The federal judge overseeing one of the two insurer-specific MDL cases ruled against Society Insurance last week in three bellwether cases. In In Re: Society Insurance Company COVID-19 Business Interruption Protection Insurance Litigation, MDL No. 2964 (N.D. Ill. Feb 22, 2021), Judge Chang rejected Society's argument that the insureds had not pleaded a viable claim for "direct physical loss or damage" to their property. The court ruled that the policy "does not say that the business suspension must be directly caused by a covered cause of loss; the text simply states that the business suspension must be "caused" by a covered cause of loss." Given that proximate cause is therefore the governing standard, Judge Chang ruled that a reasonable jury could find "that the novel coronavirus and the resulting pandemic proximately caused the business interruptions." Further, the court ruled that these limitations upon the insured's ability to use their businesses constituted a "physical loss" to the premises. The court did rule that there was no basis for "civil authority" coverage since these orders have not completely prohibited access to the premises. The court also ruled that there was no coverage under that section of these policies that provides coverage for operations suspended due to "contamination." Finally, the court rejected the argument of the Rising Dough plaintiffs that they were entitled to "sue and labor" coverage since this provision of the policy does not independently provide coverage but instead sets forth what the insured must do if there is coverage. The court declined to dismiss the insureds’ Section 155 claims declaring that those Illinois cases which have ruled that a bona fide a dispute as to the availability of coverage protects against bad faith only did so after an ultimate coverage determination and that "there was no reason to opine on whether an ultimate finding that there is no coverage always means that there could be no viable Section 155 claim." Since no discovery had taken place with respect to the claims at issue, the court ruled that any such ruling is premature at this stage of the litigation.
Judge Chang’s analysis was immediately adopted by another judge in the Northern District of Illinois. In Derek Scott Williams PLLC v. The Cincinnati Insurance Company, No. 20‑2806 (N.D. Ill. Feb. 28, 2021), Judge Kennelly (the judge that had been proposed to the JPMDL to oversee all federal COVID DJs) ruled that a Texas dentist could proceed with its suit for losses due to the pandemic. While granting Cincinnati's motion to dismiss with respect to plaintiff's claim under the policy's Civil Authority coverage, Judge Kennelly declared that the insured had pleaded sufficient facts to preclude the dismissal of its claim for business income for lost business income. Where Cincinnati had argued that the business income coverage required evidence of physical damage to the property, the District Court adopted Judge Change’s analysis that the claims in question could be construed as involving physical loss even if the property had not been physically damaged. Applying Texas law, the court ruled that "the court is persuaded that a reasonable fact finder could find that the term "physical loss is broad enough to cover, as Williams argues, a deprivation of the use of its business premises." The court also declined to adopt Cincinnati's argument that any such conclusion was contrary to the "period of restoration" language of this policy. The court found that "repair" did not necessarily involve physical damage "one need only consider common references to repairing a relationship or repairing one's health." "In a situation like the one at issue here, the "loss" would be "repaired" if and when orders by governmental authorities permitted full use of the property." The court disagreed with Cincinnati that the terms "loss" and "damage" mean the same thing and held that its arguments merely reflected "poor English" or ambiguous policy wordings. Nevertheless, the court did agree with Cincinnati that there was no Civil Authority coverage as there was no allegation that access to the area immediately surrounding the damaged property was prohibited by civil authority." The court found that the Texas shutdown order only prevented the debtors from conducting elective and non‑emergency procedures and had not completely shut down its business.
Judge Carney has ruled in Sunstone Hotel Investors Inc. v. Endurance American Specialty Insurance Company, No. 20‑2185 (C.D. Cal. Feb 26, 2021) that a Site Environmental Impairment Liability insurance policy may provide coverage for costs associated with the remediation of conditions at the Marriott Boston Long Wharf Hotel that resulted in a "super spreader" event in March 2020 at the outset of the COVID-19 pandemic. Endurance American had moved to dismiss, arguing that the insured's costs to date did not exceed the $100,000 self-insured retention necessary to trigger the policy's coverage for biological agent conditions (Coverage C). However, the District Court agreed with the insured that the applicable section of the policy was not Coverage C but rather Coverage D which insured business interruption losses and extra expenses that "directly result from Pollution Condition or biological agent conditions." The court declared the Coverage D was not subject to the $100,000.00 self-insured retention contained in Coverage C nor had the insured sought coverage under Coverage C. Further, the court found that the availability of coverage was consistent with the insured's reasonable expectations as "Coverage D contained strong language indicating that [business interruption] losses that directly result from viruses on Scheduled Locations will be covered. It seems to the Court that it would be a very rare situation for losses caused by a virus like the coronavirus resulted in Cleanup Costs over $100,000. If Defendant wish to make coverage for BI losses contingent on significant Cleanup Costs, it should have done so clearly and unambiguously. It did not."
The band formerly known as the Dixie Chicks has sued Lloyds in state court in Los Angeles, alleging in Tunashoe Tours, Inc. v. Certain Underwriters at Lloyd’s that W.R. Berkley Syndicate 1967 owes coverage for losses due to the cancellation of the Chicks’ 2020 tour to promote their Gaslighter release.
A year after an initial effort to legislatively compel retroactive property insurance coverage for Covid‑19 business interruption claims stalled in the Massachusetts legislature, new proposals have recently been submitted in the Senate and House. S.D. 1845 that was filed in the State senate on February 18 creates a "rebuttable presumption … that Covid‑19 was present on the insured's covered property and caused (i) physical loss of or (ii) physical damage to that Property resulting in business interruption lawsuits …" The legislation would further create a rebuttal presumption that the designation of a Public Health Emergency means that there has been direct physical lawsuit damage to property within one mile of the insured's covered premises so as to trigger civil authority coverage and/or that Covid‑19 was present on property other than property at the described premises. The legislation would declare a rebuttable presumption that "direct physical loss of her damage" to property shall include but not be limited to "a restriction of operations, partially or in full, including limiting customer density and permitting only distant customer interaction…" It further declares that "all exclusion for pollution shall be construed to include viruses, bacteria or micro-organisms and no exclusion for mold shall apply. Further, any exclusion for "virus, micro-organisms or bacteria" shall be construed as containing an exception for Covid‑19 viruses. The legislation is deemed to be applicable to all policies in effect during the current state of emergency but shall only apply to policies issued to insureds with 50 or fewer full-time employees in Massachusetts. These proposals also contained a "safe harbor" provision that immunizes policyholders against the consequences of having failed to file a timely notice of loss as required under the policies. Even insofar as a policyholder may have failed to file a claim within the one year period of time that is likely to expire this month, the legislation would create a new window of opportunity for policyholders to do so. A companion bill ((H.D. 3170) was submitted in the House of Representative by Representative Dillon Fernandes.
OTHER RULINGS OF CONSEQUENCE
DELAWARE D&O/Choice of Laws/Public Policy/Bad Faith
In a major victory for policyholders, the Delaware Supreme Court ruled this week in RSUI Ind. Co. v. David H. Murdock and Dole Food Company Inc., No. 154, 2020 (Del. Mar. 3, 2021) that an excess D&O policy that insured a Delaware corporation and its directors and officers should be interpreted under Delaware law notwithstanding the fact that the policy in question was negotiated and issued in California. The court emphasized that the subject matter of the policy was the liability of directors and officers in the corporation and that Delaware law was therefore highly relevant to the scope of this liability. Having found the Delaware law applied, the court refused to find the public policy precluded coverage for the underlying fraud claims. The court ruled that Delaware does not have a public policy against the insurability of losses occasioned by fraud so strong as to "vitiate the parties' freedom of contract." The court also rejected RSUI's argument that the trial court had erred in failing to allocate defense costs between covered and non-covered claims based on the "relative exposure" that they presented to the insured, ruling instead that the "larger settlement" rule should apply. Nevertheless, the Supreme Court declined to find that RSUI had acted in bad faith, declaring these were close issues that reflected a "bona fide" dispute.
KENTUCKY Intentional Acts Exclusion
The Kentucky Supreme Court has ruled that a homeowner’s exclusion for loss resulting from "any action by or at the direction of an insured person committed with the intent to cause a loss, or that could be reasonably expected to cause a loss" should be interpreted objectively and not, as the trial Court had, from the subjected view point of the insured's son who had set fire to the family home in an effort to commit suicide. However, the Supreme Court ruled in Foreman v. Auto Club Property-Casualty Ins. Co., 2018-SC-0618 (Ky. Feb. 18, 2021) that the case should be remanded so that the insureds might present evidence to establish that their son lacked adequate mental capacity at the time of the act to form an intent to injure. The Court declared that "intentional act exclusions are included in contracts to prevent the insured from manipulating the risk and thereby receiving a financial benefit from the consequences of the loss that was intended or expected by the insured. In contrast, though, an individual who lacks mental capacity to conform his conduct will not be influenced by the existence or non-existence of coverage." In this case, the Court ruled that the insured's intention may be proven "either by direct evidence of actual intent or it may be inferred by the nature of the act and the accompanying reasonable foreseeability of harm." The crucial question, according to the Court, was not whether the insured knew right from wrong, but that "he did not understand the nature and quality of his actions so that he was rendered unable to understand the physical nature of their consequences."
NEBRASKA Misrepresentations/Damage to Property Exclusion
The Nebraska Supreme Court has ruled in State Farm Fire and Casualty Company v. TFG Enterprises, 308 Neb. 460 (Neb. Feb. 19, 2021) that a homeowner’s insurer did not owe a defense to allegations that its insured had failed to disclose the presence of mold and other problems with the insured premises when he sold it to the plaintiff. While expressing skepticism that such claims involved an "occurrence," the court held that it need not resolve this issue in light of the fact that the policy clearly excluded claims for property damage to property that was owned in the care of or later sold by the insured. The court declared that its findings consistent with numerous out of state cases in which courts have found that insurance policies containing exclusions for property damage to property that is sold by the insured provide no liability coverage for lawsuits alleging misrepresentations in the sale of the property.
OHIO CGL/”Property Damage”
The Ohio Supreme Court heard argument on Thursday in Motorists Mutual Insurance Co. v. Ironics Inc. et al. (2020-0306). At issue is whether the Court of Appeals erred in ruling that Motorists Mutual had allegations that the insured’s inclusion of a defective component in its glass bottles that caused them to become brittle and break had regulated in “property damage.”
A federal district court in Dallas has ruled in RealPage, Inc. v. National Union Fire Insurance Company of Pittsburgh, PA, No. 19‑1350 (N.D. Tex. Feb. 24, 2021) that neither National Union or Beazley owed coverage for a phishing scheme that resulted in the insured transferring funds from five accounts to unauthorized third parties and granting summary judgement to RealPage's commercial prime insurers, Judge Boyle declared that there was no coverage under the primary or excess policy due to the fact that RealPage was not withholding these funds" at the time of the loss since they were within the possession of a third party payment processor, Stripe, Inc. The court ruled that RealPage's ability to direct the funds to third parties did not amount to "holding" them. In light of the fact that RealPage had not actually held the funds, the district court concluded that "its loss resulted from its decision to reimburse its clients" and that it had therefore not suffered any direct loss to property insured within the scope of its computer frauds or funds transfer fraud coverage.
OTHER DEVELOPMENTS OF NOTE
Inside the Insurance Industry
A new report from Fitch Ratings predicts that severe weather in the South and Southeast will result in record catastrophic losses for U.S. property insurers for the first quarter of 2021.
A new report from A.M., Best predicts that U.S. property and casualty insurers will see a small underwriting gain in 2020.
U.S. District Court Judge James Donato gave approval last Friday to a settlement in which Facebook agreed to pay $650 million to resolve allegations that it improperly used photo face-tagging and other biometric data without the permission of its users. The suit, which was original filed from Illinois in 2015, involves claims by nearly 2 million Facebook users.
The Illinois Supreme Court is scheduled to hear oral argument next week in West Bend Mutual Ins. Co. v. Krishna Schaumburg Tan Inc. At issue is whether a CGL policy provides coverage for claims that the insured violated the Illinois Biometric Information Privacy Act by its unauthorized sharing of a customer’s fingerprint data.
Noteworthy New Coverage Litigation
Nordstrom filed suit against its property insurers in federal court in Seattle this week, alleging in Nordstrom, Inc. v. XL Ins. America, Inc., No. 21-290 (W.D. Wash.) seeking a declaration that AIG, AXA, XL, CNA and Ironshore owe coverage for $25 million in lost revenues that the upscale retailers claims to have suffered due to civil unrest around the country following the death of George Floyd.