Business interruption

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It’s no secret that businesses of all shapes and sizes have suffered tremendous losses during the COVID-19 pandemic. From closures to the “Great Resignation” to ever-changing consumer demands, businesses have dealt with one problem after another. One of those problems is the denial of insurance coverage under  “all risk” commercial property policies. For the last two years, courts across the country have found in favor of insurers, ruling that SARS-CoV-2, the virus underlying the COVID-19 pandemic, does not cause physical damage to property.

Enter Marina Pacific Hotel, LLC, et al. v. Fireman’s Fund Insurance Company, 2022 Cal. App. LEXIS 608 (2nd Dist. 2022), a case in which the California Appellate Court looked beyond the preliminary question of whether SARS-CoV-2 causes damage to property and got back to legal basics in its analysis of the plaintiffs’ complaint. With Marina Pacific Hotel, policyholders landed a major victory, and the case may provide a winning framework for plaintiff-insureds facing similar legal battles in the future.

The Marina Pacific Hotel Case

The policy at issue in Marina Pacific Hotel contained much of the standard coverage language which has been heavily debated over the last two years, namely, that the insurer will pay for “direct physical loss or damage” caused by or resulting from a covered cause of loss. This language has proven problematic for policyholders dealing with COVID-19 losses as judges have been reluctant to find that a virus physically alters property when viewed through the lens of what is traditionally considered “property damage.”

However, the Marina Pacific Hotel plaintiffs set out detailed allegations of physical damage, including the fact that SARS-CoV-2 can bond with the surfaces of objects it touches altering the cells and surface proteins of that object. Like insurers around the country, Fireman’s Fund argued that SARS-CoV-2 cannot physically damage property, and that the insured’s loss of use of a piece of property does not constitute physical damage.Continue Reading Looking beyond “Physical Damage to Property”: Is Marina Pacific Hotel a winning framework for policyholders?

One of the top issues facing business today is the risk of business interruption resulting from a cyber-related attack. Regardless of the form of attack – ransomware, denial of service, data theft, or other form of malware – any resulting failure of an organization’s network systems can have severe consequences, financial and otherwise. These may include loss of productivity, lack of or impaired access to websites, and, importantly, loss of sales or income.

Given the potential for significant losses, a strategy for calculating and minimizing losses, and maximizing insurance recoveries for damage from a business interruption should be part of every organization’s cyber incident response plan.  Because every business is unique, there is no “one size fits all” plan that will neatly apply to all businesses or to all business interruption claims. Nevertheless, certain best practices exist and can be applied and adapted to individual businesses to facilitate an efficient and effective response to a cyber-related business interruption.

1. Know your insurance coverage

The first step to maximizing recovery for business interruption is understanding the coverage provided under the applicable insurance policies. Many stand-alone cyber liability insurance policies provide coverage for lost net profits and mitigation costs, and may also cover continuing expenses, such as employee salaries, resulting from a cyber incident. However, there are also certain limitations to such coverage common in most cyber policy forms, even though they are far from standardized. For example, most business interruption coverage includes a waiting period of a certain number of hours before coverage begins. The length of that waiting period can be critical as losses attributable to the business interruption may continue to grow until the network system and level of service has been fully restored.  Insurers also may limit the “period of interruption,” the period of time for which the policy will pay for losses. Depending on the policy language, coverage may end before operations are fully restored.

It is important to understand these limitations when purchasing cyber insurance and to obtain the insurance that best fits the needs of your business. For this reason, we recommend involving insurance coverage counsel to assist in the insurance placement and renewal process.Continue Reading Responding to a cyber-related business interruption: best practices

If an insurance company owes a duty to defend, the dispute should be decided promptly, on the pleadings. Any delay undermines the duty to defend. The scope of the duty to defend should be adjudicated on the pleadings as quickly as possible to give policyholders the true value of their policies and the benefit of their contracts.

The value and purpose of the duty to defend

The duty to defend is one of the most valuable components of an insurance policy. Like it or not, American society is litigious. Companies cannot prevent lawsuits through good conduct, laudable intentions, or strong compliance programs.  Refuting liability and damages is expensive even if the core facts are undisputed or the case is frivolous.

For a single company or individual, the frequency and size of litigation generally is unpredictable, making budgeting for defense costs a difficult task.  In any single year, the risk of litigation is low, but when a claim does come in, defense costs can be significant.  This litigation landscape is a problem for legal departments trying to budget or reserve for litigation costs.

The duty to defend addresses this problem using the principles of risk transfer and risk pooling.

  • Risk transfer: the risk and costs of defending litigation is transferred to the insurance company in exchange for a premium payment.
  • Risk pooling: the insurance company takes the collective risks of litigation against all policyholders in a pool large enough that aggregate defense costs can be statistically analyzed and predicted on an annual basis.

This way no one has to assess the risk that any individual company is sued or anticipate those defense costs. Policyholders can include insurance premium costs in their legal budgets, and shift covered defense costs onto the insurer. The insurance company underwriters can evaluate the aggregate defense spend at a gross systemic level and charge premiums to cover those costs (with a healthy profit margin).Continue Reading The duty to defend requires an early judgment

Nearly two years into the COVID-19 pandemic, the battles over threshold business interruption coverage issues like the presence of physical loss or damage, causation, and the applicability of policy exclusions continue to rage.  Results have been mixed, with insurers notching wins in federal courts, and policyholders faring better in state courts and in certain jurisdictions.

But scores of policyholders who have avoided pre-discovery dismissal are now grappling with how other policy terms will impact their recovery.

Chief among these – particularly for policyholders with diverse and widespread physical locations and operations – is the impact of a classic question typically dealt with in handling catastrophic liability claims: how many occurrences are there?

The answer has profound implications for the amount of recovery, as it affects not only how deductibles may (or may not) apply but also how primary and excess coverage might respond to a large loss.

Three “tests” have emerged in case law to deal with this problem in the liability context. The “cause” test (adopted by the majority of jurisdictions) determines the number of “occurrences” by looking to the number of causes of injury or loss. The “effect” test determines the number of “occurrences” by looking to the number of resulting injuries or losses. And the “continuous process” test determines the number of occurrences by looking at the number of processes resulting in damage that were continuous, repetitive, and interrelated. See, e.g., Unigard Ins. Co. v. United States Fid. & Guar. Co., 728 P.2d 780 (Idaho Ct. App. 1986).Continue Reading “Occurrences” in COVID-19 business interruption litigation

The COVID-19 pandemic has caused a wave of business interruption lawsuits, particularly between policyholders and their insurance companies. Initially, the nationwide trend was in favor of insurance companies, but recent decisions confirm that policyholders are gaining traction.

Policyholder arguments gather steam in court

One of the pioneer lawsuits, for example, recently survived a summary judgment motion. In Cajun Conti LLC v. Certain Underwriters at Lloyd’s of London, No. 2020-02558 (La. Civ. Dist. Ct., Orleans Parish, Nov. 4, 2020), the policyholder, a restaurant group, sought a judgment declaring that its insurance company should cover losses related to an order entered by Louisiana’s governor banning gatherings of 250 people or more. This caused the restaurants to operate at 50 percent capacity and cease service by 9 p.m. On November 4, 2020, the Louisiana state court denied the insurance company’s motion for summary judgment after finding the following four issues of material fact:

(1) Whether COVID-19 constitutes direct physical loss or damage;

(2) Whether the policy interests necessitate a more liberal reading of prior case law;

(3) If COVID-19 constituted a physical loss or damage, whether COVID-19 impacts the environment;

(4) In the context of civil authority coverage, whether COVID-19-related damages to property at another location within one mile of any of the restaurants is a covered cause of loss.

Likewise, a Pennsylvania state court overruled the insurance company’s motion to dismiss a tavern’s complaint for business interruption coverage because “at this very early stage, it would be premature for this court [to] resolve the factual determinations put forth by defendant to dismiss plaintiff’s claims.” Taps & Bourbon on Terrace, LLC v. Those Certain Underwriters at Lloyd’s, London, No. 00375 (Pa. Ct. Com. Pl. Phila. Cnty. Oct. 27, 2020) (emphasis added). The complaint alleged that the tavern sustained business losses resulting from “the COVID-19 pandemic and . . . state and local orders mandating that all non-essential businesses be temporarily closed.” The order also recognized that “the law and facts are rapidly evolving in the area of COVID-19-related business losses.”

Interpretation of “physical loss of or damage to” property

One area of law that has developed is the interpretation of the phrase “physical loss of or damage to” property, which is commonly found in policies at issue in COVID-19 business interruption cases. Noting the import of the disjunctive “or” in the phrase “physical loss of or damage to” property, the court in Hill and Stout PLLC v. Mutual of Enumclaw Insurance Company, No. 20-2-07925-1 (Wash. Super. Ct. King Cnty. Nov. 3, 2020) held that the policy provided alternative means for coverage: (1) physical loss of property (the Physical Loss Option) and (2) damage to property (the Damage Option). The Washington state court found the Physical Loss Option ambiguous and, consequently, construed it in favor of the policyholder. Under this interpretation, the court concluded that a dental practice’s alleged inability “to see patients and practice dentistry” sufficed to trigger the Physical Loss Option for coverage under the policy.Continue Reading Recent pro-policyholder COVID-19 business interruption decisions