Feb 12 2021

Insurance Law – 2/12/2021


Legislative proposals to retroactively mandate insurance coverage for COVID-19 business interruption losses—a half-baked idea that flourished briefly in the first few months of the pandemic but had since largely disappeared—have resurfaced in recent weeks. In addition to SB 5351 in Washington that we discussed two weeks ago, legislation has also now been filed in New York, Oregon, Pennsylvania and Rhode Island.

A restauranteur’s opening brief was filed on February 4 in the U.S. Court of Appeals for the Ninth Circuit in Plan Check Downtown III LLC v. AmGuard Ins. Co, No. 20-56020. This Monday, the Ninth Circuit also accepted Travelers’ opposition brief in Mudpie Inc. v. Travelers Casualty Insurance Co. of America, No. 20-16858, arguing that Judge Tigar had property ruled that there was no “direct physical loss” and that a virus exclusion applies. The brief also argues that the issue should not be certified to the California Supreme Court, noting the Court’s recent refusal to accept a petition for direct appellate review by The Inns by the Sea.

ITT has become the latest large corporation to sue its property insurer for COVID-19 losses, seeking coverage in a Connecticut law suit against Factory Mutual.

In keeping with a developing trend among federal judges in Pennsylvania, Judge McHugh has ruled in i.2i. Optique LLC v. Valley Forge Ins. Co., No. 20‑3360 (E.D. Pa. Jan. 27, 2021) that it would be inappropriate for him to retain jurisdiction over a COVID-19 involving Arizona law in light of any clear Arizona case law construing the meaning of “direct physical loss” in the context of these claims.

A federal district court in Michigan has permitted a nail salon's COVID-19 business interruption claim to go forward based upon the possibility of "communicable disease" coverage under the policy notwithstanding his independent determination that other parts of the policy are excluded pursuant to the virus exclusion. In Salon XL Color & Design Group, LLC v. West Bend Mut. Ins. Co., No. 20-11719 (E.D. Mich. Feb. 4, 2021), Judge Cox ruled that the insured's claims for Business Income, Extra Expense and Civil Authority were excluded as involving loss or damage "caused by or resulting from any virus, bacteria or other microorganism that includes or is capable of inducing physical distress, illness or disease." The court ruled, however, that this exclusion did not apply to a separate coverage under the policy for a "communicable disease, business income and extra expense." Earlier, the court had concluded that Salon XL had plausibly alleged a claim for "direct physical loss" in light of allegations "that the COVID-19 particles have infected their property, exposed their staff and patrons, and therefore Salon XL 'has been unable to use its property for its intended purpose…'."

Chubb has sued the operator of 12 boutique hotels in state court in New York, alleging in Federal Ins. Co. v. BD Hotels that the insured premises did not suffer “direct physical loss.”

Planet Fitness alleges in a new law suit filed in the Philadelphia Court of Common Pleas that Affiliated FM owes coverage to it under various parts of its policy, including Communicable Disease coverage. The suit argues that the fitness center had a reasonable expectation of coverage for COVID-19 losses, since Affiliated FM chose not to add a virus exclusion to the policy. The suit alleges that Affiliated FM acted in bad faith in denying its claim and has “adopted and devised a scheme to deny all policyholders’ claims arising from the COVID-19 pandemic, regardless of the facts giving rise to each policyholder’s loss” citing an April 2019 internal memo that senior claims personnel provided to handlers titled “Talking Points on the 2019 Novel Coronavirus” explaining how to avoid coverage for pandemic claims.

A Texas attorney learned the hard way this week to check whether small children have been messing with Zoom filters when he appeared as a talking cat in a court hearing that has since gone viral.


ARIZONA      Computer Fraud/”Occurrences”

The Arizona Court of Appeals has ruled in AIMS Insurance Program Managers Inc. v. National Fire Insurance Company of Hartford, No. 1 CA-CV 20-0032 (Ariz. App. Feb. 4, 2021) that a “spoofing” scheme that fooled the insured into issuing three wire transfers was covered under a “computer fraud” endorsement to its policy. The Court of Appeals ruled, however, that the trial court had erred in limiting coverage to a single $10,000 "per occurrence" limit. To the contrary, the court ruled that the three wire transfers were each a separate “occurrence” since did not involve a single "proximate, uninterrupted and continuing cause."

CALIFORNIA      Property Service Agreements/”Insurance”

The California Court of Appeal has ruled in Chu v. Old Republic Home Protection Company Inc., B302792 (Cal. App. Jan. 29, 2021) that a dispute involving a landlord's failure to provide proper heating, ventilation and air conditioning service to a tenant did not involve "insurance" so as to support a potential claim against the landlord for a breach of the implied covenant of good faith and fair dealing in violation of the unfair competition law (Business and Professional Code § 17200). To the contrary, the Court of Appeal declared that a home protection contract is not a "property insurance policy."

CALIFORNIA      CGL/”Impaired Property” Exclusion

A federal district court has ruled in Hallmark Specialty Ins. Co. v. Kamflex Conveyor Corp., No. 20-5563 (N.D. Cal. Feb. 5, 20201) that a customer’s claim that it cannot to use its new building because it contains the insured’s defective cookie packaging system is subject to the “impaired property” exclusion.

ILLINOIS      CGL/Auto Exclusion/”Loading or Unloading”

The Appellate Court has ruled that an auto exclusion in a general liability policy precluded any duty to defend a wrongful death claim arising out of the insured's alleged negligence in moving the plaintiff from his wheelchair to a special transport van, causing him to fall from his wheelchair and break his neck. In reversing the trial court's declaration of coverage, the Fourth District ruled in Country Mutual Ins. Co, v. Oehler's Home Care Inc., 2019 IL App (4th) 190080 (Ill. App. Ct. Feb. 4, 2021) that the incident clearly involved the "loading or unloading" of a vehicle and therefore involved an excluded use. The court distinguished Illinois cases in which courts have declined to exclude coverage where a vehicle is the mere "situs" of the underlying claimant's injuries, finding in this case that the injuries clearly arose out of the use of the vehicle as a vehicle. As a result, the court did not consider County Mutual's alternative argument that the trial court should have granted summary judgment on the basis of the "professional services" exclusion in its policy.

MINNESOTA      Cyber/”Property Damage”’/”Loss of Use”

A federal district court has ruled that a retailer is not entitled to CGL coverage for suits brought against it by credit card companies following a computer hack that exposed confidential financial data. In Target Company v. ACE-American Ins. Co., No. 19-2916 (D. Minn. Feb. 8, 2021), Judge Wright ruled that Target has not satisfied its burden to demonstrate that the Data Breach resulted in Target’s legal obligation to pay damages because of the “loss of use” of “tangible property that is not physically injured.” Despite Target’s contention that the Eighth Circuit’s 2010 opinion in Eyeblaster had construed “loss of use” in a manner that would require coverage for this data breach, the District Court distinguished this case, as involving ACE’s indemnity duties and not the duty to defend, and found that the insured’s settlement reflects the lost value of the credit cards issued by the plaintiff banks, not their lost use. In this case, the court ruled that “Target has not established a connection between the damages incurred for settling claims related to replacing the payment cards and the value of the use of those cards, either to the payment-card holders or issuers… For this reason, the connection between the damages claimed and the loss of use of the payment cards is insufficiently direct and, therefore, the damages claimed are not loss-of-use damages covered under the Policies.”

MISSOURI      Choice of Laws/Bad Faith

It has recently come to light that a federal district court ruled last year in Maritz Corp. v. Certain Underwriters at Lloyds No. 18-85 (E.D. Mo. Nov. 30, 2020) that a choice of law clause in a commercial property policy issued by Lloyd’s requiring that all policy disputes be determined in accordance with New York law did not prevent an aggrieved Missouri insured from pursuing a claim for vexatious refusal to pay under Mo. Rev. Stat. § 375.420. The District Court rejected the insured’s contention that its vexatious refusal claim is not a “dispute arising out of [the] Insurance” policies. Nevertheless, the court ruled that the Missouri “vexations refusal” statute reflected a fundamental public policy of Missouri and is therefore exempt from such choice of law clauses in light of the Missouri Supreme Court’s earlier declaration that “a state may not be required to enforce in its own courts the terms of an insurance policy normally subject to the law of another state where such enforcement will conflict with the public policy of the state of the forum.’”


Inside the Insurance Industry

A new report issued by Verisk Analytics and the APCIA estimates that the U.S. property-casualty insurance industry's net income dropped 27.5% to $35.1 billion in the first nine months of 2020. The report concludes that these losses were largely due to $57 billion in catastrophe losses and the COVID-19 pandemic.

Arch Capital reported this week that its 2020 Fourth Quarter net income was $533 million up 68.7% over 2019.

Pending the outcome of the European Union’s anti-trust review of their proposed merger, executives of Aon and Willis Towers Watson are confident that their union will be completed by mid-2021. Meanwhile, Reuters reported this week that the EU has suspended its investigation until it receives additional data that it has requested.

Cyber Update

Here’s the latest MM Cybersecurity Newsletter.

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 here.

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?

The webinar is free by you must pre-register. For more information about the program or to register, click here.

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