, so anything could happen if the question is litigated.) McMahon, Lucian, "Commercial insurance, diseases, epidemics." Insurance Information Institute, The Triple-I Blog. April 12, 2017.
The pollution exclusion was birthed in the mid-1970’s in response to federal environmental laws (i.e. the clean water act (CWA), the resource conservation and recovery act (RCRA) and the Superfund Act (aka the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA; the original intent of most standardized pollution exclusions was to exclude losses arising out injury or damages from environmental pollution falling under the jurisdiction of these laws (now known as “traditional environmental pollution”).
In fact, a 2010 New Jersey Supreme Court ruling, Nav-Its v. Selective Insurance, noted that the exclusion’s terminology is taken from environmental laws and intended to be interpreted in light of those laws. But not every state court agrees with this use and interpretation. Current application of this exclusion by many jurisdictions seem to stray from this original intent and purpose. There is an “Arising out of/ Causal Connection Requirement." Pollution is not excluded by the policy wording. Excluded is “bodily injury” or “property damage” “arising out of…” or caused by the release of a pollutant. Literally, this means that the mere presence of a “pollutant” (a term defined in the policy and interpreted by the courts) is not sufficient to trigger the pollution exclusion. The pollutant must be the cause-in-fact of the injury or damage – to trigger the exclusion. Boggs, Christopher, "Courts and Carriers Can Misapply the Absolute Pollution Exclusion." Insurance Journal, May 19, 2015.
If the exclusion arguably may not apply, carriers are well advised to look to other portions of the policy. Strict reading jurisdictions may posit that the pollutant must be the cause of the injury or damage, not just a byproduct of the negligent event or simply present at the time or place of the loss. The argument that will need to be dealt with is whether any other interpretation of this exclusionary wording makes the absolute pollution exclusion unconscionably broad. Id. However, some jurisdictions adopt a broad reading of the exclusion. The legal argument that typically arises is (1) whether the substance is a “pollutant” or not and (2) whether the jurisdiction applies the PE to a tort claim that is not traditional environmental pollution but does involve injury or harm that arises out of some substance that could fit the definition of a pollutant (smoke, gas, dust, bacteria).
Extending civil authority coverage: Insurers can always add endorsements to the policy to extend coverage to losses resulting from a disease outbreak. For example, during the 2014 Ebola outbreak, ISO released Ebola-related commercial property endorsements, including one that would offer business interruption coverage following a government-ordered shutdown of operations during an outbreak. This would extend the traditional civil authority coverage to include losses that didn’t result from damaged property. (Like business interruption coverage, traditional civil authority coverage is often limited to physical loss or damage to property.) McMahon, Lucian, "Commercial insurance, diseases, epidemics." Insurance Information Institute, The Triple-I Blog. April 12, 2017.
The United States District Courts have addressed potentially analogous factual circumstances in cases involving guests' contraction of Legionnaire's disease following the use of hotel hot tubs. The Northern District of Georgia examined a commercial general liability policy which included a "Bacteria Exclusion," which excluded bodily injury or property damage which would not have occurred except for the exposure to bacteria within a building or structure. Nationwide Mut. Fire Ins. Co. v. Dillard House, Inc., 651 F.Supp.2d 1367, 1379 (N.D.Ga.2009), However, the exclusion was limited by an exception which provided that the Bacteria Exclusion did not apply to bacteria "that are, are on, or are contained in, a good or product intended for bodily consumption.” (Referred to as the "Consumption Exception") Examining the plain meaning of the policy terms, the Court found that the hot tub, including the water contained therein, were intended for "consumption" and therefore fell within the exception.
Under a like factual scenario, the Eastern District of Louisiana found that similar "bacteria" exclusions precluded coverage, as it was undisputed that bacterial agents were involved and the "allegations here are that bacteria present at the Hotel caused a bodily injury through contact, exposure, inhalation, and/or ingestion." Paternostro v. Choice Hotel Int'l Servs. Corp., No. CIV.A. 13-0662, 2014 WL 6460844 (E.D. La. Nov. 17, 2014), opinion clarified on denial of reconsideration, No. CIV.A. 13-0662, 2015 WL 471784 (E.D. La. Feb. 4, 2015).
While the bacteria exclusion relieved several parties of the duty to defend, the Louisiana Court was persuaded by Dillard, supra, and found that for the parties with policies that contained the "Consumption Exception," coverage could be found, and that at the very least a duty to defend existed. (Paternostro involved multiple insurers with slightly varying policies)
It is also worth noting that the Paternostro court considered the "Communicable Disease" exclusion, which excluded coverage “arising in whole or in part, directly or indirectly out of, or which is in any way related to any communicable disease ...” however "[u]nlike the issue of bacteria, a term which encompasses Legionella and Pseudomonas aeruginosa, as materially agreed by the parties, the parties vigorously dispute whether Legionella and Pseudomonas aeruginosa are communicable diseases. Essentially, the parties dispute whether a communicable disease must be transmitted from a person, or whether it can be transmitted from an inanimate environment such as a hot tub, HVAC system, or air/water supply." Id. The Court ultimately declined to decide the issue, and deferred until further discovery had taken place.
In the event of a disease and/or pandemic outbreak, where a claim is made under a CGL policy, coverage counsel can assist in analyzing the facts of loss under the policy, whether an exclusion applies, and also whether the jurisdictional law governing the policy presents any conflict or challenge to the policy language. The carrier’s investigation and review of the loss or claim should always start with the policy language and then weigh the jurisdictional variances that could influence a court’s interpretation of same.
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