Feb 5 2021

Insurance Law – 2/5/2021


A.M. Best predicts that the U.K. High Court’s new ruling requiring property insurance for COVID-19 related business interruption claims will likely precipitate disputes between property insurers and their reinsurers.

The owners of the Wit Hotel in Chicago have brought suit in the Circuit Court for Cook County, alleging that Zurich-American has acted in bad faith in delaying payment for civil unrest losses arising out riots and demonstrations following the death of George Floyd. Plaintiffs allege in ECD-Great Street DE, LLC et al. v Zurich American Insurance Company, No. 2021-CH-00419 (Ill. Cir. Ct.) that Zurich has unreasonably used the pandemic as a means of avoiding $15 million in claimed business losses.

Plaintiffs in eight separate cases in which federal district courts in Pennsylvania ruled that commercial property policies did not cover business interruption losses have asked the U.S. Court of Appeals for the Third Circuit to consolidate their appeals into a separate proceeding, arguing that the cases involve the same policy wordings and the same “operative facts.” The motion also argued that consolidation would prevent not only inconsistent results but inconsistent rulings on issues to certify these issues to the Pennsylvania Supreme Court.

A federal district court in Chicago has ruled in The Bend Hotel Development Co, LLC v. The Cincinnati Ins Co., No. 20 C 4356 (N.D. Ill. Jan. 27, 2021) that a hotel in East Moline could not recover insurance for its business interruption losses since it had not alleged that the COVID-19 virus was inside its premises and that even if it could make such a claim, plaintiff could not show that the presence of virus particles had caused any physical alteration or structural degradation to the premises. In light of this finding, Judge Bucklo declared that it did not mater than Cincinnati Insurance “could have, but did not, explicitly disclaim losses caused by viral or bacterial contamination, as plaintiff observes….Plaintiff does not allege losses caused by viral contamination; and even if it did, the absence of such an exclusion does not inject ambiguity into the plain language of policy's express terms, which require direct physical loss or damage to the covered property.”

A Philadelphia judge has ruled that “physical loss” is not the same as the “loss of use” of the insured’s premises. In Frank Van’s Auto Tags v. Selective Ins. Co., No. 20-2740 (E.D. Jan. 27, 2021), Judge Pratter declared that there “must be some issue with the physical premises which precludes or impedes the business operations, thereby causing the losses complained-of.” Rather, the court ruled that “a government-imposed order which limits access to the covered premises-but has not been prompted by the condition of the physical structure” is not covered because causes at most an economic loss. In any event, Judge Pratter ruled that any coverage would have been eliminated by the policy’s Virus Exclusion, rejecting the insured’s contention that the exclusion was ambiguous or otherwise inapplicable to the policy’s Civil Authority coverage. As with the Eastern District’s recent ruling in Human Resources, however, Judge Pratter left the door open for the insured to amend its pleadings to claim coverage on the basis of representations that might have generated a reasonable expectation of coverage.

Covington & Burling seems to be the only law firm that is winning for policyholders. In Goodwill Industries of Orange County, CA v. Philadelphia Ins. Co., No. 30-2020-01169032 (Cal. Super. Jan. 28, 2021), a Superior Court judge denied Philadelphia’s demurrer, ruling Goodwill had alleged sufficient facts to support a claim for “direct physical loss” in light of allegations that “the coronavirus and COVID-19 caused direct physical loss and damages to its property. The Complaint makes the following specific factual allegations: coronavirus and COVID-19 are contained in respiratory droplets called aerosols that stay on surfaces and in the air for up to a month, physically alters the air and surfaces to which it attaches and causes them to be unsafe, deadly and dangerous.”


FIFTH CIRCUIT    Cyber/”Computer Fraud” Coverage (MS)

The Fifth Circuit has ruled that “computer fraud” coverage in a commercial crime policy did not apply to a scam in which the insured was tricked into wiring a million dollars to an offshore fraudster. In Mississippi Silicon Holdings LLC v. AXIS Ins. Co., No. 20-60215 (5TH Cir. Feb. 4, 2021), the court ruled that the policy’s Computer Transfer Fraud only covers losses resulting from Computer Transfer Fraud that “causes the transfer . . . of Covered Property from [the Insured’s account] to a[n] . . . account beyond the Insured Entity’s control, without the Insured Entity’s knowledge or consent” and therefore did not apply here where three of the insured’s employees authorized the funds transfer. The court also contrasted the limitations in the Computer Transfer Fraud language with the broader coverage provided by the policy for Social Engineering Fraud.

FIFTH CIRCUIT     CGL/”Employee Exclusion” (MS)

The Fifth Circuit has ruled in Shelter Mut. Ins. Co. v. Double J Timber, No. 19-60421 (5th Cir. Feb. 4, 2021) that an “employee exclusion” precluded coverage for a wrongful death claim arising out of the insured’s tree cutting activities. In affirming the Mississippi District Court’s ruling that the decedent was an employee and not just an independent contractor, the Court of Appeals found the worker met all of Mississippi’s criteria for being an employee, including the named insured’s right to control his work; the fact that the decedent was a foreman for the insured and not in a distinct occupation; and that the insured supplied all of the employee’s tools.

NINTH CIRCUIT      Anti-SLAPP Litigation (CA)

The Ninth Circuit has ruled in RLI Ins. Co. v. Langan Engineering, Environmental, Survey & Architecture, No. 19-17545 (9th Cir. Jan. 25, 2019) that a California District Court did not err in denying RLI’s motion to strike Langan Engineering Company’s (Langan) bad faith counterclaim pursuant to California’s anti-SLAPP statute, Cal. Civ. Pro. § 425.16, in its suit against Langan for rescission of insurance contracts and recoupment. While disagreeing with Langan that the denial of a plaintiff’s anti-SLAPP motion—as opposed to a defendant’s anti-SLAPP motion—is not immediately appealable as a collateral order, the court nonetheless ruled that although Langan’s bad faith counterclaim referenced RLI’s lawsuit, it was not “based on” RLI’s protected activity of filing suit and was therefore not subject to Section 425.16.

ILLINOIS     “Occurrence”/Extrinsic Facts/Duty to Defend

The Appellate Court has ruled that allegations that the insured took hundreds of planks of knotty pine wood, a Dutch door, a hand sink, four windows and [a] glass door knowingly belonging to the [claimants] without [claimants’] consent” and otherwise converted the plaintiff’s property did not set forth an “occurrence” under a homeowner’s policy. In Pekin Ins. Co. v. McKeown Classic Homes, Inc., 2020 IL App (1st) 190631 (Ill. App. 2020), the First District refused to find that the insured’s contention that the lumber was taken by mistake by a subcontractor was not a basis for finding a duty to defend since this allegation was contained in the insured’s response to Pekin’s coverage suit and not in the underlying suit.


Inside the Insurance Industry

Aon has reported $3 billion in fourth-quarter revenue, a 2.8% increase over 2019.

Moody’s reports that the uptick in ransomware claims is increasing the cost of cyber-insurance.

The New York Department of Insurance has issued Insurance Circular Letter No. 2 (2021) outlining best practices for insurers writing cyber-policies in New York. The Circular recommends, among other things, that insurers develop internal stress standards to protect against the risk of cyber-exposure. It states “To foster the growth of a robust cyber insurance market that maintains the financial stability of insurers and protects insureds, we have created a Cyber Insurance Risk Framework that outlines best practices for managing cyber insurance risk (the “Framework”). The Framework is based on our extensive consultation with industry, cybersecurity experts, and other stakeholders. The Framework applies to all authorized property/casualty insurers that write cyber insurance. However, property/casualty insurers that do not write cyber insurance should still evaluate their exposure to “silent risk” and take appropriate steps to reduce that exposure.”

Upcoming Pandemic Webinar

The American College of Coverage Counsel and the Seton Hall University School of Law are presenting a free webinar on February 16 from 3-4:30 p.m. To register, click on this link.

I. Introduction: (Dean Kathleen Boozang)

II. Evolution of Pandemic Insurance Disputes and Suits
Michael Aylward (Morrison Mahoney-Boston)

Since the first DJ was filed on March 16, 2020, nearly 2000 individual suits and class actions have been filed across the United States. Mr. Aylward will track the evolving form that these suits have taken and the trends that have emerged in the dozens of cases decided since Labor Day.

III. Business Interruption Disputes

A. Do Pandemic Claims Involve A “Direct Physical Loss”?

Sheri Pastor (McCarter English—Newark, NJ)
Greg Varga (Robinson & Cole—Hartford, CT)

Much of the early coverage litigation has focused on whether insureds can establish “direct physical loss of or damage” to their property to obtain coverage for pandemic-related Business Income losses. Similar issues have also arisen with respect to Civil Authority and Dependent Property coverage claims, although each also present its own issues. What arguments have the parties raised to date and how have courts responded?

B. Will Virus or Microorganism Exclusions Prevail?

Joyce Wang (Carlson Calladine Peterson—San Francisco, CA)
Lorie Masters (Junton Andrews Kurth—Washington,, D.C.)

“Virus” exclusions have also been a prominent part of the recent coverage rulings. Will policyholders be able to overcome virus exclusions by argument that the ISO/AAIS forms were not meant to address pandemics or that these losses are not actually caused by a virus. Are there other exclusions that insurers are asserting under policies that lack virus exclusions?

IV. Liability Insurance Disputes

So far, liability claims have been slow to emerge from this pandemic. As time passes (and the full economic consequences of the pandemic become clearer), claims may be brought against directors and officers that may trigger D&O coverage disputes. E&O disputes also seem likely to arise, particularly those involving health professionals who may have misdiagnosed or otherwise mishandled COVID-19 cases. Finally, the claims that are already being presented against employers will certainly result in dispute arising under Employment Practices Liability insurance policies.

A. Directors & Officers Insurance

Seth Lamden (Neil Gerber Eisenberg-Chicago, IL)
Michael Manire (Manire Galla Curley—New York, NY)

B. Employment Practices Insurance

Chris Mosley (Sherman & Howard—Denver, CO)
Laura Hanson (Meagher Geer—Minneapolis, MN)

V. Evolving Tactics and Litigation Strategies

David Goodwin (Covington & Burling—San Francisco, CA)
Laura Foggan (Crowell & Moring—Washington, D.C.)

First, insurers aggressively pursued motions to dismiss. Then, insureds pushed back with preemptive efforts to obtain summary judgment. What are the lessons that we can learn from the first year of this coverage litigation and what trends that are already evident? How do we foresee this litigation continuing to grow or evolve in 2021?

VI. Questions and Answers

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