Southern District of NY Denies Summary Judgment in COVID-19 “Contamination Exclusion” Insurance Case

The Honorable Analisa Torres of the U.S. District Court for the Southern District of New York recently issued a notable COVID-19 insurance decision. The opinion may set precedent for how the district interprets insurance policies and business interruption losses related to COVID-19. In Thor Equities LLC v. Factory Mut. Ins. Co., 20-cv-03380 (S.D.N.Y. Mar. 31, 2021), the judge denied summary judgment motions filed by both parties—the insured and the insurers. She found that the insurance policy at issue was too ambiguous to rule in either party’s favor at the summary judgment stage.

Case Background

Thor Equities, LLC is a commercial real estate company with properties throughout the United States and internationally. Thor purchased an insurance policy from Factory Mutual Insurance Company. The Mutual Corporation Non-Assessable Policy provided up to $750 million in coverage for property damage. The policy further provided coverage for loss of rental income or losses caused by government-ordered restrictions to the property. It also covered loss or damage near the locations that attract business to the properties. The policy included “loss caused by the actual not suspected presence of communicable disease” which covered “the reasonable and necessary costs incurred” for “cleanup, removal, and disposal of the actual not suspected presence of” the disease.

The Lawsuit’s Allegations

Thor alleges that it had experienced losses in all of these coverage categories. Tenants operating “non-essential” businesses stopped paying rent after executive orders forced closures. Thor also claims “the confirmed presence of coronavirus at several of its properties.” Based on discussions with its tenants, Thor estimates that it will suffer at least a $20 million loss in rental income as well as other costs associated with COVID-19.

Thor filed a coverage claim for these losses with Factory Mutual, but to date, has not received any funds. The insurance company had made clear that it would only consider coverage under the policy’s specific terms for communicable diseases. Though, this is limited by an amount far lower than the expected losses. Thor asserts that its claims also fall under other applicable coverages which are not subject to this particular sub-limit. Thor filed suit for anticipatory breach of contract on the basis that Factory Mutual will not honor its contractual obligations.

Factory Mutual’s Response

In response, Factory Mutual asserts that the contamination exclusion clause in the policy bars coverage for Thor’s losses. It states: “If contamination due only to the actual not suspected presence of contaminant(s) directly results from other physical damage not excluded by this Policy, then only physical damage caused by such contamination may be insured.” Factory Mutual also argues that its “loss of market or loss of use” exclusion does not cover losses related to Thor’s inability to use its properties due to the government’s shutdown orders. Factory Mutual filed a summary judgment motion on these bases. Thor then filed a cross-motion seeking a ruling in its favor based on its reading of the policy.

The Court’s Ruling

As part of the parties’ motions for summary judgment, they do not ask the court to determine whether the policy covers Thor’s losses. Rather, they request the court determine the applicability and scope of the contamination exclusion and loss of market or loss of use exclusion.

But per the legal standard governing summary judgment motions, a complaint must state a claim to relief that is plausible on its face. Here, the court held that the language of the contamination exclusion was too ambiguous to warrant a judgment on the pleadings. The court held that the exclusion provision is subject to interpretation which may be compatible with either party’s position.

More than One Reading

The court noted that the plaintiff’s interpretation “could tend to render certain aspects of the exclusion meaningless.” Further, it explained that a reasonable reading may encompass more than just “any costs due to contamination.” But the court also reasoned that the exclusion does not unambiguously foreclose recovery on the plaintiff’s losses due to contamination. Because the contract is ambiguous, the court cannot conclude that “there is no reasonable basis for a difference of opinion.” It presents a factual question to be determined by the fact finder.

The court also denied the parties’ motions as to the loss of market or loss of use exclusion on similar grounds. Whether the exclusion applies to the plaintiff’s losses would be inappropriate at the summary judgment stage. This is because the complaint does not mention this exclusion. As such, the factual record is not sufficiently developed.

Further Information Required

Judge Torres’s decision comes at a critical time for business interruption insurance suits. An increasing number of insurance carriers are headed to court over policy provisions and their applicability to COVID-19 losses. The court’s finding that more facts are necessary to resolve the policy’s ambiguities is significant. This suggests that insurance policies in the context of COVID-19 are not always a clear-cut issue that can be resolved on the face of the pleadings.