Insurance Litigation Yields Diverse Results As COVID-19 Pandemic Stretches into the Second Year

Posted on April 7th, 2021 at 12:25 PM
Insurance Litigation Yields Diverse Results As COVID-19 Pandemic Stretches into the Second Year

From the Desk of Jim Eccleston at Eccleston Law LLC:

As the COVID-19 pandemic stretches into the second year, many businesses continue to struggle with lost revenue from past or current shutdown orders and reduced-capacity limitations. Businesses now are turning to their insurance coverage to find an avenue for recouping some of their losses. 

Insurance companies routinely have rejected claims for coverage, such as claims for economic losses resulting from the pandemic and government shutdown orders. As a result, litigation continues to rise as policyholders and insurers expect the courts to resolve coverage disputes. 

A key COVID-19 coverage issue in the litigation is whether the inability of a business to operate due to pandemic-related shutdown orders or other restrictions fully satisfies the threshold requirement in property policies that lost revenue resulting from a suspension of operations be caused by "direct physical loss of or damage to" property. Courts across the nation are issuing mixed decisions on the matter. Recent court cases have not been uniformly pro-policyholder, however. A split of sorts is beginning to form in courts across the country. 

In a landmark U.K. decision favoring the insured with business interruption coverage, the British Supreme Court has found in favor of the Financial Conduct Authority against eight insurers with 21 different policy wordings. Despite the variations in the coverage language of the policies before it, the court ruled that coverage exists for policyholders forced to close their businesses because of an infectious disease outbreak without showing physical damage to their property. The only requirement is that the insured's business is located in a specified radius of an outbreak, typically 25 miles. Because numerous London Market carriers write considerable insurance in the United States, the U.K. court's holding  likely will be vigorously used to bolster arguments in favor of coverage on both sides of the pond. 

Absent the U.K. decision, United States policyholders are beginning to gain some traction. In multidistrict litigation (MDL) in federal court in the Northern District of Illinois, a judge ruled in favor of policyholders in three consolidated cases against one insurance company. The three sets of plaintiffs included restaurants, bars, and theaters in Illinois, Wisconsin, Minnesota, and Tennessee. Each insurance company had denied all coverage under their policies because "no tangible alteration to physical property" had taken place. The court was not persuaded by the insurer's interpretation of the policy language, noting that damage and loss are distinct concepts and holding that a jury could find that pandemic shutdowns and other restrictions could constitute a direct physical loss to the plaintiffs' property. 

The court permitted all three sets of policyholders to pursue claims under the lost business income provisions of their policies, and it also allowed two of the three to pursue bad-faith denial of coverage claims against the insurer. 

Another MDL is ongoing in the Western District of Pennsylvania, involving more than two dozen cases brought by policyholders against one insurance carrier. Efforts to consolidate policyholder cases in an industrywide docket have been unsuccessful, however, because of the diversity of insurers, policies, policy language, and applicable states' laws.

A New York state court has joined a growing number of other courts in finding that insurers are not responsible for business interruption losses. This case was brought by a chain of movie theaters, in which the insurers prevailed because the claimant could not prove direct physical damage to its premises. Similarly, a California federal court has joined other courts in finding that no coverage exists for COVID-19 losses claimed by a San Diego-based business because there was no direct physical damage to its premises, and a Georgia federal court found in favor of the insurer and against its insured on the very same issue.

Federal courts in New Jersey have issued several diverse decisions on the matter. For example, New Jersey federal courts have denied relief to a group of hotel owners and restaurant franchisees because they could not establish direct physical losses to their premises, permitted a putative class action brought by a chiropractic center to continue based on the same issue, and dismissed an action brought by a gymnasium because of a virus exclusion in its policy. 

Insurers have cited virus exclusions in denials of coverage; however, exclusions may not automatically support a denial of coverage. Courts in "proximate cause" states have found coverage for business operation losses based on government shutdown orders, ruling that such orders are the "proximate cause of the loss." Other courts in "concurrent cause" states have agreed with policyholders that any one of multiple causes could be the culprit. 

The diverse decisions from courts across the country are likely to continue litigation as it intensifies.

Tags: eccleston, eccleston law, covid, pandemic

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