What Insurers Knew Before the Pandemic Hit
Since the outbreak of SAR-CoV-2 and COVID-19, many insurers have been vociferous in proclaiming that they never intended to cover losses from pandemics and that their policies do not provide such coverage. To borrow a phrase from Shakespeare, they “doth protest too much.”
Insurers and their trade associations started weighing in fairly early. On March 18, 2020, the American Property Casualty Insurance Association, The Council of Insurance Agents & Brokers, Big i Independent Insurance Agents & Brokers of America, and National Association of Mutual Insurance Companies wrote to the House Committee on Business. In their letter, they stated: “Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.” Various insurance companies have made similarly aggressive and categorical statements. In fact, many have advanced even more aggressive positions, arguing that pandemics are “inherently uninsurable. Thus, it is no surprise that a tsunami of insurance coverage lawsuits has been filed—more than 1,200 so far in the United States alone.
Many insurers argue that there is no coverage because the presence of SARS-CoV-2 in a building—in its air and on its surfaces—does not constitute “direct loss or damage to property,” which their property and business interruption policies require for there to be coverage. But the insurers’ words today are belied by what they have known for decades and what courts have held for decades.
What is the truth? The reality is that the insurance industry has known from court decisions over the last 60 years that they could be called upon to pay for losses and clams associated with viruses. They also have known that pandemics were likely to hit; their insureds could face financial ruin; and they, too could face unprecedented challenges to their ability to pay and their very existence.
Insurers were repeatedly warned over the years of the potential impact of pandemics. In fact, there were many publicly available reports about the risks of pandemics and what insurers should do—in the months and years before the outbreak of the COVID-19 pandemic. For example, one article noted in March 2018:
Even with today’s technology, a modern severe pandemic would cause substantive direct financial losses to the insurance community. In addition, indirect losses would be severe, most notably on the asset side of the balance sheet. 
In fact, one insurance industry repository shows the proverbial “tip of the iceberg” about how much information was available to insurers regarding the risk of pandemics. The Insurance Library Association of Boston, founded in 1887, describes itself as “the leading resource for and provider of literature, information services, and quality professional education for the insurance industry and related interests.” The Association states on its website:
The past 20 years [have] seen the rise of a number of pandemics. Slate recently published an article on what has been learned about treating them in that time. We thought it might be apt for us to take a look back and see what the insurance industry has learned as well.
The Association lists more than 20 articles, reports, and white papers available to insurers from early 2007 through 2018. One white paper warned in 2009 of a pandemic’s consequences to the insurance industry:
It is highly unlikely that the insurance industry would have the financial reserves to meet the worldwide claims arising out of a pandemic of this size.
Thus, the insurance industry has known for decades that their policies probably would be called upon to pay hundreds of millions of dollars or more to their insureds.
Furthermore, many insurers have acknowledged in their financial statements the potential impact on their financial condition of pandemic-related claims that they might have to pay. For example, AIG International Group, Inc. admitted the following in its 2017 Annual Report:
Our consolidated results of operations, liquidity, financial condition and ratings are subject to the effects of natural and man-made catastrophic events. Events such as . . . pandemic and other highly contagious diseases . . . and other catastrophes have adversely affected our business in the past and could do so in the future. . . .
Such catastrophic events, and any relevant regulations, could expose us to:
- widespread claim costs associated with property, workers’ compensation, A&H, [and] business interruption . . . claims; [and]. . .
- loss resulting from actual policy experience that is adverse compared to the assumptions made in product pricing . . . .
Chubb Limited said essentially the same thing in its 2017 Annual Report:
Our results of operations or financial condition could be adversely affected by the occurrence of natural and man-made disasters.
We have substantial exposure to losses resulting from natural disasters . . . such as . . . catastrophic events, including pandemics. This could impact a variety of our businesses, including our commercial and personal lines . . . . Catastrophes can be caused by various events, including . . . natural or man-made disasters, including a global or other wide-impact pandemic . . . . The occurrence of claims from catastrophic events could result in substantial volatility in our results of operations or financial condition for any fiscal quarter or year. The historical incidence for events such as . . . pandemics . . . is infrequent and may not be representative of contemporary exposures and risks. . . . [T]he occurrence of one or more catastrophic events could have an adverse effect on our results of operations and financial condition.
There are many other similar statements. They all beg one question: If pandemics are “inherently uninsurable” and no insurer intended to insurer or thought it was insuring losses from such an event, why the disclaimers in the sworn financial statements that their financial results might be materially and negatively affected by having to pay such claims?
Insurers also long have known that their policies could be held to cover losses from the presence of a hazardous substance, such a virus inside buildings or because a building could not be used for its intended purposes or function. For decades, many courts have held that the presence of a hazardous substance in property, including the airspace inside buildings, constitutes property damage. Court also long have recognized that there may be “direct physical loss” to property even if the property is not physically damaged. Here are some of the many decisions:
- AIU Insurance Co. v. Superior Court, 51 Cal. 3d 807, 842 (1990): “contamination of the environment satisfies” the requirement of property damage.
- Aetna Casualty & Surety Co. v. Pintlar Co., 1948 F.2d 1507, 1514 (9th Cir. 1981): “The insurers further concede that contamination of the soil and water by hazardous substances constitutes injury to property . . . . And an ordinary person would find that the environmental contamination alleged . . . falls within the plain mean of ‘property damage’ as that term is used in policies.”
- Arbeiter v. Cambridge Mut.. Fire Ins. Co., 1996 WL 1250616, at *2 (Mass. Super. Ct. Mar. 15, 1996): presence of oil fumes in building constituted “physical loss” to building.
- Essex Ins. Co. v. BloomSouth Flooring Corp., 562 F.2d 399, 406 (1st Cir. 2009): odor from carpet and adhesive “can constitute physical injury to property.”
- Farmers Ins. Co. v. Trutanich, 123 Or. App. 6, 9-11 (1993): “[T]he odor produced by the methamphetamine lab had infiltrated the house. The cost of removing the odor is a direct physical loss.”
- Gregory Packaging, Inc. v. Travelers Prop. Cas. Co., 2014 WL 6675934 (D.N.J. Nov. 25, 2014): closure of facility because of accidentally released ammonia; while “structural alteration provides the most obvious sign of physical damage, . . . property can sustain physical loss or damage without experiencing structural alteration.”
- Matzner v. Seacoast Ins. Co., 1998 WL 566658 (Mass. Super. Ct. Aug. 12, 1998): building with unsafe levels of carbon monoxide sustained direct physical loss.
- Mellin v. N. Sec. Ins. Co., 167 N.H. 544, 550-51 (2015): cat urine odor inside condominium constitutes direct physical loss; “‘physical loss’ need not be read to include only tangible changes to the property that can be seen or touched, but can also encompass changes that are perceived by the sense of smell.”. . . a property policy insures “physical loss changes to the insured property, but also changes that are perceived by a sense of smell” and ‘may exist in the absence of structural damage to the insured property.’”
- Oregon Shakespeare Festival Ass’n v. Great Am. Ins. Co., 2016 WL 3267247, at *9 (D. Ore. June 7, 2016): “smoke infiltration in theatre caused direct property loss or damage by causing the property to be uninhabitable and unusable for its intended purpose.”
- Port Authority of New York & New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002): property sustained a direct physical loss because it was rendered uninhabitable by the presence of asbestos fibers.
- Sentinel Mgt. Co. v. Aetna Cas. & Sur. Co., 1999 WL 540466, at *7 (Minn. Ct. App. July 27, 1999): “If rental property is contaminated by asbestos fibers and presents a health hazard to tenants, its function is seriously impaired.”
- Sentinel Mgt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 300 (Minn. Ct. App. 1997): “Although asbestos contamination does not result in tangible injury to the physical structure of a building, a building's function may be seriously impaired or destroyed and the property rendered useless by the presence of contaminants. . . . Under these circumstances, we must conclude that contamination by asbestos may constitute a direct, physical loss to property under an all-risk insurance policy.”
- Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 39-40 (1968): direct physical loss when gasoline contaminated church building making it dangerous to use.
Hughes v. Potomac Insurance Co., 199 Cal. App. 2d 239 (1962), is an early example—58 years ago—of the fact that property insurance policies can be called upon to pay when a property cannot be used for its intended purpose or function because of a covered peril. In Hughes, the insureds’ house had been left partially overhanging a cliff after landslide. The house suffered no physical damage. However, the court rejected the insurer’s argument that there was no “direct physical loss.” The court explained why, and what an insurer should do if it did not want to cover such losses:
Despite the fact that a ‘dwelling building’ might be rendered completely useless to its owners, [the insurer] would deny that any loss or damage had occurred unless some tangible injury to the physical structure itself could be detected. Common sense requires that a policy should not be so interpreted in the absence of a provision specifically limiting coverage in this manner. [The insureds] correctly point out that a ‘dwelling’ or ‘dwelling building’ connotes a place fit for occupancy, a safe place in which to dwell or live. It goes without question that [the insureds’] ‘dwelling building’ suffered real and severe damage when the soil beneath it slid away and left it overhanging a 30-foot cliff. Until such damage was repaired and the land beneath the building stabilized, the structure could scarcely be considered a ‘dwelling building’ in the sense that rational persons would be content to reside there.
The Insurance Industry’s Adoption of a “Virus or Bacteria” Exclusion
Insurers recognized the scope of their potential liability and the fact that many courts had rejected their coverage-restricting arguments. Therefore, shortly after the original SARS outbreak, the insurance industry took steps to minimize insurers’ potential liability for pandemics.
In 2006, the Insurance Services Office, the insurance industry’s drafting organization, considered the need to draft an exclusion that would bar coverage for losses caused by a virus. On July 6, 2006, ISO prepared a circular as part of its filing with state insurance
regulators of a standard exclusion of loss due to viruses and bacteria. In that circular, it noted that examples of “viral and bacterial contaminants are rotavirus, SARS, [and] influenza,” observing, “The universe of disease-causing organisms is always in evolution.” ISO recognized that viruses could cause property damage, stating:
Disease-causing agents may render a product impure (change its quality or substance), or enable the spread of disease by their presence on interior building surfaces or the surfaces of personal property. When disease-causing viral or bacterial contamination occurs, potential claims involve the cost of replacement of property (for example, the milk), cost of decontamination (for example, interior building surfaces), and business interruption (time element) losses. 
In fact, ISO expressly warned that “the specter of pandemic or hitherto unorthodox transmission of infectious material raises the concern that insurers employing [property] 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.” Therefore, ISO introduced a standard-form exclusion that it entitled “Exclusion Of Loss Due To Virus Or Bacteria” (form CP 01 40 07 06 and, in certain jurisdictions, form CP 01 75 07 06).
Thus, insurers have had a “virus or bacteria” exclusion since 2006 that is approved for use throughout the United States. As one recent article succinctly stated, “Insurers knew the damage a viral pandemic could wreak on businesses. So they excluded coverage.” However, unfortunately for many insurers, they did not, in fact, exclude coverage.
The troubling reality for insurers is that many insurers decided to sell their policies without the “virus or bacteria” exclusion or a similar exclusion. They did so even though they had substantial information about the likelihood of a pandemic happening and with knowledge of how much losses from pandemics could cost them. It seems clear now that those insurers are suffering from “seller’s remorse” about selling policies without an exclusion—but that was their choice, and insureds paid substantial premiums for coverage. Therefore, insurers’ recent claims that their policies do not cover pandemic-associated losses or that pandemic losses are “inherently uninsurable” should be rejected.
As courts often have observed, an insurer’s “failure to use available language to exclude certain types of liability gives rise to the inference that the parties intended not to so limit coverage.” Thus, when an insurer chose “not to include limiting language,” the words it uses will not “support [the insurer's] position regarding an intent to limit coverage.” Therefore, it is time for insurers to step up and provide the coverage they promised.
 March 18, 2020, Letter, American Property Casualty Insurance Association, The Council of Insurance Agents & Brokers, Big i Independent Insurance Agents & Brokers of America, and National Association of Mutual Insurance Companies to House Committee on Small Business.
 See, e.g., March 25, 2020, letter, Travelers Casualty Insurance Company Of America to policyholders (“Nor does the policy provide coverage for cancellations, suspensions and shutdowns that are implemented to limit the spread of the coronavirus. These are not the result of direct physical loss or damage. Accordingly, business interruption losses resulting from these types of events do not present covered losses under our property coverage forms.”). While some policies may not provide coverage, we disagree with such broad unqualified disclaimers of coverage.
 See, e.g., Robert Hartig and American Property Casualty Insurance Association, “Uninsurability of Mass Market Business Continuity Risks from Viral Pandemics” (2020), https://www.pciaa.net/docs/default-source/default-document-library/apcia-white-paper-hartwig-gordon.pdf.
 “What the 1918 Flu Pandemic Can Teach Today’s Insurers,” AIR (Mar. 29, 2018), https://www.air-worldwide.com/publications/air-currents/2018/What-the-1918-Flu-Pandemic-Can-Teach-Today-s-Insurers/.
 Allan Manning, White Paper on Infectious Disease Cover (updated 2009), https://www.lmigroup.com/Documents/Articles/White%20Paper%20on%20Infectious%20Disease%20Cover.pdf?mc_cid=f0cee24803&mc_eid=41023ebc2c.
American International Group, Inc. 2017 Annual Report, “Risk Factors,” at 18, https://www.aig.com/content/dam/aig/america-canada/us/documents/investor-relations/2018/aig_2017_annual_report.pdf.
 Chubb Limited, 2017 Annual Report, at 19, https://s1.q4cdn.com/677769242/files/doc_financials/2018/AGM/Chubb_Limited_2017_Annual_Report.pdf.
 See K. Pasich, G. Warner & L. Smith, “Insurance Coverage For Hazardous Substances In The Airspace of Buildings,” 10 Mealey’s Litig. Rpts: Insurance No. 1, at 21 (Nov. 1, 1995) (discussing development of law that airspace is property that can be damaged by presence of hazardous substances).
 Id. at 248-49.
 “ISO is a non-profit trade association that provides rating, statistical, and actuarial policy forms and related drafting services to approximately 3,000 nationwide property or casualty insurers. Policy forms developed by ISO are approved by its constituent insurance carriers and then submitted to state agencies for review. Most carriers use the basic ISO forms, at least as the starting point for their general liability policies.” Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645,671 n.13 (1995).
 See ISO Circular, “New Endorsements Filed to Address Exclusion of Loss Due to Virus or Bacteria,” (July 6, 2006), https://www.propertyinsurancecoveragelaw.com/files/2020/03/ISO-Circular-LI-CF-2006-175-Virus.pdf.
 Todd Frankel, “Insurers knew the damage a viral pandemic could wreak on businesses. So they excluded coverage,” Washington Post (April 2, 2020). In the early wave of coverage litigation over losses associated with the pandemic, many insureds and insurers are fighting over whether the standard-form exclusion actually bars coverage, in whole or in part, for those losses. Only time will tell.
 Fireman's Fund Ins. Co. v. Atlantic Richfield Co., 94 Cal. App. 4th 842, 852 (2001).
 Id. See Safeco Ins. Co. of Am. v. Robert S., 26 Cal. 4th 758, 764 (2001) (“[W]e cannot read into the policy what Safeco has omitted. To do so would violate the fundamental principle that in interpreting contracts, including insurance contracts, courts are not to insert what has been omitted.”).