Developments in Coronavirus Insurance Coverage Litigation and Legislation

While the world continues to battle the coronavirus, another battle wages on in the courts, as insurers continue to issue blanket denials for COVID-19 business interruption losses. Many are closely watching how the judicial and legislative branches will answer what have emerged as two key questions: Do the causes of COVID-19 business interruption losses constitute physical loss or damage to property? And if they do, is coverage nevertheless barred by “contamination” or “virus” exclusions? Procedurally, another question involves the extent to which such cases may be broadly consolidated, a question the United States Judicial Panel on Multidistrict Litigation (JPML) just answered mostly in the negative, while ordering additional proceedings to consider four insurer-specific multidistrict litigations (MDLs) and leaving the door open for other such proceedings.   

Hundreds of lawsuits have been filed so far, but almost all of this litigation is still in its earliest stages. Only a few rulings have been issued, with both positive and negative results for policyholders. Meanwhile, in an apparent effort to short-circuit disputes and streamline coverage payments, Congress and several states are considering legislation to compel payments to small businesses and provide a “reinsurance backstop” for insurers. None of these measures has yet passed.

This alert will provide a brief snapshot in time of the status of recent COVID-19 coverage rulings in the U.S. and abroad, and of legislation concerning COVID-19-related business interruption insurance claims.

Insurance coverage lawsuits have been filed across the country seeking coverage for losses arising out of COVID-19 and the various governmental orders issued to curtail the spread of the coronavirus. The vast majority of the cases have been brought by small and mid-sized businesses, mostly on behalf of insureds that purchased standard form policies. Common trends run through most of the cases, including the type of coverage at issue: "all-risks" insurance policies that provide coverages for Business Income, Extra Expense, Civil Authority, and Sue & Labor. Many assert the same arguments, using the same language, and a number have been filed by the same law firms. Linked to this alert is Covington’s COVID-19 Coverage Case Tracker, which lists and categorizes each case according to jurisdiction, status, key coverage terms, and basic arguments. We will be continuously updating this tracker.

Although hundreds of such cases have been filed in state and federal courts in the U.S.—nearly 700 at last count—only a few trial court rulings have emerged at this preliminary stage. Here we summarize four such rulings and also report on the status of two proceedings that seek to consolidate litigations, one involving Pennsylvania cases against a single insurer, and one involving a petition to consolidate all federal COVID-19 coverage litigation.

Ruling in Favor of the Policyholder

• Studio 417, Inc. v. The Cincinnati Ins. Co.: On August 12, a U.S. District Judge in the Western District of Missouri denied an insurer’s motion to dismiss the coverage claims of a proposed class of restaurants and hair salons, rejecting Cincinnati Insurance’s arguments that plaintiffs had not adequately stated a claim for “direct physical loss” or for “civil authority,” “ingress/egress,” “dependent property,” and “sue and labor” coverage under their “all risk” policies. In so ruling, the court acknowledged that “physical loss” and “physical damage”—both undefined in the policy—are distinct and not synonymous, and that “loss” includes “the act of losing possession” and “deprivation,” as well as property being in a condition that is “unusable for its intended purpose.” Accordingly the court concluded that the complaint “plausibly alleges a ‘direct physical loss’ based on ‘the plain and ordinary meaning of the phrase.’” The court also rejected the Southern District of New York’s rationale in Social Life Magazine, discussed below, which did not include allegations of physical loss. Order Denying Defendant’s Motion to Dismiss, Studio 417, Inc. v. The Cincinnati Ins. Co., No. 20-cv-03127-SRB (W. D. Mo. Aug. 12, 2020).

Rulings in Favor of Insurer

• Rose’s 1, LLC v. Erie Ins. Exch.: On August 6, a D.C. Superior Court judge disagreed with the policyholder’s argument that the mayor’s restaurant closure orders themselves constitute “direct physical loss” under the plaintiffs’ commercial property policies. The plaintiff restaurants apparently did not argue for coverage under the policy’s civil authority provision, but instead staked their claims solely on the policy’s grant of business interruption coverage caused by “direct physical loss,” due to government closure orders and not the actual presence of the virus. After an incomplete recitation of contract interpretation principles, the court mentioned dictionary definitions and discussed non-binding cases—including a D.C. Court of Appeals decision regarding riot coverage, which the court admitted was not directly on point, and other courts’ rulings on “physical loss” and “physical damage” in other factual contexts. The court apparently assumed without deciding that the phrase “direct physical loss” was ambiguous; yet, it failed to apply a basic tenet of D.C. contract interpretation: when policy “language is reasonably open to two constructions, the one most favorable to the insured will be adopted.” Carlyle Inv. Mgmt. LLC v. Ace Am. Ins. Co. (quoting Chase v. State Farm Fire & Cas. Co.). The plaintiffs have 30 days to appeal. Order Denying Plaintiffs’ Motion for Summary Judgment and Granting Defendant’s Cross-Motion for Summary Judgment, Rose’s 1, LLC et al. v. Erie Ins. Exch., No. 2020-CA-002424-B (D.C. Super. Ct. Aug. 6, 2020).
• Gavrilides Mgmt. Co. v. Mich. Ins. Co.: On July 1, a Michigan state trial judge, ruling from the bench, granted an insurer’s motion for judgment on the pleadings. The policyholders are small businesses in the food & beverage industry, with an insurance policy based almost entirely on Insurance Services Office (“ISO”) forms (including the ISO virus exclusion).[1] In the absence of any allegations of direct physical loss of or damage to property, said the court, the policyholder plaintiff had failed to make out a cause of action under the policy, which expressly required such loss or damage. The court emphasized that there was no allegation that the virus was even on the property—in fact, there were allegations that the virus was not found on the property. However, relying on precedent in Michigan that has not been adopted in most other states, the court also suggested that there must be some tangible, physical alteration of the property to qualify as “direct physical loss of or damage to” property, and that being “physically restricted” to access the property would not suffice. In light of the policyholder’s initial allegations to the contrary, the court declined to grant leave to file an amended complaint. Finally, in apparent disregard of the insurer’s burden to prove the applicability of an exclusion, the court also ruled that the policyholder had failed to establish the inapplicability of an exclusion for loss caused by virus or bacteria. The policyholder has twenty-one days from the time the formal order was entered on July 21, 2020 to file an appeal. Oral Argument, Gavrilides Mgmt. Co. v. Mich. Ins. Co., No. 20-000258-CB (Mich. Cir. Ct. July 1, 2020), ECF No. 19.
• Social Life Magazine v. Sentinel Ins. Co.: In May, a U.S. District Judge in the Southern District of New York orally denied a policyholder’s request for a preliminary injunction to award immediate payment under business interruption coverage not subject to a virus exclusion. The policyholder owns and operates a small publishing business and purchased an insurance policy which incorporated ISO forms. The court found that the plaintiff’s showing of a likelihood of success on the merits was insufficient, based principally on the failure to proffer definite evidence of property damage at the plaintiff’s business premises, such as proof that the virus was actually present on surfaces in those premises. (The court also appeared skeptical of the claim that the policyholder had lost substantial use of its premises, reasoning that the owner and others were still permitted to access and use the premises for some purposes.) Based on the absence of proof of property damage, the judge appeared to rely on a prior New York case involving loss of use resulting from collapse of a neighboring property, Roundabout Theatre Co. v. Continental Casualty Co. The Roundabout decision concerned an insured theater that had failed to obtain business interruption coverage arising either from damage to off-site property or loss of ingress/egress to its theater. It held that the theater’s inaccessibility to the public caused by street closure and the resulting loss of income was not covered under such circumstances. In keeping with Roundabout, the Social Life court appeared to conclude that—even if it had credited loss of use of business premises—in the absence of proof of physical damage to those premises, a preliminary injunction awarding coverage could not be granted. Before the court could enter the written opinion it had alluded to in the oral argument, however, the plaintiff first quickly filed an interlocutory appeal to the Second Circuit, and then almost immediately voluntarily dismissed its claim without prejudice. Thus, it appears that the S.D.N.Y. court’s full analysis of the policyholder’s application for preliminary injunction will never be issued. Minute Entry on Hearing Denying Plaintiff’s Preliminary Injunction, Social Life Magazine v. Sentinel Ins. Co., No. 1:20-cv-03311-VEC (S.D.N.Y. May 14, 2020).
    

Efforts to Consolidate COVID-19 Coverage Litigation

• In re COVID-19 Bus. Interruption Ins. Coverage Litig.: As noted above, and as we discussed in an earlier client alert, a large number of policyholders, nearly all small or medium-sized businesses represented in the main by class action plaintiffs’ counsel, requested the federal JPML to centralize all federal COVID-insurance cases in a coordinated proceeding in a single court pursuant to the Multidistrict Litigation Act, 28 U.S.C. § 1407. Insurance industry participants, joined by various amici curiae, argued against the institution of any MDL.[2] The JPML heard oral argument on July 30, and on August 12 denied two overall consolidation motions, ruling that “industry-wide centralization … will not serve the convenience of the parties and witnesses or further the just and efficient conduct of this litigation,” because the core issues “share only a superficial commonality” and because there were “very few common questions of fact, which are outweighed by the substantial convenience and efficiency challenges posed by managing a litigation involving the entire insurance industry.” The JPML also rejected single state-specific MDLs for similar reasons. With regard to insurer-specific MDLs, on the other hand, the JPML seemed more receptive to the petitions, but declined to create such an MDL on the record before it, which was limited to proposals that were made midway through the briefing, and for which no insurer-specific MDL motion had been made. In fact, the JPML directed the parties to show cause why actions against four insurer groups—Lloyd’s, Cincinnati, Hartford, and Society Insurance (but not other insurers)—should not be centralized. The JPML will consider arguments regarding these four proposed insurer-specific MDLs at its next hearing session on September 24, 2020. Order Denying Transfer and Directing Issuance of Show Cause Orders, In re COVID-19 Bus. Interruption Ins. Coverage Litig., No. 2942 (J.P.M.L. Aug. 12, 2020), ECF No. 772.
• Erie Ins. Exch. Litigation: In a purely procedural ruling, on July 23, a Pennsylvania state court granted a joint plaintiffs’ motion to coordinate four actions pending in three different Pennsylvania counties against a single insurance company, Erie Insurance Exchange, and ordered the actions consolidated into one state court proceeding in Pittsburgh. The consolidation order also required Erie to notify the court of any other action against it in Pennsylvania state court concerning its denial of business interruption coverage—so that they too can be considered for transfer to the Allegheny County court. In such cases, the court will consider policyholders’ objections to consolidation and coordination with the original four actions. As of our writing, sixteen such actions have been identified, many of them small businesses, and policyholders constituting the plaintiffs in five of those actions have filed objections, generally on the grounds that coverage disputes are centered on the specific facts of each case that, accordingly, coordination would not result in either an efficient or fair method of adjudicating their claims and determining damages. Order Granting Joint Motion for Coordination, Tambellini Inc. v. Erie Ins. Exch., No. GD-20-005137 (Pa. Ct. Comm. Pl. July 23, 2020), ECF No. 20.
    

COVID-19 Insurance Litigation Outside the United States

Several developments in COVID-19 insurance coverage litigation outside the U.S. merit special mention.

• In the U.K., the insurance regulator, the Financial Conduct Authority (“FCA”), has seized upon a rarely-used, distinctively British statute in order to institute litigation against insurers, primarily for the benefit of small U.K. businesses, to resolve whether a variety of representative policy wordings cover coronavirus-related claims under certain hypothetical factual scenarios. Trial was held during the last half of July and completed on July 30, 2020. A decision is anticipated in mid-September. Because some U.S. policy forms use similar wordings or raise factual issues similar to those in the FCA proceeding, and because many of our clients have coverage issued under U.K. forms and subject to U.K. law, we are following this proceeding closely. Our recent alert explaining the FCA proceeding may be found here.

In France, Germany, and South Africa, courts have recently ruled in policyholders’ favor on COVID-19-related coverage claims.

• In France, a Paris court ordered AXA to pay a restaurant's business interruption losses after the government ordered it to close to slow the spread of COVID-19. The French court dismissed AXA’s argument that general events, such as pandemics, cannot be insured, and stated that AXA should have explicitly excluded that risk if that had been AXA’s intent. Although AXA originally vowed to appeal the ruling, it is reported to have subsequently agreed to pay claims for the bulk of restaurant owners with similar policies in France.
• In Germany, a regional court in Mannheim held that local ordinances prohibiting hotels from providing accommodations to tourists amounted to a de facto closure of the hotels, given that business travel had already been severely curtailed by work-from-home requirements and conference cancellations. The court indicated that resulting damages could be covered under coverage for “notifiable diseases”—i.e., diseases that are subject to mandatory reporting to public health authorities.
• In South Africa, a Cape Town court issued an order declaring that an insurer was liable to indemnify a café for business interruption losses stemming from the pandemic and an ensuing lockdown order, citing a “notifiable disease” extension in the policy's business interruption cover.

These foreign court rulings are based on policy forms that appear to differ in some respects from most of those deployed in the U.S. Nonetheless, the rulings provide an early and resounding indication that the first-moving foreign courts are prepared to award coverage to policyholders for COVID-19 losses, and that not all courts are prepared to agree with the predominant view in the global insurance industry that pandemic losses were not meant to be and accordingly are not insured.

In addition to lawsuits, legislation potentially affecting coverage for COVID-19-related business interruption losses is currently under consideration in Congress and in several states. We describe here some highlights of that process.

In the U.S. Congress, four bills have been introduced and referred to the House Committee on Financial Services: HR 7011 (the “Pandemic Risk Insurance Act” or PRIA), HR 6494 (the “Business Interruption Insurance Coverage Act of 2020”), HR 6497 (the “Never Again Small Business Protection Act of 2020”), and HR 7412 (the “Business Interruption Relief Act of 2020”). Each would create a voluntary scheme whereby insurers would pay certain COVID-19 business losses experienced by small businesses in exchange for a reinsurance-like “backstop,” funded by the U.S. Treasury (which under some bills would be funded by policyholder premium payments). All four bills have been referred to the House Committee on Financial Services.

The effect of some state bills would be to void virus exclusions and force insurers to pay some business interruption claims under certain circumstances or for certain types of insureds (e.g. small businesses, as defined in the bill). None of the bills has yet passed.

In California, AB 1552, as amended, was referred to the Senate Committee on Insurance on July 2, 2020. Unlike some of the other state bills, California’s proposed legislation would not retroactively invalidate virus exclusions, but would instead require that “COVID-19 shall not be construed as a pollutant or contaminant for purposes of any exclusion within a commercial insurance policy unless viruses are expressly included in that exclusion policy language.” In addition, instead of dictating how to construe policy terms like “physical loss or damage to property,” the measure would create “rebuttable presumptions” that COVID-19 was present and caused physical damage, either to the insured’s property or, in cases involving civil authority or ingress/egress coverage, to other property. If passed, the California bill would take effect immediately as an “urgency statute” and would apply retroactively back to March 4, 2020.

The fate of these bills remains to be seen, but all, to be effective, will need to navigate the Contracts Clause of the U.S. Constitution (Art. IV, § 10, Clause 1), which prohibits states from passing any law “impairing the Obligation of Contracts.” This constitutional prohibition is not absolute, but any significant statutory changes to the interpretation of material provisions of insurance contracts are likely to be carefully reviewed by the courts.

Special thanks to Suzan Charlton, Jad Khazem, Joan Li, and Hakeem Rizk who helped research and draft this alert and the litigation tracker mentioned above.