Bedrock Principles of Insurance Contract Interpretation May Aid Policyholders Seeking Coverage for Losses Due to COVID-19

Determining how an insurance policy applies to a situation not anticipated by the policy’s drafters often results in disputes between an insurer and a policyholder.  So, it’s no surprise that the COVID-19 pandemic, which is unprecedented in many respects, has led to numerous differences of opinion regarding the extent to which various types of insurance cover a wide array of losses related to COVID-19.  And while the first court rulings on this subject were recently issued, these decisions reached differing conclusions and are largely driven by the specific facts alleged and policy language at issue (as well as controlling law), leaving broader disagreements over the scope of coverage largely unresolved.[1]  In other words, seven months after policyholders began submitting claims, uncertainty continues to hang over a wide array of coverage issues related to COVID-19.

With this uncertainty in mind, policyholders evaluating potential coverage for losses due to COVID-19 should bear in mind a central tenet of insurance coverage law:  the interpretation of insurance policies weighs heavily in favor of coverage when there is uncertainty.  From this basic precept flow a few well-established principles of insurance contract interpretation that all policyholders should bear in mind and that may play a valuable role for those seeking coverage as a result of COVID-19.

First, courts nationwide generally agree that insurance policies should be construed in favor of coverage and any ambiguities should be read in the policyholder’s favor.  A sampling of decisions from around the country illustrate how this rule operates to ensure broad coverage for policyholders in situations that may appear uncertain.  For instance, courts have held that:  (1) a policy that covered acts by a truck driver while “on duty” included events that occurred while the driver was asleep in the passenger berth of the truck[2]; (2) a policy that covered “collapse” of a structure could include sagging of that structure[3]; and (3) a policy that covered “functions incidental to [an auto dealership’s] garage business” included an informal gathering of a few employees after work to drink beer at the dealership.[4]  While these cases all differ significantly in their specifics, they each illustrate the broad manner in which courts will interpret the scope of coverage under an insurance policy, especially when some uncertainty is present.[5]

Second, where an insurer seeks to deny coverage based on an exclusionary clause, that exclusion should be read narrowly and the insurer bears the burden of proof.  Coverage rulings from various courts demonstrate the narrow reading that courts will apply to exclusions when their application is disputed.  For example, courts have rejected insurers’ attempts to preclude coverage by narrowly reading exclusions such that:  (1) an exclusion applying to a “contractor” included only contractors retained by the insured, rather than any contractor performing work that benefits the insured[6]; (2) an exclusion for “owned property” did not apply to groundwater located on an insured’s property[7]; and (3) an exclusion for injury arising “from or during the course of business pursuits of an insured” did not apply to an insured’s posting of allegedly defamatory posters regarding a coworker at their workplace.[8]  Courts will often apply this principle not only to provisions explicitly marked as an “exclusion” but to other limitations on coverage as well.

Third, some courts will resolve disputes in favor of coverage when a policyholder can demonstrate that they had a reasonable expectation of coverage, even if that expectation is arguably inconsistent with certain terms in the policy.  In an illustrative example, a court refused to bar coverage for a fight under a nightclub’s policy with an “assault and battery” exclusion because the nightclub alleged it was not aware of the exclusion and believed that physical altercations were covered by the policy.[9]

Fourth, with respect to third-party liability insurance policies, insurers generally have a very broad duty to defend, and often must defend an entire lawsuit when any allegation pled in a complaint could potentially fall within coverage.  To illustrate how broadly this rule can apply, an insurer under a policy covering a landlord’s “real estate manager” was found to have a duty to provide a complete defense to a tenant watering a few plants as a favor to the landlord.[10]

Of course, these tenets alone will not determine whether a particular claim is covered under a particular policy, and policyholders seeking coverage should be prepared to detail the specific facts and law supporting their demand for coverage.  For instance, a policyholder seeking business interruption coverage under a property insurance policy that requires “direct physical loss” will want not only to cite these favorable general principles but should also consider providing any available evidence regarding the potential presence of COVID-19 at the property.  The policyholder should further look to draw analogies to cases where a similar policy requirement was satisfied by the existence of condition that impacted property but did not result in permanent damage to property, such as bacteria, ammonia, or a loss of power.[11]  But, regardless of the specific facts and policy provisions under which a policyholder is seeking coverage, the key principles of insurance coverage law placing a thumb on the scale in their favor should play a key role in their coverage analysis during these uncertain times.

[1] See Social Life Magazine v. Sentinel Ins. Co., No. 1:20-cv-03311-VEC (S.D.N.Y. May 14, 2020); Gavrilides Mgmt. Co. v. Mich. Ins. Co., No. 20-000258-CB (Mich. Cir. Ct. July 1, 2020); Rose’s 1, LLC v. Erie Ins. Exch., No. 2020-CA-002424-B (D.C. Super. Ct. Aug. 6, 2020); Studio 417, Inc. v. The Cincinnati Ins. Co., No. 20-cv-03127-SRB (W. D. Mo. Aug. 12, 2020); Optical Servs. USA/JC1 v. Franklin Mut. Ins. Co., No. BER-L-3681-20, (N.J. Super. Ct. Bergen Cty. Aug. 13, 2020).

[2] Torres v. Transguard Ins. Co. of America Inc., 2014 WL 3362124, No. CV-13-01578 (D. Ariz. June 20, 2014).

[3] Key Biscayne Ambassador Condominium Association Inc. v. Aspen Specialty Insurance Co., 2018 WL 1863741 No. 16-24564, (S.D. Fla. Feb. 5, 2018).

[4] Sentry Select Insurance Company v. Ruiz, 324 F. Supp. 3d 874 (W.D. Tex. 2018).

[5] Additionally, not only must insurers read policies broadly in favor of coverage, they also have a duty to investigate a claim before denying coverage, and failure to investigate may give rise to extracontractual liability.  Given the haste with which many insurance carriers have denied coverage for claims related to COVID-19, it’s little surprise that a number of lawsuits have already been filed alleging that an insurer failed to conduct an adequate investigation before denying coverage for a COVID-19 related claim.

[6] United States Liability Insurance Co. v. Benchmark Insurance Services, 797 F.3d 116 (1st Cir. 2015); Atain Specialty Inc. Co. v. Lusa Construction, Inc., 2016 WL 3452750, No. 14-4356 (D.N.J. June 21, 2016).

[7] Reliance Inc. v. Armstrong World Industries, 678 A.2d 1152 (N.J. App. Div. 1996).

[8] Illinois Farmers Ins. Co. v. Modory, 2019 IL App (1st) 180721-U, ¶ 42 (App. Ct. Ill. March 15, 2019).

[9] Fall v. First Mercury Ins. Co., 225 F. Supp. 3d 842, 849 (D. Ariz. 2016).

[10] Dove v. State Farm, 399 P.3d 400 (N.M. Ct. App. 2017).

[11] Motorists Mutual Ins. Co. v. Hardinger, 131 Fed. Appx. 823 (3d. Cir 2005); Gregory Packaging, Inc. v. Travelers Property Casualty Co. of America, Civ. No. 2:12-CV-04418, 2014 WL 6675934 (D.N.J. Nov. 25, 2014); Wakefern Food Corp. v. Liberty Mutual Fire Insurance Co., 968 A.2d 724 (N.J. App. Div. 2009).