Virus, disease exclusions in insurance policies may be unenforceable

In recent months, many insured businesses have turned to their insurers seeking coverage for claims and losses related to COVID-19. In response, some insurers have cited exclusions purporting to bar coverage for viruses, communicable diseases, pathogens and the like. Under the governing rules of policy interpretation, such exclusions must be narrowly construed. See Meraz v. Farmers Ins. Exch., 92 Cal. App. 4th 321, 324 (2001) ("[C]overage exclusions and limitations are 'strictly construed against the insurer and liberally interpreted in favor of the insured.' ... '[T]he burden rests upon the insurer to phrase exceptions and exclusions in clear and unmistakable language.'"). However, regardless of the scope of such exclusions, they might not be enforceable.

Indeed, many of the more common virus, communicable disease, and pathogen exclusions were first incorporated into insurance policies in the last decade or so -- and in some cases, even more recently than that. Given that businesses frequently purchase coverage from the same insurers for long periods of time, an insured initially may have been sold a policy by its current insurer that did not contain the virus, communicable disease, or pathogen exclusion now being invoked. In that case, the exclusion necessarily was introduced in one of the insured's renewal policies -- meaning that, unless the insurer can demonstrate that it satisfied all requirements when adding the exclusion, it may now be unenforceable.

Under California law, an insurer must tell its insured if it intends not to renew coverage or if it intends to add new exclusions or limitations upon renewal. For example, the California Insurance Code states: "An insurer, at least 60 days, but not more than 120 days, in advance of the end of the policy period, shall give notice of nonrenewal, and the reasons for nonrenewal, if the insurer intends not to renew the policy, or to condition renewal upon reduction of limits, elimination of coverages, increase in deductibles, or increase of more than 25% in the rate upon which the premium is based." Ins. Code Section 678.1(c). If an insurer fails to timely provide the required notice, the Insurance Code states that "the policy of insurance shall be continued, with no change in its terms or conditions," until after the insured receives adequate notice of the proposed changes. Id. Section 678.1(d).

Many courts likewise have required insurers to highlight any reductions in coverage when renewing policies. For instance, in a 1949 decision, the California Supreme Court confirmed that when an insurer agrees to renew an expiring policy, "no change may be made in the terms of the renewal policy without notice to the insured." Industrial Indem. Co. v. Indus. Acc. Comm'n of Cal., 34 Cal. 2d 500, 506 (1949); see also Zito v. Fireman's Ins. Co., 36 Cal. App. 3d 277, 282 (1973) ("an insurer, when renewing a policy, may not change the terms of the policy without first notifying the insured").

Thus, whenever an insurer incorporates an exclusion into a renewal policy, it is obligated at that time to notify its insured of the change and of any reduction in coverage. Such notice, as with all notices from insurers, must be conspicuous, plain and clear. See Allstate Ins. Co. v. Fibus, 855 F.2d 660, 663 (9th Cir. 1988) ("To be adequate, notice must be conspicuous, plain, and clear.").

In this regard, California courts have held renewing insurers to high standards when evaluating the adequacy of notice to their insureds. As these courts have confirmed, all such notices must clearly, conspicuously, and plainly highlight the specific changes and reductions in coverage. See Davis v. United Servs. Auto. Ass'n, 223 Cal. App. 3d 1322, 1332 (1990) (the law "requires notice of the specific reduction in coverage"); Sorensen v. Farmers Ins. Exch., 56 Cal. App. 3d 328, 334 (1976) (when insurer reduces coverage in a renewal policy, insured may reasonably expect "some form of specific notice (probably separate from the policy) that would direct his attention to or acquaint him with the change"). General admonitions to "read the policy for changes" are, thus, insufficient. See Davis, 223 Cal. App. 3d at 1332; see also Casey v. Metro. Life Ins. Co., 688 F. Supp. 2d 1086, 1095-96 (E.D. Cal. 2010) (warning to insured to "read your entire policy carefully" not effective notice of changes in renewal policy).

Importantly, when an insurer fails to highlight and sufficiently explain reductions in coverage in renewal policies, the changes are void and unenforceable. As one court put it, "[i]t is a long-standing general principle applicable to insurance policies that an insurance company is bound by a greater coverage in an earlier policy when a renewal policy is issued but the insured is not notified of the specific reduction in coverage." Fields v. Blue Shield of California, 163 Cal. App. 3d 570, 579 (1985).

Courts in other jurisdictions are in accord. See, e.g., Shelter Mut. Ins. Co. v. Mid-Century Ins. Co., 246 P.3d 651, 657 (Colo. 2011) (when insurer fails to provide adequate notice of reduction in coverage in renewal policy, it is "precluded from relying on the existence of such [a] limitation to avoid liability' [and] is 'bound by the greater coverage' in the earlier policy"); Canadian Universal Ins. Co., Ltd. v. Fire Watch, Inc., 258 N.W.2d 570, 575 (Minn. 1977) ("[W]hen an insurer by renewal of a policy ... substantially reduces the prior insurance coverage provided the insured, the insurer has an affirmative duty to notify the insured in writing of the change in coverage. Failure to do so shall render the purported reduction in coverage void."); Bauman v. Royal Indem. Co., 174 A.2d 585, 590 (N.J. 1961) ("[W]here an insurance company purports to issue a policy as a renewal policy without fairly calling the insured's attention to a reduction in the policy coverage, it remains bound by any greater coverage afforded in the earlier policy.").

Thus, when pursuing coverage for losses associated with COVID-19, insureds should not automatically presume that virus, communicable disease, and pathogen exclusions in their policies -- whether incorporated recently or several years ago -- are valid and enforceable. It is possible that such exclusions were introduced into renewal policies by insurers that, contrary to governing statutory and case law, failed to highlight the changes and adequately explain them to their insureds. If that is indeed the case, then such exclusions may be unenforceable and may not provide insurers with a legitimate basis to contest coverage. 