Fourth Circuit: No “Pollution” Coverage For COVID-19 Lockdowns
There is little question that 2020 rocked the world with uncertainty and change, and also little question that the COVID-19 pandemic was a chief culprit. The virus, its rapid spread, and the measures put in place to delay or halt that spread brought sharp consequences for both individuals and businesses alike. While most economic and social institutions now are thankfully regaining stability, the courts still are grappling with the legal ramifications of those unprecedented times.
In the early days of the pandemic, lockdowns and occupancy restrictions were implemented across the United States in an effort to slow the spread of the virus. The Commonwealth of Virginia was no exception. In the aftermath of the lockdowns, business owners sought to recover economic losses in various ways. While many sought to recover compensation from the government, some also sought coverage under their insurance policies by arguing that COVID-19 was a pollutant.
Most federal trial courts in Virginia have balked at this argument. However, without a hard, binding rule in the Fourth Circuit, little could dissuade desperate business owners from rolling the dice, believing that a more sympathetic judge would buck the trend and grant them relief. The lack of a binding precedent bred a large degree of uncertainty into every case.
The status quo of uncertainty finally may have come to an end. On January 31, 2023, the U.S. Court of Appeals for the Fourth Circuit weighed in on this dispute, adopting the District Court’s holding in Central Laundry, LLC v. Illinois Union Insurance Co., that under Virginia law COVID-19 fell outside the definition of a “pollution condition” in a pollution coverage policy. This decision binds all federal District Courts in Virginia to that holding, with very limited exceptions.
Central Laundry, LLC was one of several hospitality, hotel, and/or restaurant businesses in Norfolk and Virginia Beach owned by Gold Key/Professional Hospitality Resources, Inc. (“PHR”). During the lockdowns, PHR saw a drastic reduction in business across its properties, suffering over $11 million in economic losses in about five months.
PHR held a pollution coverage policy from Illinois Union Insurance Co.; the policy included coverage for “business interruption loss” due to a “pollution condition”, and defined “pollution condition” to include “the discharge, dispersal, release, escape, migration, or seepage of any solid, liquid, gaseous, or thermal irritant, contamination, or pollutant”. It also listed examples of pollutants to include “smoke, soot, vapors, fumes . . . hazardous substances, hazardous materials . . . and medical, red bag, infectious or pathological wastes”. Notably absent, however, was any mention of general bacteria or viruses.
When PHR filed a claim under the policy with Illinois Union, Illinois Union denied the claim, asserting that COVID-19 did not fall within the policy. PHR filed suit in the U.S. District Court for the Eastern District of Virginia.
PHR believed that while viruses are not normally considered a pollutant, that simply made COVID-19 a non-traditional pollutant, rather than no pollutant at all. Thus, they relied on a Virginia Supreme Court case stating that the phrase “pollution condition” included both traditional and non-traditional pollutants to argue that COVID-19 was a pollution condition. PHR contended that the Commonwealth’s declaration that COVID-19 was present through the entire Commonwealth, and the assumption that its COVID-positive employees had worked prior to testing, proved that COVID-19 was present on site.
Illinois Union, on the other hand, argued that (1) because the policy referred to environmental principles, the term “pollution condition,” when read in context, referred only to environmental pollution, and not to a human-transmissible viruses; and (2) PHR’s “proof” of COVID-positive tests was proof that the employees had the virus, but not proof that they transmitted it to PHR’s properties.
The District Court ruled in favor of Illinois Union in early 2022, and the Fourth Circuit adopted the District Court’s opinion as its own on January 31, 2023. The District Court held that when the policy was read in context, “pollution condition” did not include COVID-19. First, it reasoned, the policy contained multiple references to the requirements of environmental law, which implied that the policy concerned itself with environmental pollution. Second, however, the Court looked at other Federal District Court cases interpreting the phrase, and found that there was only one opinion which considered COVID-19 a pollutant at all. In that one instance, the policy explicitly included “viruses” in its list of example pollutants. The Court reasoned that the inclusion of “viruses” in that policy made all the difference, and since viruses were not listed in PHR’s policy, COVID-19 was not a pollution condition.
Importantly, the Court also held that even if COVID-19 was a pollution condition, PHR could not recover under the policy because their loss of business was not caused by COVID-19 itself. Rather, the Court held, the loss of business was caused by the actions of the Commonwealth’s government.
Central Laundry is a major victory for insurance companies which offered pollution coverage during the COVID-19 pandemic. The Court’s decision in Central Laundry drew upon multiple details of PHR’s specific policy, including both the presence of environmental language and the lack of language referring to bacteria, viruses, or other diseases. While it is true that these two distinctions limit when the full force of the Court’s holding may be brought to bear, the importance of binding precedent on this issue is still quite significant. It should make it much easier for insurance companies in Virginia to defend against similar lawsuits moving forward, which, in turn, may reduce the number of lawsuits filed for COVID-19-related insurance disputes.