A company which owns and operates a shopping mall, and which had stipulated a commercial insurance policy filed suit against its insurer for coverage of losses sustained as a result of shutdown orders issued in the wake of the COVID-19 pandemic. It alleged claims of breach of contract and bad faith because the insurer had denied her request for coverage.

The insurer alleged that the insured’s claim had to be dismissed on account of the pollution and contamination exclusion contained in the policy which allegedly precluded coverage of plaintiff’s losses. Under such a clause of the policy, coverage did not extend to “loss or damage caused by, resulting from, contributed to or made worse by actual, alleged or threatened release, discharge, escape or dispersal of contaminants or pollutants [...]”. Contaminants or pollutants were defined by the policy as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste, which after its release can cause or threaten damage to human health or human welfare or causes or threatens damage, deterioration, loss of value, marketability or loss of use to property insured hereunder”. In the defendant’s view, such a clause clearly extended to losses connected to the COVID-19 pandemic.

However, by judgment of 27 February 2023, the District Court of California denied the defendant’s motion to dismiss and allowed the case to go ahead for further examination precisely on account of the ambiguous terms of the virus exclusion. Namely, the Court held that while the defendant’s interpretation of the clause was reasonable, the same held true with respect to the interpretation of the exclusion clause provided by the plaintiff. The latter had not contested the plain meaning of the word “virus” to which the defendant had referred in outlining its interpretation of the clause. However, the policyholder had contended that the clause was nonetheless inapplicable to its claim because the plain language of the exclusion required a volitional act involving an “actual, alleged or threatened release, discharge, escape or dispersal of contaminants and pollutants” while no such volitional act existed in the case of the COVID-19 virus. Since “ambiguities or uncertainties in the policy are to be construed against the insurer”, the Court held that the exclusion at issue in the present case had to be construed against the defendant and accordingly denied the latter’s motion to dismiss the case.

Reference: C.J. Segerstrom et al. v. Lexington Insurance Company et al., District Court of California, 27 February 2023.

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