Even positive reforms can carry hidden risks –A potential limitation period “trap” in the UK’s Third Parties (Rights against Insurers) Act 2010

At a time when, globally, insured businesses are under severe financial strain, the availability and extent of their insurance assets take on a new significance. It is significant not just for troubled businesses and their insurers, but also for third parties with potential or actual claims against those businesses. 

An insured may, for example, notify under a professional indemnity or other liability insurance in response to a third party claim. But if the insured goes into some form of insolvency process, will any insurance proceeds (or the right to those proceeds) form part of the insolvent estate? 

In many jurisdictions, that is the case and it would leave the third party claiming on the insolvent estate in competition with other creditors. In other jurisdictions, however, the law instead affords the third party more direct access to the insurance proceeds.

The UK falls under the latter category, based on the Third Parties (Rights against Insurers) Act 1930 (the “1930 Act”) and the Third Parties (Rights against Insurers) Act 2010 (the “2010 Act”). 

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Physical loss and reasonable expectations of policyholders: The Third Circuit whiffs

On January 6, 2023, the Third Circuit affirmed lower court rulings in 14 consolidated appeals from orders dismissing claims for property damage and business interruption losses resulting from the coronavirus and/or COVID-19. Policyholder lawyers can (and will) find fault with many parts of Wilson v. USI Ins. Service LLC, Case No. 20-3124, in which the Third Circuit tries to predict how the state supreme courts of New York and Pennsylvania would interpret the phrase “physical loss of or damage to property.” 

The Wilson court distills the issue presented as, “whether the businesses’ inability to use their properties for their intended business purposes constitutes ‘physical loss of’ property.” In answering this question “no,” the Wilson court interpreted physical loss of property to require a “complete (or near complete) dispossession of the property, regardless of the purpose for which that property is used,” for there to be physical loss.

What this conclusion means to businesses that lease premises

This conclusion does little for business policyholders who rent space and commit resources towards a particular endeavor. According to Wilson, as long as the property has some function or use, there is no physical loss, even where the policyholder cannot, in whole or in part, conduct its chosen business due to the presence of a deadly virus or disease. In other words, as long an insured restaurant space can be used to, for example, store auto parts, in the court’s view, the policyholder has not been dispossessed of the property, and is not entitled to coverage. This interpretation is neither commercially reasonable nor in keeping with the expectations of policyholders who are tenants operating businesses in the buildings.

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Liability insurance in mass tort bankruptcy cases – A brief primer

Chapter 11 bankruptcy as a means for resolving mass tort claims

In recent years, a growing number of defendants have sought to use reorganization under chapter 11 of the United States Bankruptcy Code to obtain permanent and complete relief from mass tort claims. Many of these entities were defendants in asbestos bodily injury litigation, and were eligible for the special protections for such claims provided in Bankruptcy Code section 524(g). Yet defendants facing other types of claims – including those alleging bodily injury from silica, talc, silicone breast implants, opioid painkillers, and allegedly defective ear protection – also have pursued relief in bankruptcy cases. Several Roman Catholic dioceses, as well as the Boy Scouts of America, have used chapter 11 to seek permanent solutions to sex abuse claims. 

The general outline of the chapter 11 strategy for all of these defendants is similar. A debtor entity obtains immediate relief from tort system litigation (and its attendant costs) by filing bankruptcy, due to the automatic stay of all litigation under Bankruptcy Code section 362. It then prepares a chapter 11 plan that establishes a settlement trust to resolve the mass tort claims against it. The debtor will ask a Bankruptcy Court to issue an injunction that will force mass tort claimants to forego tort litigation against the debtor, in favor of submitting to the settlement trust for resolution.  The debtor’s aim is to emerge from the chapter 11 proceeding shorn of its mass tort obligations, with the settlement trust serving as the exclusive source of resolution for those claims on a permanent basis.

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Policyholders seeking coverage for Covid-19-related losses may have reason to be optimistic

I recently wrote about lessons that could be learned from the ongoing insurance coverage jurisprudence related to the coronavirus / Covid-19 pandemic.  That article discussed broad trends that had developed and cohered across this vast litigation landscape, through multiple decisions in many courts over the course of several months or more.  Although descriptive, most of those trends have been and are anti-plaintiff, anti-policyholder, and anti-insurance recovery.

Is a pro-policyholder trend on the horizon? 

This piece is different in two important respects.  First, it focuses on a point that has not yet achieved a level of pervasiveness that could be fairly characterized as a trend, although it should and hopefully will reach that point soon.  Second, this piece discusses a positive outcome for policyholders seeking to recover for their coronavirus- and Covid-19-related losses.

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COVID-19 business income claims – Will state appellate courts reject federal court predictions as to state law?

In the past few months, in cases considering whether SARS-CoV-2/COVID-19 can cause direct physical loss or damage to property so as to trigger business income coverage, policyholders have secured three wins in state appellate courts: Ungarean in the Superior Court of Pennsylvania, Huntington Ingalls in the Vermont Supreme Court, and Cajun Conti in the Louisiana Court of Appeal. 

These cases stand in stark contrast to several hundred decisions of federal district courts and courts of appeals. As these federal courts have only have the power to predict state law, it will be state supreme courts that actually decide whether policyholders are entitled to coverage. Insurance companies in these state appeals will rely heavily upon this federal authority, so it is worth exploring its origins. As shown below, the federal decisions are a product of courts reflexively accepting misrepresentations about the status of the common law as of March 2020 and then cohering (or, perhaps, congealing) into what has essentially become the federal common law of COVID-19.  

The state of state law on physical loss or damage in March 2020

As an initial matter, the law on business income is, comparatively, underdeveloped. As of March 2020, in the United States, there were only about 1,300 decisions, in total, considering any of many hundreds of time element issues. (That figure has now doubled, nearly entirely due to SARS-CoV-2 decisions). Compare this to liability insurance, for which there are likely 1,300 decisions on pollution exclusions alone. Given this paucity of authority, there were no decisions on whether a virus could cause physical loss or damage, and insurers (as well as policyholders) had no real constraints on what they could argue.

Oddly enough, the single business income issue with the most case authority in March 2020 was whether events that render property unfit or unsafe for its intended use cause physical loss or damage. There were about 50 such cases, about 40 of which found in favor of coverage, many in highly-analogous contexts – including bacteria and circumstances, like wildfire smoke or ammonia fumes, which essentially resolve themselves over time. How did the insurance industry deal with this?

The insurance industry misrepresented the state of the common law, and federal courts accepted those misrepresentations

The insurance industry misrepresented the state of the common law. Specifically, insurance companies repeatedly cited 10A Couch on Insurance 148:46 for the proposition that the common law was settled and physical loss or damage required a “distinct, demonstrable, physical alteration” of property. There are a number of things wrong with this. One, when the author of this section of the treatise, Steven Plitt, an insurance industry lawyer, first advocated for this rule in 1995, no court had adopted it. Two, to be fair to Mr. Plitt, he identified two rules, the other being the one under which about 40 courts had found coverage. Three, relatedly, the rule for which Mr. Plitt argued was not the majority rule, which he subsequently, repeatedly, acknowledged. See Richard P. Lewis, Lorelie S. Masters, Scott D. Greenspan & Christopher E. Kozak, Couch’s “Physical Alteration” Fallacy: Its Origins and Consequences, 56 Tort, Trial & Ins. Prac. L.J. 621 (2021). 

Unfortunately, hundreds of federal courts ignored these problems (or they were never raised by counsel), and cited 10A Couch on Insurance 148:46 (or Mr. Plitt’s invented “alteration” standard) to dismiss complaints seeking business income coverage for loss caused by COVID-19. Indeed, it is difficult to find a pro-insurer case on this topic that does not cite Mr. Plitt’s section or his suggested standard, or rely upon the hundreds of cases that do.

Federal courts reflexively cohered around what has come to be a federal common law of COVID-19

This reflexive reasoning was common in federal courts. In November 2020, the Uncork & Create court made a factual finding, not based on record evidence, but “common sense,” that SARS-CoV-2 did not cause “direct physical damage or loss to property.” Thereafter, a string of cases deciding against policyholders did the exact same thing: i.e., rather than examining the record evidence before them, they cited the conclusion in Uncork & Create. Other courts then cited decisions that cited Uncork & Create, or decisions which cited decisions that cited Uncork & Create, etc. Almost every case reaching this conclusion derives from a single court’s finding of fact against a policyholder on a motion to dismiss (on a bare record when the court should have accepted well-pleaded allegations as true).

Early on, the insurance industry was strategic, and lucky

Clearly, there has been a snowball effect, and by the spring of 2021, most federal courts had done little or no analysis but simply pointed to the snowball. One should consider, however, how the industry started rolling the snowball. In part, it was because it was extremely clever, and extremely lucky, in which cases came to decision first. For instance, the first case on this issue, Society Life Magazine, was brought by a policyholder lawyer seeking a preliminary injunction directing the insurance company to pay. That motion had essentially no chance of success – preliminary injunctions as to coverage are not granted in insurance cases – but the decision denying the motion was cited by the insurance industry in every case thereafter as if it were a decision on summary judgment.

State courts of appeal should give little credence to the federal common law

The insurance industry used early and easy victories, such as in Society Life, and misrepresentations as to the state of the common law to generate an avalanche of federal authority which essentially amounts to a federal common law of COVID-19. State supreme courts, however, are the arbiters of state common law. They can and should decide these cases without undue deference to this mass of federal authority of dubious provenance. 

California Supreme Court rules in favor of policyholders: what we learn from Yahoo! Inc. v. National Fire Insurance 

Earlier this month, the California Supreme Court, in Yahoo Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pennsylvania, Supreme Court of California No. S253593, ruled in favor of Yahoo, Inc. (Yahoo!), a policyholder seeking insurance coverage for Telephone Consumer Protection Act (TCPA) claims.

The case came to the California Supreme Court as a certified question of law from the Ninth Circuit Court of Appeals. The Supreme Court reviewed the federal district court’s ruling, which dismissed Yahoo!’s insurance coverage action, and entered a judgment in favor of National Union Fire Insurance Company of Pittsburgh, PA (National Union). The high court disagreed, applying well-settled California rules of insurance policy interpretation, and found that the commercial general liability policy was ambiguous and must be interpreted in accordance with Yahoo!’s objectively reasonable expectations.

The facts

Congress passed the TCPA in 1991 to protect telephone users from unsolicited robocalls, robotexts, and junk faxes. Yahoo! has been named in a series of putative class action lawsuits alleging unsolicited text messages in violation of the TCPA. National Union declined to defend or indemnify Yahoo! in these lawsuits, claiming that the policy language in its commercial general liability insurance policy unambiguously bars coverage.

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Hurricane Ian and Hurricane Nicole: Answering questions policyholders frequently ask (or should ask) to ensure maximum recovery

At $40-70 billion in estimated insured losses, Hurricane Ian is the nation’s second most expensive natural disaster for the insurance industry. Less than two months later, Hurricane Nicole made landfall in Florida. Securing insurance coverage for these losses will be an important part of rebuilding and recovery.

Recently, Reed Smith’s insurance coverage lawyers hosted a webinar, “Maximizing Insurance Recovery after Hurricane Ian,” to answer several frequently asked questions policyholders ask (or should ask) to ensure maximum recovery after these natural disasters. We summarize a few of those answers below.

What type of insurance coverage applies? Property Damage? Business Income? Ordinance and Law? Service Interruption? All of the above?

Put simply, the answer is: It depends on the facts and the language of the policy, but one or more types of coverage may apply. For example, a policyholder may have property damage coverage if they sustained physical damage to buildings, business property (e.g., machinery, equipment, raw materials, etc.), or property of others in the policyholder’s control. That same policyholder may also have service interruption coverage if they experienced dislocation of utility or telecommunications service and suffered business income losses as a result.

All types of common coverages are discussed during the webinar, which can be viewed on demand.

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Direct physical loss in COVID Coverage cases: Are policyholders seeing a litigation shift in favor of COVID-19 coverage?

The ongoing COVID-19 pandemic led to unprecedented closures and losses for businesses throughout the United States. Naturally, policyholders have sought recovery for pandemic-related losses under their “all risk” commercial property policies. According to the University of Pennsylvania Carey School of Law Covid Coverage Litigation Tracker, there have been approximately 2,300 of these COVID-19 coverage cases filed to date. Early pre-trial court decisions overwhelmingly favored insurers; however, recent appellate and high court decisions have demonstrated a slight shift in favor of policyholders.

For example, one of the first COVID-19 coverage decisions was issued by a Michigan state court in the summer of 2020:  Gavrilides Management Company LLC et al v. Michigan Insurance Company. The Gavrilides court rejected the policyholder’s arguments that (1) the loss use of property constitutes a “direct physical loss” covered by the policy and (2) the virus exclusion should not apply since the loss use was caused by government orders. This full dismissal was just the start of policyholders’ uphill court battles.  Since Gavrilides, nearly 70% of state court merits hearings have resulted in a full dismissal with prejudice. In federal courts, that number jumps to nearly 87%.

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Maximizing recovery for combined wind and flood damages in hurricane claims

This year, Hurricane Ian swept through the Southeastern United States, causing extensive damage to property in the affected areas. While obtaining insurance recoveries for any loss can be a complex endeavor, recovery for hurricane loss is particularly complex, as it typically involves a mix of covered and excluded perils. Most standard homeowners or other property insurance policies provide coverage for wind-related losses, but exclude coverage for loss caused by flood. While some policyholders may have purchased standard flood insurance policies that provide coverage for flood losses; many have not. Whether the policyholder has a homeowner’s or general property policy, a flood insurance policy, or both, the question of recovery for damage caused by mixed wind and flood forces requires a complex analysis as both covered and uncovered causes may contribute to the damage to insured property. 

Analyzing combined causes of loss

Where a loss stems from multiple causes, some covered and others excluded, coverage will depend on whether the causes are contributing, or separate and independent causes of loss. 

Where separate perils combine to create one indivisible loss, these will be considered combined or contributing causes of loss and courts will generally apply one of two tests:

  1. A majority of jurisdictions apply the efficient proximate cause test. This test permits recovery for loss caused by a combination of covered and excluded perils when the efficient proximate cause, i.e. the primary event producing the loss, is a covered cause of loss.
  2. The concurrent cause doctrine, the minority approach, provides coverage for combined-peril claims so long as a covered cause of loss is a contributing cause of the loss, regardless of whether it is the primary cause or not. 

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Amy’s Kitchen: A step in the right direction

On October 4, the California First Appellate District in Amy’s Kitchen, Inc. v. Fireman’s Fund Insurance Company, 2022 Cal. App. LEXIS 836, reversed a trial court’s order granting the insurer’s demurrer in a COVID-19 property damage claim, and remanded to allow the policyholder to amend its allegations of loss under a communicable disease coverage extension.  In so doing, the court applied correctly the pleading standards in California, and a process of careful evaluation of the policy language in context, existing physical loss or damage law in California, ultimately applying the clear language in the policy in a common sense manner.  The Amy’s Kitchen decision is important because it interpreted the policy in the way a reasonable layperson would read its language, focusing on the actual policy language, not terms of art defined by case law.  

The facts

Amy’s employs more than 2,500 people to manufacture meals at facilities in California, Oregon and Idaho.  As alleged in Amy’s complaint, COVID-19 was present at Amy’s locations because some of Amy’s employees had confirmed cases, prompting Amy’s to take measures to mitigate, contain, clean, disinfect, monitor and test for COVID-19.  Public health orders also required Amy’s to implement various measures, including decontamination, disinfection and sanitization of its facilities to continue operating.

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