Factory Mutual’s “Contamination” Exclusion Is Ambiguous; May Not Limit Coverage For COVID-19 Business Interruption Loss
On Wednesday, a federal judge in New York denied FM’s Rule 12(c) motion for judgment on the pleadings after finding the Contamination Exclusion in the Factory Mutual policy to be ambiguous as to whether it bars coverage for business interruption losses resulting from communicable disease. The case is Thor Equities, LLC v. Factory Mutual Ins. Co., No. 20 Civ. 3380 (AT) (SDNY). This is a critical decision under the Factory Mutual policy form, which is substantively the same as policies issued by Factory Mutual’s sister company, Affiliated FM Insurance Company. Factory Mutual and Affiliated FM have maintained that the contamination coverages are “exceptions” to this exclusion, with the exclusion precluding coverage for communicable disease loss under other policy coverages. But the ruling validates what policyholders have been arguing – that communicable disease “loss” is covered throughout the Factory Mutual policy, in addition to under the sublimited communicable disease emergency response coverages.
In her decision, Judge Torres explained that both parties argued that the contamination exclusion unambiguously favored their respective positions. Thor argued that the exclusion’s failure to mention any loss “due to contamination,” while explicitly referencing “any cost due to contamination,” indicates that the exclusion does not bar coverage for Thor’s business interruption losses. Factory Mutual, on the other hand, maintained that the Contamination Exclusion’s mention of “inability to use or occupy property” unambiguously excludes losses due to contamination caused by COVID-19, including Thor’s loss of rental income. Judge Torres found the exclusion susceptible to more than one reasonable interpretation, since it is potentially compatible with either party’s interpretation. Accordingly, Judge Torres concluded that the exclusion was ambiguous as a matter of law.
The decision in Thor Equities is the first decision in any COVID-19 insurance dispute under the Factory Mutual/Affiliated FM policy wording to specifically address the unique language found in those policies. Although one other court recently issued a decision under the Affiliated FM version of the policy, the magistrate judge in Out West Restaurant Group Inc. v. Affiliated FM Ins. Co. failed to consider any of the unique wording in the policy and specifically avoided any consideration of the policy’s Contamination Exclusion or how the policy’s affirmative coverage for communicable disease affects the scope of coverage afforded under that policy. The decision in Thor Equities, therefore, stands as the only pronouncement on the merits of Factory Mutual’s unique policy wording.