By Gary Chester, Senior Writer
When the COVID-19 pandemic forced the cancellation of sporting events, sports attorneys immediately began to consider the legal ramifications. While many lawyers discussed force majeure, there are other legal concepts at issue. One example is the virus exclusion contained in general liability insurance policies.
A virus exclusion was considered in Chattanooga Professional Baseball Club v. National Casualty Company, No. 20-17422 (9th Cir. 2021), where minor league baseball clubs tried to recoup their losses from a cancelled season.
The Facts
The Chattanooga Lookouts and 18 other Minor League Baseball (“MiLB”) teams in California, Idaho, Indiana, Maryland, Oregon, South Carolina, Tennessee, Texas, Virginia, and West Virginia held substantially identical commercial property and casualty policies provided by National Casualty and other insurance companies. MiLB experienced its first-ever cessation, allegedly due to “continuing concerns for the health and safety of players, employees, and fans…action and inaction by federal and state governments…and Major League Baseball (“MLB”) not supplying players to their affiliated minor league teams.” [Chattanooga Prof. Baseball LLC v. National Casualty Co., No. CV-20-01312 (D. Ariz. 2020).]
The teams, along with five hospitality and concession companies whose businesses were interrupted, presented claims for loss of income to their insurance carriers. National Casualty Company, Scottsdale Indemnity Company, and Scottsdale Insurance Company allegedly denied the claims or intended to deny them.
The Amended Complaint filed on August 21, 2020, set forth claims for breach of contract, anticipatory breach of contract, and declaratory judgment. The trial court granted the defendants’ motion to dismiss; the plaintiffs appealed.
The Virus Exclusion
The insurers argued at the trial level that each of the applicable policies contained a valid virus exclusion that reads in relevant part as follows: “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism.”
The MiLB teams conceded that under the law of each of the 10 states in which they reside, the plain and ordinary meaning of the exclusion is that coverage does not apply to losses stemming from a virus. They argued that: (1) causation is a question of fact and, (2) the defendants should be estopped from applying the exclusion.
The plaintiffs asserted that it was unclear whether their losses were caused by the government’s orders in response to the virus or the virus itself. The trial judge rejected the argument, stating that the complaint contained no allegation that “absent the pandemic, the government would have been prompted to issue stay-at-home orders or otherwise inhibit access to the ballparks.”
The court also considered the plaintiffs’ argument that its losses were caused by MLB’s failure to furnish players to MiLB, as required by contract. But the court found that the insurance policies included a valid exclusion for losses resulting from “suspension, lapse or cancellation” of a contract.
The teams also argued that regulatory estoppel prevents enforcement of the virus exclusion because the insurance companies obtained regulatory approval for the exclusion in 2006 by making misrepresentations to the state insurance commissions. (They allegedly misrepresented that the exclusion was merely a clarification of current policy to avoid premium reductions when, in fact, the exclusion reduced prior coverage.)
The court rejected this argument because none of the applicable states recognize the defense (only New Jersey fully recognizes regulatory estoppel as an affirmative defense). The court noted that courts in Texas and Indiana have specifically refused to apply regulatory estoppel when given the chance, and that general equitable estoppel is not applicable to risks expressly excluded from coverage.
The Appeal
The Ninth Circuit affirmed the trial court based primarily on proximate cause. For the eight states applying an efficient proximate cause analysis, the teams did not plausibly allege that the government needed to act for a reason unrelated to the COVID-19 virus.
The court stated that efficient proximate cause “generally refers to the cause ‘that sets other causes in motion’…or ‘the cause to which the loss is to be attributed, though the other causes may follow it, and operate more immediately in producing the disaster.’”
The court added: “The Teams also fail to plausibly allege that MLB did not supply them with players for a reason independent of the spread of COVID-19. In fact, the Teams’ allegations suggest the opposite by noting that 2019 was the first year in more than 100 years that minor-league baseball was not played.”
The causation argument failed under Texas law because the teams did not plausibly allege that there were concurrent causes of the teams’ losses that were susceptible to allocation, since their alleged causes all flowed from the virus. The teams’ causation argument failed under Virginia law because they did not plausibly allege that the other causes of their losses were efficient intervening causes.
As to regulatory estoppel, the Ninth Circuit stated that federal law does not recognize the defense. As to a single West Virginia case that applied the defense, the court found it distinguishable because the teams did not allege that the insurers were attempting to rely on an interpretation of the virus exclusion that was contrary to a position they had previously expressed.
The Takeaway
- Some insurers were savvy enough to write virus exclusions into their general liability policies, so they did not have to rely on judicial interpretations of force majeure in the era of COVID
- MLB’s failure to provide players was clearly the result of the virus; even in closer cases, courts would be hard-pressed reject virus exclusions because doing so would likely subject the insurance industry to massive losses and bankruptcies – not to mention a wave of litigation that would overwhelm the courts
