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.

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

By Rich Lewis on 6 December 2022 Posted in Business interruption, COVID-19, Insurance Coverage, Insurance General, Property Damage & Business Interruption

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

By Elizabeth Bowman, David E. Weiss and Tim Law on 30 November 2022 Posted in Insurance Coverage, Insurance General, Insurance News of Note

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.

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

By Jessica E. Gopiao and Matthew B. Weaver on 22 November 2022 Posted in Business interruption, Environmental, Insurance Coverage, Insurance General, Property Damage & Business Interruption

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.

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

By Connor O'Carroll, Elizabeth Bowman and David E. Weiss on 17 November 2022 Posted in Business interruption, COVID-19, Insurance Coverage, Insurance General

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%.

Maximizing recovery for combined wind and flood damages in hurricane claims

By Maria Castro Sanchez and Matthew B. Weaver on 11 November 2022 Posted in Business interruption, Insurance General, Property Damage & Business Interruption

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:

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.
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.

Amy’s Kitchen: A step in the right direction

By Adrienne N. Kitchen and Douglas C. Rawles on 19 October 2022 Posted in COVID-19, Insurance Coverage, Insurance General, Property Damage & Business Interruption

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.

Pay and pay without delay – Section 13A of the Insurance Act 2015

By Margaret Campbell and Eleanor Ruiz on 13 October 2022 Posted in Insurance Coverage, Insurance General

How often have we seen insurers raise spurious defences, ask further questions and delay payment of good claims for years? For obvious reasons, the insured’s priority when making a claim under any type of insurance policy is that the claim is successfully and promptly resolved. However, it was not until 2016 that any statutory guidance was developed in England on the subject of what is a reasonable time to investigate, evaluate and settle a claim.

Introduced by the Enterprise Act 2016 which came into force on 4 May 2017, Section 13A of the Insurance Act 2015 implies a term into every contract of insurance (concluded after 4 May 2017) that “the insurer must pay any sums due in respect of the claim within a reasonable time”, which is allowed to include “a reasonable time to investigate and assess the claim”.

Section 13A requires insurers to justify the time they take to reach a determination on claims. However, prior to this year, the meaning of “reasonable time” remained undefined in either the legislation or case law.

Calculating business income losses for a business interruption claim

By Evy Wild and Anthony Newman on 10 October 2022 Posted in Business interruption, Insurance Coverage, Insurance General

Many commercial property insurance policies require that policyholders submit a Sworn Statement in a Proof of Loss (also referred to as “Proof of Loss”) in order to receive benefits under the policy. A Proof of Loss provides the insurer with specific information about the incident giving rise to the claim, such as the cause, the nature of any damage sustained, and the financial impact to the business, if any. In the event a policyholder suffers a financial loss as a result of an insured event, it is essential that the policyholder understands how to calculate business income losses covered under its policy so it can attest to that amount in the Proof of Loss. Ultimately, the specific language in the policy will dictate the policyholder’s approach for calculating business income losses, but there are two general approaches typically used by insurance industry experts.

Top-Down or Gross Receipts Method

The first approach is referred to as the “Top-Down or Gross Receipts Method”. Under this approach, the policyholder must (1) calculate the lost sales resulting from covered property damage and then (2) subtract expenses that were saved as a result of not achieving those sales.

(1) Projected Sales – Actual Sales = Lost Sales

(2) Lost Sales – Saved Expenses = Business Income Losses

Projected Sales

“Projected Sales” (also referred to as “but for revenue”) is the revenue the policyholder would have earned between the date covered property damage forced the policyholder to suspend its operations and the date when the policyholder resumed, or reasonably could have resumed, normal operations (the “Period of Restoration”) if the insured event had not occurred. To develop a foundation for Projected Sales, the policyholder may consider:

(a) the history of sales in the years leading up to the incident;

(b) the pre-loss average monthly sales achieved in those years;

(d) the rate of inflation; and

(e) any other factors that could influence the expected sales volume or price offered for impacted products

These other factors may include seasonality, growth, industry trends, and other outside factors (e.g., political changes, changes in industry regulations, competition, economic forecasts and conditions, etc.).

Insurance coverage for sexual abuse in New York

By John Berringer on 29 September 2022 Posted in Insurance Coverage, Insurance General

With the passage of New York’s Child Victim’s Act (the “CVA”) and similar revival statutes around the United States, there have been literally thousands of formerly time-barred actions commenced against institutions such as churches and other religious organizations, schools, camps, and other groups working with children for damages on account of sexual abuse by their employees, volunteers or agents allegedly occurring years or even decades in the past. When these institutions turn to their insurers seeking coverage under old insurance policies for injuries occurring during the relevant policy periods, they are often confronted with the defense that, because the institution may have been aware of an alleged perpetrator’s “propensity” to commit acts of abuse, the resulting injury was “expected and intended” and, therefore, excluded from coverage.

Abuse claims generally allege that the institution failed to use due care to protect children from abusive perpetrators for whom the institution is alleged to be responsible. Sexual abuse complaints typically allege that, as a result of the policyholder’s negligence in hiring, retention, supervision, or training, the claimants suffered bodily injury for which the policyholder is legally liable. In resisting coverage for sexual abuse claims, insurers typically assert that, if the institution knew of a perpetrator’s “proclivities” or “propensities,” then the injury arising from child abuse should not be deemed an “occurrence” because it should be considered “expected or intended” from the standpoint of the insured.

Negligent conduct is insurable

These arguments ignore the very high burden insurers must carry on such a defense. Like environmental litigation that preceded it, the insurers attempt to use a modern lens to evaluate policies and procedures adopted many decades earlier. While a church might have at one time believed that a perpetrator could be safe to return to the care of children after an intensive religious retreat and/or psychiatric treatment, one would be unlikely to find any now holding similar views. Thus, what might now seem outrageous, should be seen as negligent (and eligible for insurance coverage) in light of the understanding at the time the conduct occurred.

This is the approach adopted by New York courts. As an initial matter, New York holds that negligence in hiring or retaining an employee who commits a sexual assault can constitute an “occurrence” that is not “expected or intended” from the standpoint of the insured. See RJC Realty Holding Corp. v. Republic Franklin Ins. Co., 808 N.E.2d 1263 (N.Y. 2004). In the context of a suit against a massage parlor, the court explained that, although the assault was not an “accident” from the masseur’s point of view because he expected and intended it, the masseur’s expectations or intentions were irrelevant in determining the applicability of the insurance policy to his employer. Under New York law, the perpetrator’s abusive conduct is not imputed to his employer. Judith M. v. Sisters of Charity Hosp., 93 N.Y.2d 932 (1999). Instead, the institution is only liable for its own negligence in hiring or retaining such perpetrators. Accordingly, the court did not ascribe the masseur’s expectations or intentions to his employer in determining the applicability of the insurance policy. Id. See also Jewish Cmty. Ctr. of Staten Island v. Trumbull Ins. Co., 957 F. Supp. 2d 215, 233-34 (E.D.N.Y. 2013) (following the RJC court’s interpretation of “accident” in the context of sexual harassment and assault of children at a community center); NYAT Operating Corp. v. GAN National Insurance Co., 46 A.D.3d 287, 287-88 (1st Dep’t 2007) (“[it] does not avail [the insurer] to argue that the assault was foreseeable.”).