Sometimes an article needs an introduction to put the subject in context for the reader. Sadly, no introduction is needed for the coronavirus. It will have affected everyone who reads this. Some will have suffered physically. A larger group will have been emotionally affected. Except for hospitals and toilet paper and disinfectant manufacturers, economic loss extends everywhere.
The redistribution of that loss at some point will occur. As businesses begin to recover, shareholders may second guess the decisions of management in preparing for and responding to the pandemic. The Securities and Exchange Commission or others may challenge the disclosures made by publicly traded companies. Still, others may allege economic harm arising from the acts or omissions of the company and its officers, directors and employees.
These are not just law school hypotheticals. Norwegian Cruise Lines has been sued in Florida in a securities class action for allegedly false and misleading public statements concerning the impact of the coronavirus on its business. Inovio Pharmaceuticals Inc. is the subject of class action litigation for the allegedly false public statements by its CEO concerning the development of a COVID-19 vaccine.
Prudent companies will have procured "directors and officers" or management liability policies (D&O policies) to address these and other coronavirus eventualities. Two critical questions will be whether such policies have exclusions directed toward viruses or disease, and, if they do, whether those exclusions reach the actions or inactions of management and employees in a world of coronavirus. This article addresses those two questions.
D&O Insurance Basics: Wrongful Acts and Exclusions
Put simply, a D&O policy insures against economic loss associated with wrongful acts. Put less simply, a "wrongful act" may be defined as any actual or alleged breach of duty, neglect, error or omission, misstatement, or misleading statement. If the wrongful act is committed by an officer or director, or even by the business entity or its employees, and a claim is brought, the D&O policy will provide or pay for a defense and indemnify for the loss - assuming all required conditions are met, and no exclusion applies.
That last part will be extremely pertinent. Although we have located no "pathogen" or "communicable disease" exclusion issued within a D&O policy, two possibly relevant exclusions are found: a "pollution" exclusion and a "bodily injury" exclusion. Regardless of the wordings, as set forth below, in many circumstances these types of exclusions should not bar claims for coronavirus-connected wrongful acts. A typical pollution exclusion is set forth here:
"This policy does not cover Loss Arising out of, based upon or attributable to the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials, or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water, ..."
A carrier might invoke the exclusion asserting a lack of coverage for coronavirus contamination. A common bodily injury exclusion looks like this:
"The Underwriter shall not be liable to make any payment for any Claim For any actual or alleged bodily injury, mental anguish, emotional distress, sickness, disease or death of any person, or damage to or destruction of any tangible property including loss of use thereof; ..."
An insurer will assert: COVID-19 is a sickness or disease and therefore excluded.
There are numerous statements on blogs, alerts, websites and other publications that these exclusions will defeat coverage for a coronavirus D&O claim. Blanket statements like these should be rejected. While claims by sick cruise ship passengers against the cruise line, for example, probably belong under a general liability policy rather than a D&O policy with a bodily injury exclusion, in many instances (e.g., the Norwegian Cruise Lines and Invidio Pharmaceuticals cases described above) bodily injury and pollution exclusions have no place because bodily injury and pollution are not what the claims are about.
Construction of a Bodily Injury Exclusion in a Breach of Duty Case
The Georgia Court of Appeals rejected an insurer's attempt through reliance on a D&O policy's bodily injury exclusion to evade coverage for a corporate employee's failure to complete an application for a disability insurance policy. In Fireman's Fund v. University of Georgia Athletic Association Inc., 654 S.E.2d 207 (Ga. Ct. App. 2007), the university undertook to procure disability insurance for its football players. One player sought coverage, the university (through its affiliated entity) botched the application, the player was seriously injured, and the disability carrier denied coverage. The player sued the university entity and the employee involved for their failure to procure the coverage, who then tendered the claim to the D&O insurer, which denied, relying on the policy's bodily injury exclusion, among other things.
The D&O policy's bodily injury exclusion was broad and excluded any claim "[a]lleging, based upon or attributable to, arising out of, in consequence of or in any way related to" any bodily injury, provided, this exclusion shall not apply to an employment practices claim for emotional distress, mental anguish or humiliation.
The insurer argued the football player's claim was "entirely predicated on his bodily injury. Therefore, the insurer contended, the claim arose out of the player's bodily injury and there could be no coverage. The Court of Appeals concluded "that the nexus between [the player's] bodily injury and his claims against [the employee and the university entity] is too attenuated to bring his claims within the ambit of the bodily injury exclusion."
The finding of a lack of nexus was proper because there was no causal relationship between the conduct of the insureds and the player's injury. The insureds' wrongful conduct did not cause or create the conditions giving rise to the player's injury. The player played without the protection of the disability insurance and the insureds' wrongful acts were complete at the time of the injury. Accordingly, the bodily injury exclusion did not bar coverage and the insurer was required to provide a defense.
'Two critical questions will be whether such policies have exclusions directed toward viruses or disease, and, if they do, whether those exclusions reach the actions or inactions of management and employees in a world of coronavirus.'
Construction of Pollution Exclusions in Two Securities Fraud Cases
Asbestos-related liabilities were at the heart of the class action against Sealed Air Corporation, or so its insurer asserted. In Sealed Air Corp. v. Royal Indemnity Co., 961 A.2d 1195 (N.J. Super. Ct. 2008), the insured, Sealed Air, sought coverage for federal securities claims brought against it as the result of a precipitous drop in its stock price when a federal bankruptcy court ruled that a complex series of spinoffs, mergers and reorganizations was tainted by inadequate disclosures of asbestos liabilities. Those transactions had lifted those liabilities from Sealed Air's balance sheet, but through the bankruptcy of the spun off entity, the liabilities threatened to return. Sealed Air settled the creditors' claims for $850 million. The securities claims ensued, which Sealed Air tendered to its D&O insurer.
The insurer denied coverage, citing the pollution exclusion in the policy, which provided:
The Insurer shall not be liable for Loss resulting from any Claim made against any Insured Person, or with respect to Insuring Clause C, the Company, (6) based on, arising out of, or in any way involving:
(a) the actual, alleged or threatened discharge, release, escape, seepage, migration or disposal of Pollutants into or on real or personal property, water, or the atmosphere; or (b) any direction or request that the Company or the Insured Persons test for, monitor, clean up, remove, contain, treat, detoxify or neutralize Pollutants, or any voluntary decision to do so: including without limitation any Claim for financial loss to the Company, its security holders or its creditors based on, arising out of, or in any way involving the matters described in subparts (a) or (b) above (emphasis added).
Sealed Air sued. The trial court rejected the insurer's position and granted summary judgment. The insurer then appealed, arguing for a "literal reading" of the exclusion and asserting the securities claims were "for financial losses to security holders based on, arising out of, or involving the actual, alleged, or threatened discharge, release, escape, seepage, migration, or disposal of asbestos and asbestos products."
Notwithstanding the nexus to asbestos, the New Jersey Court of Appeals did not find that dispositive: "it is clear to us that the gravamen of the securities holders' complaint has its root in securities fraud and misrepresentation, not pollution." The stockholder plaintiffs linked their stock losses to the allegedly false and misleading statements made by Sealed Air, not to asbestos injury. But why weren't those losses "based on, arising out of, or in any way involving" asbestos pollution? The Court took each phrase in turn:
"Base" meant "basis" and the basis of plaintiffs' damages was securities fraud, not asbestos. "Arising out of" is a broad term, but if no boundaries are provided then the "reasonable expectations" of a policyholder buying securities litigation coverage (as Sealed Air did) would not include an expectation that a pollution exclusion would apply to a securities claim, particularly where there were numerous intervening events between the exposure to asbestos and the ultimate claim. Finally, although "in any way involving" is even broader than "arising out of," it is properly limited by those terms "to include only events that are not unreasonably attenuated from pollution." In sum, "it is reasonable to interpret the environmental pollution provision to allow the insurer to disclaim coverage where a company's directors or officers were sued for polluting," but "[i]f insurers seek to exclude misrepresentations in securities cases that have some remote connection with pollution, the policy language must be changed."
The New Jersey Court of Appeals apparently would have enforced the D&O pollution exclusion where the "company's directors or officers were sued for polluting." In U.S. Liquids v. National Union Fire Insurance Co. of Pittsburgh, Pa., 88 Fed. Appx. 725 (5th Cir. 2004), the Fifth Circuit Court of Appeals followed that course. In the case, the insured, a provider of integrated liquid waste management services, allegedly engaged in illegal discharges of liquid hazardous waste into Detroit's sewer system and illegal transportation and disposal of hazardous waste. A criminal investigation and public disclosures led to suspension of trading in the insured's stock, a fall in stock price, and a securities class action and a shareholder derivative suit. Plaintiffs made the standard allegations of breaches of duty and reliance on materially false and misleading statements in the insured's press releases and SEC filings.
The insured sought coverage for the suits from its D&O insurer. The policy contained a pollution exclusion, barring coverage for any loss in connection with a claim:
(1) alleging, arising out of, based upon, attributable to, or in any way involving, directly or indirectly; (1) the actual, alleged or threatened discharge, dispersal, release or escape of pollutants; (emphasis added).
The insurer relied on the pollution exclusion to deny coverage, and then brought a declaratory judgment action.
Applying Texas law, the district court found the pollution exclusion barred coverage of the underlying suits against the insured and its directors and officers. The Fifth Circuit affirmed. The language of the exclusion required a "but for" test, which meant an "incidental relationship" between the loss and the excluded conduct needed to exist.
Lessons for Insureds
There are a number of lessons here for policyholders facing coronavirus claims. First, in all three of the cases discussed, the applicable exclusion contained broad language such as "arising out of" or "in any way involving" the excluded item. But that will not always be the case.
The example of a limited bodily injury exclusion is from a current D&O policy. Without broad "arising out of" language, an insured has a simple argument that the securities litigation, or breach of duty claim for economic loss, is not a claim "for bodily injury" and that the exclusion, on its face, does not apply. Going forward, insureds should seek D&O coverage without broad "arising out of" exclusionary language.
Second, the rules providing favorable policy construction to the insured may mitigate the exclusion's application. As stated by the Georgia Court of Appeals in Fireman's Fund, when a provision of an insurance contract is ambiguous, "[t]hree well known rules" apply in the construction of the contract:
- [a]ny ambiguities in the contract are strictly construed against the insurer as drafter of the document;
- any exclusion from coverage sought to be invoked by the insurer is likewise strictly construed; and
- [the] insurance contract[is] to be read in accordance with the reasonable expectations of the insured where possible.
Ambiguities construed against the insurer, exclusions construed narrowly, and the application of a policyholder's "reasonable expectations" - these rules are not a panacea, but should be recognized and pressed in any discussion with a carrier. Third, as in all coverage matters, the specific facts of the claim and law of the jurisdiction matter. In Sealed Air, the complexity of the circumstances served to attenuate the nexus between the excluded asbestos and the covered securities claim. In U.S. Liquids, the court acknowledged the applicable rule in Ohio would have led to a different outcome than the rule followed in Texas.
Coronavirus-related claims are likely for many business enterprises. Effective responses will include documenting the approaches taken as the crisis built and unfolded, reliance on strong contractual terms, and implementing loss mitigation strategies. The response should also incorporate a company's insurance portfolio with a plan to pursue the coverage for which premiums were paid.
About J. Wylie Donald
Donald is a partner in the Washington, D.C., office of McCarter & English and a member of the firm’s Insurance Recovery, Litigation & Counseling practice. He counsels and litigates for clients on insurance coverage, environmental and product liability matters. The views expressed are those of the author and are not intended to speak for the Firm or its clients. Email: email@example.com.