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The Rough Notes Company Inc.



July 27
12:42 2020

Dig a Little Deeper

By Dawn Jackson, AU, AINS


Is the culprit wind or virus?

The Court Decisions column is one of the most popular parts of Rough Notes magazine. One reason for this is that the courtroom is where the promises made in an insurance contract often become real. All insurance professionals can develop “what if” scenarios but until those scenarios are tested with an actual loss and a court decision, they remain mental exercises.

This column comes from the industry expert editors of Policy Forms & Manual Analysis (PF&M). This is a knowledge base consisting of more than 15,000 pages of coverage explanations from The Rough Notes Company’s digital solutions. The editors are going to dig a little deeper into one of those court decisions to identify a coverage problem, provide possible solutions or offer broader perspectives.

This court case involves a tornado, a virus and a passel of pigs. It began on March 13, 1990, in Clay County, Nebraska, when a tornado stirred up a windstorm directly in the path of a farm with pseudorabies-infected swine, which were in quarantine for the illness. According to the U.S. Department of Agriculture, it is a disease of swine infecting other animals—a contagion of herpes virus that causes reproductive problems, respiratory issues, and death to breeding and finishing hogs. The windstorm blew the virus to the insured’s farm and infected its swine, resulting in sickness and death. The affected swine were to be used exclusively for breeding.

A few months before the incident, the insured purchased an insurance policy to cover the livestock in the event of a loss. The policy it purchased included windstorm as a covered peril, but infectious disease was not mentioned. When the insured suffered the loss, it submitted a claim to the insurer for reimbursement of the vet bills incurred and the money it had to return to clients since it could no longer sell the swine. The insurer denied coverage stating windstorm does not include the transmission of an airborne virus, so the insured sued the insurer for recovery. The district court found that the windstorm was the direct and proximate cause of loss, but since the insurer did not agree with the ruling, it filed an appeal.

What can be learned from this case is that if an insurance company’s intent is to exclude a specific peril, then it should exclude it from the policy.

The insurer did not dispute that the windstorm transmitted the virus to the insured’s farm or that the swine became infected. Its dispute was that the policy did not include airborne transmission of a virus. However, if the windstorm had not occurred, the virus would not have been transmitted to the insured swine. As well, infectious disease was silent from the policy language, and being silent on a peril could trigger coverage. It’s important to keep in mind, though, that windstorm is included in the policy coverage, and it is the direct link to the virus being transmitted to the swine.

The insurer was relying on the windstorm not being the immediate reason for the loss but that it was the virus and other prior conditions that made the swine susceptible to illness. While the virus is the cause of the sickness and death to the swine, again, it would not have occurred had the windstorm not blown it to the farm, and even if the swine were susceptible to sickness, the direct source of the illness came by way of the windstorm.

We have to stop and go back to the fact that the policy is silent on infectious diseases, which creates ambiguity. It becomes an issue when a disagreement between parties finds its way to the legal system, which in this case, it did. Since the majority of insurance policies are unilateral, ambiguity does not bode well for an insurance company during litigation. Most often, courts will find in favor of a policyholder. So, if an insurance company intends to exclude a particular type of loss from coverage, then it needs to be specified in the policy language.

However, in this case, both courts found that the language of the policy was clear and unambiguous, and the insurer was liable to pay the loss. The appellate court used the example that the wind did not need to physically blow the infected swine to the farm for coverage to apply, that it was the windstorm that set the loss in motion. It treated the windborne virus no differently from any other type of object. Thus, the windstorm is the direct cause of injury and transmitted the virus. The appellate court found the insurer was liable for vet bills, client reimbursements and attorney fees.

Here’s how the verdict was broken down: The insured received reimbursement of the vet bills of $128,732.38. This was for the medical attention of the swine to assist in preventing further damage to more death and sickness. It was considered mitigation of the loss as required under the duties of an insured after a loss. If the insured had not mitigated from more damage, then it risked a penalty or reduction in settlement if damages continued beyond discovery. Also, it received client reimbursement fees of $19,900 for purchased hogs, and this was an indirect loss caused by the windstorm. Lastly, it was awarded the attorney fees of $8,373.

What can be learned from this case is that if an insurance company’s intent is to exclude a specific peril, then it should exclude it from the policy. In this case, even if infectious disease was excluded from the policy, the windstorm would nonetheless be considered the direct cause of loss and consequently would still be covered. The policy would need to explicitly exclude viruses caused by a windstorm.

The author

Dawn Jackson, AU, AINS, is senior editor, Technical & Educational Products Division, at The Rough Notes Company, Inc. She has more than 20 years of experience in the property and casualty insurance industry with a primary focus on commercial lines. She worked for fifteen years as a commercial underwriter with both national and regional carriers. Dawn is also an experienced business analyst with a primary emphasis on commercial underwriting systems. She has experience as a P-C claims trainer as well. Dawn is a licensed Indiana resident P-C producer and she obtained her bachelor’s degree from the University of Indianapolis. Among the Technical & Educational Products Division’s offerings is Policy Forms & Manual Analysis (PF&M), a knowledge base consisting of more than 15,000 pages of coverage explanations offered through the Rough Notes Company’s digital solutions operation.

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