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.