But, the world was turned on its head almost overnight, and there can be no question, even with the second half of 2020 barely underway, COVID-19-related losses is the most profound coverage issue to face the insurance industry in 2020, and likely the most profound issue the industry has faced in the past 25 years or more.
As the insurance industry confronts a tidal wave of COVID-19-related business interruption claims and litigation across the country, many insurers rely on the exclusion of loss due to virus or bacteria, or like exclusions, as a pillar of their position on COVID-19-related business interruption claims, the main pillar being that the mere presence of the virus that causes COVID-19 at or near the insured premises does not constitute direct physical loss of or damage to property. Policyholders have begun to mount a defense to the application of the virus exclusion.
One such argument against the virus exclusion that has garnered recent press is a regulatory estoppel theory that the exclusion should be invalidated because it was proposed to and approved by insurance regulators based on purported misrepresentations about the availability of insurance for virus-caused property damage.
However, the history of the virus exclusion does not invite application of the seldom-used regulatory estoppel theory because there was no misrepresentation to the regulators, let alone a material one with respect to property coverage for pandemics. Moreover, this argument against the virus exclusion would undermine the value of formal clarifications of insurance policy intent.
Finally, even if the regulatory estoppel theory, as it pertains to purported misrepresentations by Insurance Services Offices Inc. on behalf of one or a small number of carriers, is found relevant to a coverage dispute and is otherwise to be believed, the remedy cannot be a draconian penalty against all insurers, even those who had no involvement with the statements made by ISO.
The Origins of Policyholder Assertions of Regulatory Estoppel
A recently filed class action complaint, 1 S.A.N.T. Inc. v. Berkshire Hathaway et al. in the U.S. District Court for the Western District of Pennsylvania, provides an example of the arguments insurers can expect in response to their invocation of the virus exclusion. The restaurant policyholder, which alleges it was shut down by government order as a nonessential business in response to the COVID-19 pandemic, contends the insurer should be estopped from applying the virus exclusion.
The restaurant contends that in 2006, ISO, which represented certain insurers following the 2002-2003 Severe Acute Respiratory Syndrome outbreak in seeking approval of the virus exclusion from state regulatory bodies, misrepresented to the regulators that property policies were not sources of recovery for loss involving, in pertinent part, pandemics.
In advancing their regulatory estoppel defense, policyholders most prominently point to a July 6, 2006, ISO circular entitled, "New Endorsements Filed To Address Exclusion of Loss Due To Virus or Bacteria." The circular contains a current concern section that was part of the virus exclusion's submission to insurance regulators.
That section of the submission begins:
The circular then goes on to state:
Although building and personal property could arguably become contaminated (often temporarily) by such viruses and bacteria, the nature of the property itself would have a bearing on whether there is actual property damage. An allegation of property damage may be a point of disagreement in a particular case.
The Seldom Invoked Regulatory Estoppel Theory
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 and to create sources of recovery for such losses, contrary to policy intent.
Many, if not most, jurisdictions will refrain from looking to materials submitted to regulatory bodies to interpret an otherwise unambiguous virus exclusion. Hence, policyholders forwarding the regulatory estoppel theory likely have in mind the minority position espoused by the New Jersey Supreme Court in Morton International Inc. v. General Accident Insurance Co., in the context of the pollution exclusion. There, the disputed issue was the interpretation of the phrase "sudden and accidental" in a commercial general liability insurance policy's pollution exclusion.
To aid the interpretation, the court analyzed representations of the phrase's meaning to the insurance regulators in New Jersey and other states. Upon review, the court in Morton determined the true scope of the phrase's effect was not what had been represented and, further, its addition to the pollution exclusion was not a mere clarification of the previous contours of coverage.
Indeed, the phrase significantly reduced coverage that was otherwise available. Accordingly, the court held the phrase should be interpreted in a manner consistent with the representations to the regulatory authorities.
Courts following Morton have likewise limited their consideration of regulatory estoppel theories to the context of the pollution exclusion in commercial general liability policies. One such court to do so was the U.S. District Court for the Eastern District of Pennsylvania in Simon Wrecking Co. v. AIU Insurance Co.
There, the court determined that regulatory estoppel requires a showing of the following elements for an unambiguous policy provision to be forcibly narrowed: (1) the party made a statement to a regulatory agency, and (2) afterward, the party took a position contrary to the one presented to the regulatory agency.
The Virus Exclusion Did Not Materially Change the Available Coverage
For a court to consider this novel regulatory estoppel theory as a basis for invalidating the exclusion, it will first have to decide that the theory may be applied in an entirely different context of a first-party property policy. Then, if the theory passes that initial threshold, the court will need to examine the materials presented by ISO to regulatory bodies. They will be the focal point of the court's analysis.
And, the materials demonstrate that losses due to pandemics were never intended to be covered. Most important, the ISO circular unequivocally states that a pandemic raises the concern that policyholders may, contrary to policy intent seek to expand coverage for contamination by disease-causing agents.
Against this backdrop, the virus exclusion should be able to withstand challenges on the basis of regulatory estoppel. The key question with respect to regulatory estoppel should be whether the insurance industry took a subsequent position contrary to the one presented to the regulatory agency.
Indeed, it is readily apparent from materials submitted by ISO to the regulators that losses related to pandemics caused by viruses are not covered. The ISO circular even specifically references SARS as an illustrative example, which itself is a form of coronavirus. The insurance industry has since taken a similar approach, as evidenced by the virus exclusion being a pillar of insurers' coverage positions with respect to claims related to COVID-19.
Hence, these circumstances are a far cry from those in Morton where the submissions to regulators were found to be misleading, if not outright deceptive, with respect to the impact of the additional language in the pollution exclusion. Ultimately, the scope and intent of the virus exclusion was never a mystery.
The misrepresentation policyholders target is the statement by ISO that property policies have not been or were not intended to be sources of recovery for losses involving disease-causing viruses. They contend that the virus exclusion was, indeed, a material change in coverage, one that should be accompanied by a premium reduction.
ISO's statement is not inaccurate for multiple reasons. First, the statement reflects the position taken by the insurance industry that no coverage is available for losses caused by viruses. Again, the position taken by ISO in 2006 is the same as what the insurers' positions are today.
Second, policyholders point to examples where courts purportedly found property coverage for a loss involving a disease-causing agent, such as E. Coli bacteria, lead, asbestos, mold, mildew and more. Yet, this divorces the representation from the context of the challenge to the submission, whether coverage was available in 2006 for damage caused by a virus. Notably, policyholders, including the Pennsylvania restaurant, have not cited examples of courts finding coverage for such virus-caused losses.
Third, merely because there exists unpublished, nonprecedential or persuasive authority on a subject does not mean that ISO misrepresented whether property policies have "been a source of recovery for losses involving contamination by disease-causing agents," especially in light of the seminal precedent finding to the contrary.
Fourth, even in the face of a handful of nondispositive opinions involving property damage caused by what policyholders believe to be "disease-causing agents," it was hardly a material change to the overall scope of property coverage to include the virus exclusion. What the commensurate premium reduction should have been was likely a de minimis amount, especially since the virus exclusion was often relegated to the list of forms rarely discussed on renewal or initial purchase of a policy, thereby negating the argument that any misrepresentation to the regulators was material.
Fifth, to the extent standard market insurers still considered the virus exclusion a reduction in coverage, the regulatory estoppel theory disregards notice of the exclusion provided by those insurers to their policyholders on renewal. The argument also disregards the policyholders' awareness of the virus exclusion's significance, whether that awareness was derived independently or through advice by the policyholders' brokers, when purchasing a post-2006 property policy.
The argument then further disregards that excess and surplus line insurers typically need not submit policy forms to insurance regulators or provide separate notice to policyholders of a material reduction in coverage on renewal.
Therefore, for these reasons and others, regulatory estoppel is not a viable defense to the virus exclusion.
Regulatory Estoppel Undermines the Value of Policy Certainty Created by ISO-Led Clarifications
Even though the regulatory estoppel theory may seem salacious and attractive to conspiracy theorists, ISO submissions like the one in 2006 are frequently much more benign. ISO periodically crafts and submits for regulatory approval policy language that merely clarifies policy intent, as opposed to language that changes the settled or accepted policy intent. This can be done in the wake of an unanticipated judicial construction of policy language or the prospect that policyholders are apt to advance expansive or unintended interpretations of policy provisions.
One of ISO's roles is to provide certainty. The virus exclusion was one such instance.
One Bad Apple Does Not Spoil the Bunch: Regulatory Estoppel Should Not Punish Unwitting Insurers
Were a court tempted to believe ISO misstated whether insurance was available for property damage caused by disease-causing agents, the proper remedy is not complete invalidation of the virus exclusion for every insurer. This is especially true for insurers who were not part of ISO's submission of the virus exclusion. This also stands in stark contrast to Morton, which frames the submission of pollution exclusions as being by the "insurance industry" as a whole. There simply is no need to throw the proverbial baby out with the bathwater.
Insurers have relied on the virus exclusion for as many as 14 years and have priced premium accordingly. To retroactively invalidate the virus exclusion now would unfairly rewrite policies and unjustly enrich policyholders with a benefit that dwarfs the alleged reduction in premium the policyholders believe they should have gotten when the virus exclusion was first introduced.
It stands to reason that the virus exclusion, which was found in many policies prior to 2020, was rarely the subject of prepolicy issuance discussion between insurers and their policyholders. To now go back and invalidate the provision after policyholders repeatedly ratified its inclusion would be inequitable.
With coverage disputes resulting from COVID-19-related business interruption claims being the hottest topic in 2020 and the potential for unprecedented recoveries, policyholders are pulling out all the stops and advancing myriad creative, albeit unsustainable, arguments.
Regulatory estoppel just happens to be the issue du jour, one plucked from jurisprudence involving liability policies' pollution exclusions. The salacious argument lacks for substance, as the regulators were properly and accurately informed of the impact of the virus exclusion on first-party coverage available for property damage caused by viruses and pandemics like SARS.
To now go back more than a dozen years and relitigate regulatory approval of the virus exclusion, due to a single representation, a host of unpersuasive cases about losses caused by something other than a virus, and a proposed remedy grossly disproportionate to the purported misstatement, distracts from the real issues in dispute and wastes court, insurer, and policyholder resources. Courts should reject this regulatory estoppel theory out of hand and return the focus of the disputes to the bargained-for terms of the policies.
Jonathan Schwartz is a partner and Colin Willmott is an associate at Goldberg Segalla LLP.
Goldberg Segalla partners Jared Greisman and Eric Fitzgerald contributed to this article.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 (CP 01 40 07 06) (Virus Exclusion).
 Based on recent amendments to pleadings and other newly filed complaints, it appears other policyholders are advancing a similar argument. E.g., Protégé Restaurant Partners LLC v. Sentinel Ins. Co., Ltd., N.D. Cal., No. 5:20-cv-03674; Aria Dental Grp., LLC v. Farmers Ins. Exch., et al., M.D. Ga., No. 3:20-cv-00068-CAR.
 Similar to ISO, the American Association of Insurance Services (AAIS) represented in a Filing Memorandum in support of the Virus Exclusion:
Property policies have not been, nor were they intended to be, a source of recovery for loss, cost or expense caused by disease-causing agents. With the possibility of a pandemic, there is concern that claims may result in efforts to expand coverage to create recovery for loss where no coverage was originally intended . . .
This endorsement clarifies that loss, cost, or expense caused by, resulting from, or relating to any virus, bacterium, or other microorganism that causes disease, illness, or physical distress or that is capable of causing disease, illness, or physical distress is excluded . . .
 See, e.g., Shaw v. Liberty Mut. Fire Ins. Co. , No. 6:15-cv-686-Orl-TBS, 2016 U.S. Dist. LEXIS 17626 (M.D. Fla. Feb. 12, 2016) (applying Texas law and predicting that Texas would reject regulatory estoppel based on Texas Supreme Court's rejection of reliance on extrinsic evidence to create a latent ambiguity where the policy provision is clear); Sher v. Allstate Ins. Co. , 947 F. Supp. 2d 370, 389-390 (S.D.N.Y. 2013) (dismissing regulatory estoppel claim because, among other reasons, New York's parol evidence rule counsels against adoption of a regulatory estoppel cause of action); Emp'rs Ins. Co. of Wausau v. Duplan Corp. , No. 94 Civ. 3143, 1999 WL 777976, at *12-14 (S.D.N.Y. Oct. 20, 1999) (because the pollution exclusion is clear and unambiguous, extrinsic evidence is not admissible to vary the terms of the exclusion); E. I. du Pont de Nemours and Co. v. Allstate Ins. Co. , 693 A.2d 1059, 1062 (Del. 1997) (regulatory estoppel is inapplicable because contract language is clear and unambiguous); Transamerica Ins. Co. v. Duro Bag Mfg. Co. , 50 F.3d 370, 373 (6th Cir. 1995) (declining to examine drafting history of unambiguous pollution exclusion clause in connection with estoppel argument); Federated Mut. Ins. Co. v. Botkin Grain Co. , 64 F.3d 537, 541 (10th Cir. 1995) (rejecting estoppel argument because extrinsic evidence is not permitted to interpret unambiguous pollution exclusion).
 Morton International Inc. v. General Accident Insurance Co. , 629 A.2d 831 (N.J. 1993).
 Eastern District of Pennsylvania in Simon Wrecking Co. v. AIU Insurance Co. , 541 F. Supp. 2d 714 (E.D. Pa. 2008).
 Id., citing Sunbeam Corp. v. Liberty Mutual Insurance Co., 782 A.2d 1189 (Pa. 2001).
 E.g. Columbiaknit, Inc. v. Affiliated FM Ins. Co. , 1999 U.S. Dist. LEXIS 11873 (D. Or. Aug. 4, 1999) (contamination of property by mold, absent tangible injury, was not property damage); Great N. Ins. Co. v. Benjamin Franklin Fed. Sav. & Loan Ass'n , 1992 U.S. App. LEXIS 1593 (9th Cir. 1992) (asbestos contamination represented economic loss, not physical loss).
 The "Regulatory Estoppel" argument advanced by policyholders here does not exactly fit within the strictures of "regulatory estoppel." Policyholders instead seem to be asserting a "regulatory fraud" defense, which requires a showing of materiality and reliance to support invalidating the exclusion. See Wysong & Miles Co. v. Emp'rs of Wausau , 4 F. Supp. 2d 421 (M.D.N.C. 1998). This is most clearly evidenced by policyholders' arguments that the inclusion of the Virus Exclusion should have been accompanied by a proper premium reduction.
 E.g., CE Design Ltd. v. Cont'l Cas. Co. , 2016 IL App (2d) 150530-U, ¶¶ 23-29 (upholding the 2005 submission of the Distribution of Material in Violation of Statutes and its clarification that coverage was unavailable for TCPA claims).
 629 A.2d at 848-850.
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