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Ambiguity Favors Insureds In COVID-19 Coverage Disputes

By Jay Angoff and Joshua Karsh · Aug 12, 2020, 5:34 PM EDT

Jay Angoff
Jay Angoff
Joshua Karsh
Joshua Karsh
The rule that ambiguous language in an insurance policy should be construed against the carrier and in favor of coverage has been called the most distinguishing feature of American insurance law, the first principle of insurance law, perhaps the most prominent rule in all of insurance law, and the most frequently employed principle of insurance policy interpretation.[1]

So it's surprising it's been invoked so infrequently, so far, in the avalanche of business interruption insurance coverage litigation related to COVID-19 — now 800 lawsuits and still mounting.[2]

Countless court decisions have resolved cases by applying that rule. But we've reviewed a few hundred of the policyholder complaints filed since March 2020 seeking coverage for COVID-19-related lost business income, and they seldom invoke ambiguity as a basis for recovery.

In our view, suits seeking coverage under commercial property policies that contain an express virus exclusion are their own chimera. But policyholders suing on property casualty policies that have no such exclusion have a strong ambiguity argument on their side.

In most commercial property casualty policies, eight key words determine whether coverage exists for COVID-19-related lost business income. Those words are combined in one phrase, drafted by the Insurance Services Office, a trade group serving the insurance industry: direct physical loss of or damage to property.

In most policies, those eight words establish a precondition for both business income and civil authority coverage. And one of the most striking things about those eight words is that often they are not defined in a commercial property policy — not "direct," not "physical," not "damage," nor even "loss" or "property" — and they create ambiguity.

Here, then, is the ambiguity argument that many policyholders are omitting or missing.

First, the phrase "direct physical loss of or damage to property" has no single plain meaning. And it has no plain meaning, in part, because the term "property damage" is reasonably susceptible of at least two interpretations. On a narrow reading, property damage could be limited to structural damage.

Some cases suggest or adopt that interpretation. But the word "damage" can also reasonably be interpreted more broadly — as including not only physical alterations or changes but also an impairment of use or functionality and perhaps a reduction in value, whether partial or complete, temporary or permanent, tangible or intangible, structural or only surface-deep.

In fact, courts have struggled with this tension for years, long before COVID-19, and disagreed about how to interpret the phrase "direct physical loss of or damage to property." Evincing this ambiguity, that bedeviling phrase or very similar words have variously been applied both to require and to exclude coverage for losses of business income due to vapors or odors, asbestos, lead, mold and the loss of electronic data. In short, the phrase "direct physical loss of or damage to property" is cloudy, not clear.

Second, insurers have known about the risk of a virus-induced pandemic for years. They've also had accessible policy language to describe and exclude this risk for years. There is, therefore, no good reason to countenance any carrier's failure to avoid the evident uncertainty and ambiguous wording of the phrase "direct loss of or physical damage to property."

The current COVID‐19 pandemic is, after all, the third serious coronavirus outbreak in less than 20 years, following SARS in 2002‐2003 and MERS in 2012. Other recent virus epidemics or pandemics have included Ebola, the swine flu, Zika and various strains of the avian flu.

Any insurer wanting to preclude doubt about coverage for property losses caused by viruses could easily have done that — simply by adding the Insurance Services Office's standard-form virus exclusion — commercial property endorsement No. CP 01 40 07 06 — which has been available since 2006.

In determining the meaning of ambiguous policy language, it makes sense to consider the ease with which that language could have been written to provide or exclude coverage more plainly.

According to the U.S. Court of Appeals for the Second Circuit in Pan American World Airways Inc. v. Aetna Casualty & Surety Co., the doctrine of "contra proferentem [construed against the offeror] has special relevance as a rule of construction when an insurer fails to use apt words to exclude a known risk."[3]

Third, drafting history also reinforces the argument for ambiguity.

Fourteen years ago, in a circular introducing its standard virus exclusion, the Insurance Services Office acknowledged that the existing, industry standard pollution exclusion addressed contamination broadly, but not viruses specifically; that that exclusion might be susceptible of a narrow interpretation and had been at times narrowly applied by certain courts; and that in light of these concerns, a new and specific exclusion for viruses and bacteria "appear[s] to warrant particular attention."

A new exclusion would not have been needed if the phrase "direct physical loss of or damage to property" were unambiguous.

Similarly, and at the same time, the American Association of Insurance Services, which files information with state regulators on behalf of insurance companies, provided a filing memorandum in support of the new virus exclusion. In that memorandum, the American Association of Insurance Services admitted that the exclusion's purpose was to clarify that coverage for losses relating to any virus, bacterium or other microorganism was excluded. Again, no such clarification would have been needed if existing policy language had already excluded coverage for virus-related losses.

Fourth, resolving the ambiguity inherent in the phrase direct physical loss of or damage to property in favor of coverage also likely accords with policyholders' reasonable expectations under the circumstances. Words mean what people understand and use them to mean. And notably, state and local government officials across the country have found or assumed that COVID-19 causes property loss or damage, as reflected in their emergency declarations and orders.

For example, the Illinois governor's April 30 order noted "the virus's propensity to physically impact surfaces and personal property"; New York City's emergency executive order, on March 16, noted that "the virus physically is causing property loss and damage"; and Los Angeles' March 19 stay-at-home order noted that this "Order is given because, among other reasons, the COVID‐19 virus can spread easily from person to person and it is physically causing property loss or damage."

As these statements indicate, the public understanding of the loss and damage caused by COVID-19 has included property loss and damage — suggesting that a reasonable policyholder would have the same understanding and, therefore, expect coverage for COVID-19 losses under a property casualty policy.

There is a reason for the rule that ambiguous policy language is construed in favor of coverage. It creates an important incentive for insurers to draft clearly. It may not be possible to eliminate all ambiguity, and it might not be either wise or cost-effective to hold drafters to a standard that demanded crystalline clarity and precision for every conceivable contingency, particularly unforeseen ones.

But COVID-19 coverage is an easy case. The risk was foreseen. That is beyond dispute. And in the face of a well-known risk, if an insurer nevertheless uses ambiguous policy language — when a precise provision, common in the industry, could have been used instead, with little effort and no seeming disadvantage — the rationale for construing that ambiguous policy language in favor of coverage is powerful.



Jay Angoff and Joshua Karsh are attorneys at Mehri & Skalet PLLC.

 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.


[1] M. Radhert, Reasonable Expectations Reconsidered, 18 Conn. L. Rev. 323, 327-28 (1986); Kenneth S. Abraham, A Theory Of Insurance Policy Interpretation, 95 Mich. L. Rev. 531 (1996); Kenneth S. Abraham, Environmental Liability Insurance Law 27 (1991); Kenneth S. Abraham Insurance Law and Regulation 37 (5th ed. 2010).

[2] https://cclt.law.upenn.edu/; https://www.huntonak.com/en/covid-19-tracker.html.

[3] Pan Am. World Airways, Inc. v. Aetna Cas. & Sur. Co. , 505 F.2d 989, 1000 (2d Cir. 1974); see also, Restatement of the Law of Liability Insurance § 4, Comment k.

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