Advisen

COVID-19 Insurance Coverage Litigation Continues to Mount

By Gfeller Laurie, LLC

The following is an overview from law firm Gfeller Laurie. It is republished here with permission. This is Part II of a two-part post. Find Part I here.

The pace of new COVID-19 coverage litigation filings has increased since our last report. Most cases involve business interruption claims under property policies, typically with civil authority coverage. Most do not feature virus exclusions, with the notable exception of the Proper Ventures case, discussed below. Our report will not address all new cases, nor will it describe every detail of each case analyzed. Instead, we will address the most relevant and notable cases, identifying the distinctive core allegations, arguments and defenses presented as the landscape takes shape.

SCGM, Inc. d/b/a/ Star Cinema Grill, et al. v. Certain Underwriters at Lloyd’s, Case No. 4:20-cv-01199 (U.S.D.C., S.D. Tx., Houston Div., filed April 3, 2020). A chain of movie theaters and a restaurant seek business interruption coverage under a Lloyd’s “Pandemic Event Endorsement.”  The endorsement provides coverage for twenty-five specific pathogens and “their mutations, or variations.”  The list includes “Severe Acute Respiratory Syndrome-associated Coronavirus (SARS-CoV) disease.”  The complaint purports to draw a connection between this pathogen and COVID-19, including allegations that the first identified strain of the SARS coronavirus, identified as “SARS-CoV” a/k/a “SARS-CoV-1,” originated in “a meat market in China through the intermediary of civets (small mammals) to cave-dwelling bats,” describing civets as creatures that feed on bats and that are sold for meat in Chinese markets. The complaint further alleges that the International Committee of the Taxonomy of Viruses has formally recognized the current coronavirus as a variation of SARS-CoV-1, designating it as SARS-CoV-2 and concluding that SARS-CoV-2 is the causative virus for the COVID-19 disease. The complaint claims that the World Health Organization, the Center for Disease Control and the scientific community at large agree with this conclusion.

The complaint alleges the plaintiffs were required to cease operations as the result of local orders and by a Public Health Disaster Declaration and Executive Order issued by the Governor of Texas. Plaintiff’s broker provided notice of the claim to the appointed agent for Lloyd’s. The agent responded, “as a reminder” the COVID-19 was not covered under the endorsement because “it is not a named disease on that endorsement,” but to date, plaintiffs have not yet received a formal denial of coverage. The complaint includes claims for declaratory judgment of coverage, anticipatory breach of contract, breach of the duty of good faith and fair dealing, gross negligence and/or malice and attorney’s fees and costs. It alleges “on information and belief, Lloyd’s denial of coverage was also based on an internal, high-level directive to automatically deny all pandemic-related business-interruption claims” (emphasis added).

Big Onion Tavern Group, LLC, et al. v. Society Ins., Inc., Case No. 20-cv-02005 (U.S.D.C., E.D. Ill., filed March 27, 2020). Plaintiffs are owners and operators of restaurants and movie theaters in the Greater Chicago area who allege they were forced to cease operations by two Closure Orders issued by the State of Illinois. They seek business interruption coverage under all-risk commercial property policies that include a standard civil authority clause but that do not include virus or pandemic exclusions. Their complaint alleges that other insurers’ policies do include such exclusions and thus, plaintiffs reasonably could have expected such coverage. Plaintiffs claim that “Society Insurance has issued blanket denials for any losses related to the Closure Orders – often within hours of receiving  claims – without first conducting any meaningful coverage investigation, let alone a ‘reasonable investigation based upon all available information’ as required under Illinois law.”  They allege that before many plaintiffs had submitted their claims, the CEO of Society Insurance issued a memorandum to its “Agency Partners” stating that its policies would likely not provide coverage for government-imposed shutdown. And in an inflammatory accusation, plaintiffs allege, “based on information and belief, Society Insurance directed its insurance agents…to make sham claim notifications…even before claims were submitted, as part of its plan to discourage claims notifications.”

In one of its denial letters (attached to the complaint), Society Insurance explained its position is that because there was no direct physical loss, there was no covered cause of loss. Society Insurance further explained that it follows that there is no coverage under the civil authority coverage due to lack of a covered cause of loss and further, that there was no coverage because access to the businesses was not prohibited because of damage to premises other than the plaintiffs’ premises. It also denied coverage under the contamination and spoliation coverages.

On the main point of physical loss or damage, plaintiffs allege that Illinois Courts have consistently held that the presence of a dangerous substance in a property constitutes physical damage or loss. And referring to the existence of virus exclusions in other policies, they allege that “if a virus could never result in physical loss to property, there would be no need for such an exclusion.” 

Plaintiffs seek a declaratory judgment of coverage, including a declaration that Society Insurance has waived any right “to assert defenses or otherwise seek to bar or limit coverage…by issuing blanket coverage denials without conducting a claim investigation.”  Plaintiffs also assert claims for breach of contract, statutory penalties for bad faith denial of insurance, and attorneys’ fees.

Mace Marine, Inc., d/b/a/ Conch Republic Divers v. Tokio Marine Specialty Ins. Co., (Cir. Ct. Fla, 16th Judicial Cir., filed April 6, 2020). Plaintiff is a scuba and dive shop located in the Florida Keys. It suspended operations following an Emergency Directive by Monroe County, which closed the county to tourists and leisure visitors and an Executive Order from the Florida Governor restricting public access to non-essential businesses. Plaintiff seeks business interruption coverage under an all-risk insurance policy covering direct physical loss or damage. The policy includes civil authority coverage. Plaintiff submitted a claim for coverage, which was denied, based on lack of direct physical damage and that the civil authority coverage requires that access is prevented because of direct physical damage off the insured’s premises. For many factual allegations, plaintiff relies on WHO and CDC reports about COVID-19 and its transmission. It seeks a declaratory judgment that a pandemic is a covered cause of loss on the ground that the inability to use property because of “the risk of contamination from COVID-19 is tantamount to direct physical loss of that property,” and that “acts of civil authority are tantamount to a direct physical loss or damage to property.”  Plaintiff also asserts clams for breach of contract, statutory bad faith and attorneys’ fees.

Proper Ventures, LLC d/b/a Proper Twenty-One v. Seneca Ins. Co., Inc., et al., Case No. [], (Super. Ct. D.C., filed April 8, 2020.)  The plaintiff sports bar seeks business interruption coverage under a commercial property policy after having to suspend operations following an Order of the Mayor of the District of Columbia prohibiting table seating at any restaurant or tavern. The insurer has denied coverage. The policy requires “direct physical loss,” and includes a standard civil authority clause. The usual claims and defenses around these provisions were invoked. In addition, the policy contains an “Exclusion of Loss Due to Virus or Bacteria,” which provides: “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness, or disease.”  In its denial, Seneca addressed this by saying that the claim “entirely arises out of such a virus.”  Plaintiff alleges that its loss “was not ‘caused by or resulting from’ a virus as its loss occurred as a result of the Mayor’s Order.”  Plaintiff seeks a declaratory judgment, damages for breach of contract, and attorneys’ fees.

Indiana Repertory Theatre, Inc. v. The Cincinnati Cas. Co., Case No. 49D01-2004-PL-013137 (Ia. Super. Ct., Marion County, filed April 3, 2020). Plaintiff is a nonprofit professional theatre company that canceled its season after city and county officials prohibited gatherings of more than 50 people. It seeks business interruption coverage under an all-risk commercial property policy, with no virus exclusion. Plaintiff presented a claim and received a reservation of rights letter. The letter stressed that there must be direct physical loss or damage, which it characterized as “a deformation, permanent change in physical appearance or other manifestation of a physical effect.”  Plaintiff asserts that this descriptive definition appears nowhere in the policy. It asserts that “the complete loss of use … fits easily within a ‘direct physical loss.’” Plaintiff seeks declaratory relief and attorneys’ fees.

Four More States Introduce Legislation Designed to Mandate Business Interruption Coverage for COVID-19 Related Losses While Alternative Approaches Also Advance

The State Legislatures of Louisiana, Pennsylvania, New York and South Carolina recently joined their counterparts in New Jersey, Ohio and Massachusetts in introducing legislation designed to mandate business interruption coverage for COVID-19 losses. The proposed legislation in Pennsylvania and New York largely tracks that proposed in New Jersey, Ohio and Massachusetts, but the proposals in Louisiana and South Carolina legislation take otherwise unique approaches. 

Contemporaneously, on March 31, 2020, a broad swath of business and industry policyholder groups, as well as major insurance trade associations, including the National Association of Mutual Insurance Companies (NAMIC), issued a joint letter to President Trump and Congressional leaders calling for establishment of a “COVID-19 Business and Employee Continuity and Recovery Fund” modeled after the 9/11 Victims Compensation Fund. They proposed that the Fund be financed by the federal government and administered under the authority of a special federal administrator, empowered to execute contracts with interested businesses. The requested relief would be designed to help businesses retain and rehire employees, maintain worker benefits, and meet operating expense obligations. Compensation under the proposed program would be distributed to eligible businesses according to a formula based on payroll, payroll support, operating expenses, and lost income of sick employees. In their letter, these groups urged that strong “anti-abuse provisions,” including audits and Special Inspector General oversight, be included.

At the same time, legislation reportedly is moving forward in Congress to create a Federal Pandemic Risk Reinsurance Program, in response to State’s legislative efforts to mandate business interruption coverage retroactively. The legislation, the Pandemic Risk Insurance Act of 2020, would develop a new reinsurance program in order to provide a “transparent system of shared public and private compensation for business interruption losses resulting from a pandemic or outbreak of communicative disease.”  In its current form, the legislation calls for the reinsurance program to be triggered when industry losses exceed $250 million and aggregate losses are capped at $500 billion annually, for insurers and the government. Participation in the program would be voluntary and those that elect to join the program would pay a premium for the reinsurance protection, which would be placed into a Pandemic Risk Reinsurance Fund that would be maintained by Treasury to pay insured losses and related administrative costs. The draft bill currently requires that participating insurers make coverage available under all of their business interruption policies.

Below is a brief summary of the newly introduced State legislation:

Louisiana

Both the Louisiana Senate and House introduced separate draft legislation on March 31, 2020. Unlike most States’ draft legislation, the Louisiana draft legislation does not create a fund for payment of COVID-19 claims, instead simply mandating that individual carriers pay up to policy limits for such claims under their issued policies. The Louisiana draft legislation contemplate carriers being reimbursed for those payments. Perhaps to make this pill less bitter, the Senate Bill calls for policies issued after August 1, 2020 to expressly list the exclusions that apply to the policies’ business interruption coverage and for the insured to execute a form expressly acknowledging those exclusions, thereby creating a rebuttable presumption that the insured has accepted the exclusions upon issuance of the policy.

The Louisiana Senate Bill

Senate Bill, SB 477, applies “to any property insurance covering any business interruption which occurs in Louisiana and involves a Louisiana business,” which policy is in force in Louisiana on or after March 11, 2020, and which insures “against loss or damage to property that includes the loss of use, loss of occupancy, or business interruption.”  The Bill calls for such policies to be construed to include coverage for “business interruption due to imminent threat posed by COVID-19 as provided in Proclamation Number 25 JBE 2020, declaring the existence of a statewide public health emergency.” The Bill dictates that the required coverage “shall indemnify the insured, subject to the limits of the policy, for any loss of business or business interruption for the duration of the declared state of emergency.”  Moreover, the Bill states the legislation will apply retroactively, to March 11, 2020, and will apply to losses incurred during the declared state of emergency.

As to the provisions mandating express notice of policy exclusions, the Senate Bill calls for the notice to be included in any insurance policy “covering business interruption delivered or issued for delivery in this state on and after August 1, 2020.”  The notice must list all exclusions contained in the policy, on a form prescribed by the commissioner of insurance. The insured or the insured’s legal representative must sign the form, and upon executing it, the form becomes a part of the policy, whether physically attached to it or not, and remains valid “for the life of the policy.” A new form is not required when the policy is renewed, reinstated, substituted or amended for the same named insured by the same insurer or any of its affiliates. Most significantly, the executed form “creates a rebuttable presumption that the insured knowingly contracted for coverage with the stated exclusions.” 

he Louisiana House Bill

Louisiana House Bill, HB 858, employs similar language as to require coverage for business interruption losses, but limits the scope of the legislation to “small” business insureds (fewer than 100 full time employees) and to policies in effect on the effective date of the Act. Notwithstanding the House Bill’s stated application only to policies in effect on the effective date of the Act, the House Bill also calls for the mandated coverage provisions to apply retroactively to March 11, 2020 as to such policies. In contrast, the Senate Bill states it applies to all policies in force as of March 11, 2020. The House Bill otherwise extends the scope of losses to include not only those caused by the conditions identified by Emergency Proclamation Number 25 JBE 2020 but also in “the related supplemental proclamations concerning the coronavirus disease 2019 pandemic.”  The House Bill does not include the exclusion notice provisions contained in the Senate Bill. 

South Carolina

On April 8, 2020, the South Carolina State Senate introduced Senate Bill 1188, which, like the Louisiana legislation, takes a bit of an outlier approach in that it not only mandates loss of use and occupancy and business interruption coverage under the policies identified in the legislation, up to policy limits, but also expressly prohibits affected insurers from denying coverage based on specifically identified policy exclusion pertinent to the COVID-19 circumstances. Specifically, insurers are prohibited from denying coverage based on: (1) COVID-19 being a virus, even if the policy excludes losses resulting from viruses; (2) lack of physical damage to the insured’s property or to any other “relevant property;” or (3) orders issued by any civil authority, or acts or decisions of a governmental entity.

The draft legislation applies to policies issued to insureds with up to 150 full time employees in the State, in force on the effective date of the Act, or which become effective thereafter and prior to the date the Governor's state of emergency declaration expires. Like most other States’ draft legislation, the South Carolina legislation includes procedures by which compliant insurers may seek reimbursement from the State, funded through annual assessments against all licensed domestic companies and foreign companies in proportion to their net premiums written and annuity considerations in the State.

Pennsylvania

Like New Jersey, Massachusetts and Ohio, Pennsylvania House Bill 2372 mandates that an insurance policy that insures against loss or damage to property including the loss of use and occupancy and business interruption, “shall be construed to include . . . business interruption due to global virus transmission or pandemic.”  The required coverage “shall indemnify the insured . . . for any loss of business or business interruption for the duration of the declaration of disaster emergency.”  The Bill applies to policies in force in Pennsylvania on March 6, 2020 (the date of the Proclamation of Disaster Emergency concerning the coronavirus pandemic) issued to insureds with fewer than 100 eligible employees in Pennsylvania. As in its sister States, the Pennsylvania draft Bill also allows compliant insurers to apply for reimbursement using funds collected from assessments charged against insurers calculated based on “net written premiums received by all insurers writing that property and casualty insurance within this Commonwealth during that same calendar year.”

New York

The New York draft legislation, New York Assembly Bill 1022, introduced on March 27, 2020, largely tracks verbatim Pennsylvania’s legislation, calling for property damage policies to be construed to cover business interruption losses incurred during the State’s declared state of emergency due to the COVID-19 pandemic, up to policy limits, for insureds with fewer than 100 employees, insured under policies that were in effect as of the date of the Act, but employing a retroactive effective date for the legislation of March 7, 2020. The New York legislation also calls for compliant insurers to apply to the superintendent of financial services for reimbursement of their business interruption coverage payments, using monies the superintendent collects from insurers based on net written premiums received in-State.

For more information, please contact the Gfeller Laurie LLP attorney with whom you regularly communicate, or one of our COVID-19 Coordinators, Robert Laurie ([email protected], 860-760-8405), Elizabeth Ahlstrand ([email protected], 860-760-8420), Vince Vitkowsky ([email protected], 212-653-8870), or Melicent Thompson ([email protected], 860-760-8446). 

Sincerely,

Gfeller Laurie LLP

The memorandum is for informational purposes only. It does not constitute the rendering of legal advice or opinions on specific facts or matters. The distribution of this memorandum to any person does not constitute the establishment of an attorney-client relationship.