Motion to Dismiss COVID-19 Claim Denied

    Finding that a contamiation exclusion was ambiguous, the Court denied the insurer’s Motion to Dismiss the insured’s COVID-19 claim. C.J. Segerstrom and Sons v. Lexington Ins. Co., 2023 U.S. Dist. LEXIS 33293 (C.D. Cal. Feb. 27, 2023). 

    Segerstrom owned and operated a shopping mall. It was forced to close the mall due to the outbreack of COVID-19 in order to comply with related closure and stay-at-home orders issued by state and county governmental authorities. The mall was unable to open for several months, resulting in losses over $3,000,000. 

    Segerstrom had a polidy with Lexington. Coverage was denied. The policy provided coverage for loss as a result of closing of the premises by order of a public authority due to the existence or threat of hazardous conditions. The policy also had a pollution and contamination exclusion which excluded coverage for loss due to contaminants or pollutants, defined to include “bacteria, virus, or hazardous substances as listed in the Federal Water, Pollution Control Act, Clean Air Act, Resource Conserfation and Recovery Act of 1976 and Toxic Substances Control Act or as designated by the U.S. Environmental Protection Agency.”

    Segerstrom sued and Lexington moved to dismiss. Lexington argued that the pollution and contamination exclusion precluded coverage. Segerstrom contended that the exclusion was inapplicable and did not preclude its claim. 

    The court found that a reasonable interpretation of the policy was that the SARS-CoV-2 virus and resulting COVID-19 pandemic fell within the pollution and contamination exclusion. Segerstrom argued, however, that the exclusions terms of “release, discharge, escape or dispersal” should be interpreted in the context of traditional environmental pollution. Further, there was no act involving the “release, discharge, escape, or dispersal” of a “virus,” as defined in the exclusion, to trigger the exclusion. Binding authority in California was the California Supreme Court case in McKinnon v. Truckers Ins. Exchange, 73 P.3d 1205 (Cal. 2003), where the court found that the terms “discharge, dispersal, release or escape” related to intentional industrial pollution. Therefore, the court limited the scope of the pollution exclusion to environmental pollution. 

    The court concluded that the terms “discharge, dispersal, release, and escape” should, as in McKinnon, be read as limited to traditional environmental pollution and not encompass coughing, breathing, or sneezing. The holding in McKinnon therefore supported Segerstrom’s reading of the exclusion as reasonable. The coverage language expressly included discussion of an outbreak of a communicable disease, which established a reasonable expectation that Segerstrom would have coverage for such an outbreak.

    Therefore, the court found that Segerstrom’s reading was reasonable, making the exclusion ambiguous. The Pollution and Contamination Exclusion endorsement did not preclude coverage of Segerstrom’s COVID-related losses and Segerstrom therefore properly stated a breach of contract claim. The motion to dismiss was denied,.