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Supply chain disruptions due to natural and man-made events, such as the COVID-19 pandemic, climate change, and global and regional conflicts, have become more prevalent in recent times. Businesses need to focus on these issues more carefully as part of their risk management strategies. Many companies seek to insure potential losses caused by disruptions to their supply chain through first-party or property insurance coverage. The insurance industry has designed a range of coverages for this exposure, the main one being contingent time element (or dependent property) coverage, which provides coverage when (typically) physical loss or damage to a third-party supplier or customer prevents that third party from supplying goods to or purchasing goods from the policyholder. Policyholders need to be aware of certain key issues with this coverage.Continue Reading Tomorrow’s supply chain – First-party insurance coverage for supply chains

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

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

Recently, a California federal court issued a favorable decision for policyholders seeking coverage for losses arising from COVID-19 who paid significant premiums to purchase substantial coverage limits including “coverage for business interruption losses from a virus.”  Sunstone Hotel Investors, Inc. v. Endurance Am. Spec. Ins. Co., Case No. SACV 20-02185 (C.D. Cal., June 15, 2022).

The facts

In Sunstone Hotel Investors, Inc., the Boston Marriott Long Wharf (the “Marriott”) hosted a three-day conference in February 2020.  Following the event, the Boston Public Health Department informed the hotel that three attendees tested positive for COVID-19.  Sunstone, the operator of the Marriott, timely filed an initial notice of loss with Endurance under its environmental impairment liability policy for the losses stemming from the presence of COVID-19.

In exchange for the placement of the policy, Sunstone paid a significant premium for an aggregate maximum of $40 million limit of insurance to protect itself against all kinds of events, including $25 million for “business interruption losses from a virus.”

After receiving the notice, Endurance denied the claim in full.  Following the notice but prior to denial, the Boston public health authorities informed the Marriott that the City would force it to quarantine and close immediately if the hotel failed to suspend its operations.  The Marriott thereafter suspended its operations for a period of 14 days.  Prior to the hotel’s reopening date, the State of Massachusetts issued a governmental order mandating the closure of all non-essential businesses, which included the hotel.  The Marriott thus remained closed until July 7, 2020, when the State permitted it to reopen at limited capacity. Continue Reading A policyholder win: Court finds coverage for COVID-19 related losses

Under standard property policies, insurers are broadly claiming that the pollution exclusion applies to bar coverage for losses caused by the COVID-19 pandemic. But the insurer in Essentia Health v. ACE American Insurance Company, which involved a Premises Pollution Liability Portfolio Insurance Policy, made the precise opposite argument. Essentia alleged that COVID-19 was a covered pollution condition, while ACE claimed that COVID-19 did not involve pollution. Essentia Health v. ACE American Insurance Company, No. 21-cv-207 (ECT/LIB) (D. Minn., May 25, 2021). Because Essentia turns the usual COVID-19 arguments upside down, it may provide helpful precedent for policyholders seeking coverage. In particular, ACE argued that a separate limitation on virus coverage demonstrated that insurers recognized the risks from a virus pre-COVID-19, and accordingly chose to limit the coverage for losses from diseases that are transmitted from person to person.

The court agreed with ACE that pollution condition could not include a virus (the opposite claim to that made by insurers relating to COVID generally), particularly when read with an endorsement providing limited coverage for viruses

The court granted ACE’s motion, because Essentia sought coverage only on the ground that COVID-19 was a “pollution condition,” reasoning that “pollution condition … read in conjunction with other provisions of the policy in this case, cannot reasonably be understood to include a virus.”Continue Reading Consistency not a concern for insurers fighting COVID-19 business loss claims, but policyholders can take advantage of divergent coverage positions

In Deere & Co. v. Allstate Ins. Co., 2019 WL 912151 (Cal. Ct. App. Feb. 25, 2019), a California Court of Appeal recently held that an insured’s self-insured retention (SIR)[1] was considered part of the underlying limit of liability such that it need not be satisfied again and again just to access excess insurance policies. This case represents another example of the California appellate courts shooting down an insurance company’s attempt to overreach. Nonetheless, insurance companies will continue to look for ways to avoid providing the coverage they contracted to provide, and policyholders must always be vigilant.

This particular dispute arose over insurance coverage for several asbestos personal injury claims made against manufacturer Deere & Company arising from products it manufactured from 1958 to 1986. During that period, Deere had coverage in place via a series of first-layer umbrella policies[2] for personal injury claims; several layers of excess insurance provided additional coverage above the limits of the first-layer umbrella policies. In all, there were 49 policies at issue representing $200 million in policy limits. In all of its first-layer umbrella polices, Deere contracted to pay an SIR before the coverage limits would be reached. Deere’s excess policies “followed form” to the first-layer policies, except the excess policies had different limits of liability.
Continue Reading Self-insured retentions are not a windfall for excess insurers looking to avoid coverage

A California Court of Appeal recently held that the alleged loss of use of a premises as a nightclub qualified as “property damage” under a general liability insurance policy. Thee Sombrero, Inc. v. Scottsdale Ins. Co., 2018 WL 5292072 (Cal. Ct. App. Oct. 25, 2018).

Thee Sombrero, Inc. (Sombrero) owned and operated a nightclub in Colton, CA. After a fatal shooting at the club, city officials revoked Sombrero’s use permit and made it so the premises could only be used as a banquet hall. Sombrero sued its private security company, Crime Enforcement Services (CES), claiming that its subpar security caused the shooting and cost Sombrero its ability to run a nightclub on its property.

Sombrero alleged that the property was worth $2,769,231 as a nightclub and only $1,846,153 as a banquet hall. In 2012, Sombrero secured a default judgment against CES for $923,078 – the difference in value between the nightclub and banquet hall.Continue Reading Tangible property doesn’t have to be physically lost to find coverage

On Monday, June 4, 2018, the California Supreme Court ruled that an insurance company must provide liability coverage to its corporate insured against claims of negligent hiring, retention, and supervision of its employee, who allegedly sexually assaulted a 13-year-old child. The case is Liberty Surplus Ins. Corp. v. Ledesma & Meyer Construction Co., Inc., Case No. S236765 (June 4, 2018). This decision is “of exceptional importance to injured parties, employers, and insurance companies doing business in California,” wrote the U.S. Court of Appeals for the Ninth Circuit, in an order certifying the issue to the California Supreme Court.

In 2002, Ledesma & Meyer Construction Co. (L&M) entered into a contract with the San Bernadino School District for a construction project at a local middle school. L&M hired Darold Hecht to work on the project. In 2010, a 13-year-old student at the school (Jane Doe), filed suit asserting numerous claims against L&M, alleging that she was sexually abused by Hecht. One of Doe’s claims against L&M alleged negligent hiring, retention, and supervision of Hecht. L&M’s insurer, Liberty Surplus Insurance Corporation, agreed to defend L&M under a reservation of rights.Continue Reading California Supreme Court rules broadly in favor of insureds

The October 21, 2016 DDoS attack on the internet’s domain name system infrastructure underscores the need to consider cyberliability insurance coverage as a critical component of your company’s security and privacy breach response plan, and if your company carries cyberliability insurance, to ensure that your coverage will respond to a network business interruption, security breach…