Traditional Pollution Exclusion Does Not Bar COVID-19 Claim

    The trial court's dismissal of the insured's loss of business income claim due to COVID-19 based upon a traditional pollution exclusions was reversed and remanded as to most of the insurers. JRK Prop. Holdings v. Colony Ins. Co., 2023 Cal. App. LEXIS 760 (Cal. Ct. App. Oct. 2, 2023). 

    JRK was a real estate investment firm with investments in approximately 100 hotel and residential properties across 22 states. When the COVID-19 pandemic arrived, JRK had $245 million in business interruption coverage from various insurers. The policies provided business interruption coverage for "loss resulting from necessary interruption of business conducted by the insured and caused by direct physical loss, damage, or destruction by any of the perils covered herein." However, the policies included a pollution exclusion for "pollution caused directly or indirectly by the release, discharge, dispersal, seepage, migration, or escape of pollutants or contaminants." "Pollutants of contaminants" were defined as any,

solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste, which after its release can cause or threaten . . . loss of use to property insured hereunder, including, but not limited to, bacteria, virus, or hazardous substances. . .

    JRK filed suit alleging breach of contract and declaratory relief due to the insurres' refusal to cover JRK's losses. JRK alleged the highly contagious virus caused loss and damage to its properties. The virus could survive for days on surfaces, compromising the "physical integrity of the structures it permeates" and posed an "imminent risk of physical damage to all other structures." Residents at JRK's properties tested positive for COVID-19 as early as mid-March 2020. Accordingly, the pandemic caused JRK to suffer significant financial losses, including substantial costs incurred to respond to on-site cases. 

    The insurers filed a motion for judgment on the pleadings, arguing that JRK failed to allege facts showing a distinct "physical alteration" to its covered properties as required to establish "direct physical loss or damage" under California law. The insurers also argued specific exclusions precluded coverage, including the pollution exclusion in the policies, and the pathogen exclusions in two of the policies. 

    The trial court granted the motion without leave to amend. The court found that JRK suspended its operations due to the government shutdown orders, not the presence of the virus on its properties. The court also found that the pollution and pathogen exclusions barred coverage. 

    In a portion of the opinion not certified for publication, the appellate court found the JRK adequately stated causes of action for breach of contract and declaratory judgment. The court turned to the pollution exclusion. 

    The insurers contended that the pollution exclusion barred coverage because it covered the dispersal sand migration of pollutants and contaminants, which terms were specifically defined to include a virus. The court determined, however, that the pollution exclusion did not apply because a reasonable interpretation of the exclusion was that it applied only to traditional sources of environmental pollution, as the Supreme Court held in McKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635 (2003). 

    The insurers relied on cases with pollution exclusions that excluded "loss or damage" caused by the "release, discharge, escape or dispersal" of contaminants or pollutants, with contaminants defined to include a virus. The policies here more closely tracked the pollution exclusion in McKinnon, excluding "pollution" (not loss or damage) caused by the "release, discharge, dispersal, seepage, migration, or escape of pollutants or contaminants," with a specific reference to the Clean Air Act and CERCLA.

    The pathogen exclusions in policies issued by Evanston and RSUI barred coverage, however. There was no reference in these exclusions to pollution. These exclusions specifically barred coverage for losses from a virus, thereby precluded coverage for COVID-19. 

    The order of dismissal was reversed except as to RSUI and Evanston.