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(USA Herald) – Luxury Orange County mall South Coast Plaza has been granted the right to proceed with its lawsuit against an AIG unit, after a California federal judge ruled that a policy exclusion did not block its claims for over $5 million in COVID-19 pandemic closure losses.

Legal news contributor for USA Herald, Samuel Lopez, reports that plaintiff C.J. Segerstrom and Sons had been forced to close the upscale shopping center in March 2020 as a result of the outbreak of COVID-19 and suffered losses of more than $5 million as a result. The company's insurers, Lexington Insurance Co. and Starr Surplus Lines Insurance Co., declined to insure Segerstrom for its losses, prompting the lawsuit.

Lexington Insurance Co., a subsidiary of AIG, filed a motion to dismiss, citing a policy exclusion for loss or damage caused by "contaminants", including a "virus". However, U.S. District Judge Maame Ewusi-Mensah Frimpong ruled that the "pollution and contamination" policy exclusion did not block South Coast Plaza's claims.

Frimpong noted that Lexington and Starr are part of an insurance program incorporating several insurance policies purchased by Segerstrom, which provide up to $5 million in "Special Time Element" coverage that insures losses sustained from the "cancellation … [or] interference with the business" as a result of contagious or infectious disease, including those losses resulting from the outbreak of a contagious or infectious disease within a 10-mile radius of the insured location.

The policies also state that they cover the "closing of the whole or part of the premises of the insured either by the insured or by order of a public authority consequent upon the existence or threat of hazardous conditions either actual or suspected at an insured location." While the policy has an exclusion for "pollution and contamination", the judge determined that it was ambiguous and required to be construed in favor of Segerstrom and against Lexington.

The judge cited Mackinnon v. Truckers Insurance Exchange, in which the California Supreme Court looked at a similar "pollution" exclusion in a case related to the use of a pesticide at a residential property, in which the court said it was "far from clear" that pesticides "would be commonly thought of as pollution" and so the coverage was not precluded.

According to the judge's ruling, the terms "discharge, dispersal, release, and escape" in the Segerstrom policy must be interpreted to apply only to traditional environmental pollution, and not to coughing, breathing, or sneezing. The judge emphasized that Segerstrom's policy explicitly covers outbreaks of communicable diseases, and that the "Special Time Element Coverage" serves a purpose similar to that of business interruption insurance, safeguarding against losses incurred when operations are disrupted without warning.