Coverage unclear for SARS losses

As the deadly SARS virus continues to spread in China, shutting down schools, museums, libraries and local businesses, it remains unclear whether commercial insurance policies would respond should a similar outbreak occur in the United States.

With very little understanding about the pneumonia-like virus and no insurance claims filed to date, opinions vary as to whether an environmental impairment liability policy would cover SARS contamination claims or whether pollution exclusions on other commercial policies would apply.

The spread of severe acute respiratory syndrome has led to the postponement or cancellation of numerous exhibitions, conventions and sporting and entertainment events in affected areas, prompting event cancellation insurers to begin excluding the virus from policies (BI, April 14).

Late last month, Chicago-based Aon Corp. sent a white paper to clients about potential coverage issues arising from first-party cleanup costs and third-party bodily injury or property damage associated with SARS contamination in the United States.

In the paper, Aon advises risk manager clients to look to environmental liability policies for SARS-related coverage as pollution and mold exclusions in commercial general liability and property policies would most likely bar coverage for SARS.

"Certainly, if we see the same number or anything approximating what is happening in China here in the United States, there certainly is going to be a significant business shutdown," said Jeffrey R. Hanneman, an attorney with Aon Environmental in Houston and author of the white paper.

"If you had multiple or even one or two people (with SARS), a lot of employees would not want to show up to work. You're going to have to do something proactive, and that would probably comprise a total wipe down of the facility," which is not only time-consuming but also very expensive, he said.

While no court has addressed coverage specifically for SARS, several courts have ruled that no coverage exists under CGL policies for other viruses or bacteria such as E. coli and the microorganism that causes Legionnaires' disease, as they constitute pollutants and are excluded by the standard ISO pollution exclusion, Mr. Hanneman wrote in the white paper.

"I would expect the GL carriers with their mold exclusions or pollution exclusions to exclude coverage for any claims arising from SARS or any infectious diseases," he said. "So if there's no coverage there, I think the most likely vehicle to find coverage would be the environmental impairment policy," he said.

"In theory, the environmental policy is the right policy" to respond to a SARS outbreak, said David Dybdahl, president of the American Risk Management Resource Network L.L.C., an environmental risk management consulting group in Madison, Wis. But half of the EIL policies in place exclude "naturally occurring substances" under the definition of a pollutant and would therefore exclude SARS, he said.

Robert P. Hartwig, senior vp and chief economist of the New York-based Insurance Information Institute, said he thinks that providing coverage for SARS exposures "is probably stretching the intent" of the EIL policy.

If the EIL policy were to cover costs associated with SARS contamination and clean-up, "where do you draw the line?" Mr. Hartwig asked. "There's literally no end to the number of viruses, bacteria, mold spores, airborne pathogens and biological pathogens that one could claim is causing illness. And the potential costs of having to stop and decontaminate are astounding," he said.

"I don't think it's a cut-and-dried deal when it comes to environmental impairment simply because... there are many other diseases running through America today that are causing far more people to become ill and are killing them," he said. "Yet we do not routinely call upon EIL policies to provide coverage for decontamination."

Ann V. Kramer, a partner with Anderson Kill & Olick P.C. in New York, said she thinks SARS claims would be covered by most commercial insurance policies-even those with absolute pollution exclusions.

"It's called a pollution exclusion for a reason: It's supposed to be about pollution," Ms. Kramer said. "So the argument than an infection is pollution seems to me to be ridiculous."

"It's our belief that SARS gives rise to claims under" all sorts of commercial policies, from directors and officers liability policies, to workers compensation to general liability, she said. "To the extent these policies have absolute pollution exclusions, we still think there would be coverage for SARS," she said.

Craig Simon, managing director of Willis Group Ltd.'s casualty market practice in New York, expressed a similar sentiment. "There's no exclusion right now in standard (general liability) policies if a widespread epidemic similar to China or worse happened" in the United States, he said.

Although most CGL policies do contain exclusions for pollution and mold claims, Mr. Simon said viruses are not contaminants and therefore would be covered.

"What it would do is create possible havoc with our available capacity and cause large losses" in the commercial casualty market, he said of a potential SARS outbreak.

A spokesman for the Insurance Service Office in Jersey City, N.J., said that standard ISO commercial property and general liability policies are silent when it comes to communicable diseases like SARS.

"A lot will depend on the facts and circumstances of the claim, the insurer's interpretation of the policy language, and, if all else fails, it will eventually be a matter for the courts to decide," he said.