Sep 3 2021

Insurance Law 9/3/2021

PANDEMIC UPDATE

Trial Court Decisions

A federal judge in Florida ruled last week in Sun Cuisine LLC v. Certain Underwriters at Lloyd’s, No. 20-21827 (S.D. Fla. Aug. 31, 2020) that a Miami restauranteur was not entitled to coverage for COVID business interruption losses as it had not pleaded a plausible claim for “direct physical loss.” Judge Gayles declared that the insured’s allegation that virus particles had altered the property from a satisfactory to an unsatisfactory did not create coverage, as the mere presence of virus particles did not cause physical damage nor did the fact that the insured was obliged to make some physical alterations to its restaurants during the pandemic cause physical loss or damage.

Judge Singhal ruled this week in Map Legacy, Inc. v. Zurich American Ins. Co., No. 20-60815 (S.D. Fla. Sept. 1, 2021) that issues remained as to whether a “microorganism” exclusion applied to the insured’s claim. Nevertheless, the court granted Zurich’s motion to dismiss without prejudice based on the absence of any allegation of “direct physical loss.”

Appellate Activity

Insurers are now 2-0 in the early appellate innings. Earlier this week, the Eleventh Circuit ruled in Gilreath Family & Cosmetic Dentistry, Inc. v. The Cincinnati Ins. Co., No. 21-11046 (11th Cir. Aug. 31, 2021) that "shelter in place" restrictions imposed by the State of Georgia following the outbreak of the pandemic in the Spring of 2020 did not result in "direct physical loss" to the insured's dental office. In keeping with state law, the court held that direct physical loss requires proof of "actual change" to the insured property that either makes the property "unsatisfactory for future use" or requires that repairs be made. The court noted that the insured, while restricted in its ability to conduct business, was still able to perform emergency dental procedures. Further, despite the insured's argument that the office was an enclosed space where viral particles might linger, the court observed that "we do not see how the presence of those particles would cause physical damage or loss to the property." For similar reasons, the Eighth Circuit affirmed the Georgia District Court's ruling that there was no basis for "civil authority" coverage.

New Litigation

Paramount Pictures has sued Chubb in the federal district court in Los Angeles, alleging in Paramount Pictures Corp. v. Federal Insurance Co., 21-CV-06975, that it is entitled to coverage for millions of dollars in additional costs due to pandemic-related delays in the production of the latest Mission Impossible movie.

OTHER CASES OF CONSEQUENCE

FIFTH CIRCUIT           D&O/”Legally Obligated to Pay” (TX)

The Fifth Circuit has ruled that a Texas District Court erred in ruling that a D&O insurer was relieved of any obligation to cover losses due to a cyber-attack because the statute of limitations for the claim had expired. Whereas the trial court had ruled that this was not a loss that the insured was "legally liable to pay", the Fifth Circuit ruled in HM International, LLC v. Twin City Fire Ins. Co., No. 20-20122 (5th Cir. Sept. 2, 2021) that this language does not require a judgment against the insured and can refer to a "contractual obligation to pay". In this case, the court ruled that the insured’s settlement of claims by a client that it negligently transferred funds to a fraudster "constitutes a Loss because it is an amount that HMI is legally liable – through contract – to pay to the Gibes as a result of the demand letter." The court ruled the fact that the Gibes had never filed their threatened lawsuit and that the limitations period had run did not change that conclusion, as the policy does not require that the party suing the insured win a judgment in order to obtain coverage. The Fifth Circuit separately rejected Twin City’s contention that any resulting coverage was excluded as involving Loss arising out of or related to "services for or on behalf of others for a fee." In this case, the court ruled that, although the insured provided wire transfers to customers as a matter of course, it did not always do so for a fee and that the insured had, therefore, presented sufficient facts to avoid summary judgment being entered in the District Court.

SIXTH CIRCUIT           Business Interruption (OH)

The Sixth Circuit has ruled in Hastings Mut. Ins. Co. v. Mengel Dairy Farms, LLC, No. 20-4090 (6th Cir. July 16, 2021) that reduced milk production suffered by a dairy farmer due to electric shocks to his cows did not trigger business interruption coverage since “loss of business income . . . due to the necessary suspension” of the insured’s operations only applied to a complete cessation of operations. In affirming the Ohio District Court’s entry of judgment for the insurer, the Court of Appeals predicted that the Ohio Supreme Court would adopt the common and ordinary meaning of “suspension” as a temporary but complete halt to something. The court declined to find that this interpretation was unreasonably narrow or rendered the coverage illusory. As the court concluded:

"Litigation has a way of transforming common-sense questions into impenetrable legal mazes. But in this case, for once, the issues are just as they seem. A business suspends its operations when it temporarily stops all business activity. Though the Mengels’ cows produced less milk, the Mengels never completely shut down their dairy farms. As a result, we affirm."

EIGHTH CIRCUIT           Bad Faith (MN)

The Eighth Circuit has affirmed a finding that a property insurer acted in bad faith in refusing to reimburse a homeowner for hailstorm damage to the insured residence, even though the loss included damage from an earlier hailstorm for which the insured had been paid by another insurer but had not yet repaired as of the time of the second storm. In affirming the lower court's award of attorney's fees pursuant to § 604.18, the court ruled in Selective Ins. Co. of South Carolina v. Sela, No. 20-2029 (8th Cir. Aug. 30, 2021) that Selective had lacked a reasonable basis for disputing the claim and had not acted as a "reasonable insurer" in its investigation and denial. The court ruled that the insurer had been "blinded by personal animosity" towards the insured and had relied on mistaken factual assumptions in refusing to pay the loss.

ILLINOIS           General Liability/”Professional Services” Exclusion

The Appellate Court has ruled in RLI Ins. Co. v. Thomas Engineering Group, LLC, 2021 IL App (1st) 191950) (Ill. App. Aug 26, 2021) that a trial court erred in granting judgment on the pleadings to the insurer of a highway engineer who was blamed for a multi-fatality car crash. Whereas the Circuit Court had ruled that these claims were subject to a "professional services" exclusion, the First District found that allegations that the insured was negligent in failing to post a flagman or in its shifting of lanes did not require "specialized knowledge, labor, skill or training" so as to constitute an excluded "professional service."

OTHER DEVELOPMENTS OF NOTE

Inside the Insurance Industry

AIR Worldwide predicts that insured losses from Hurricane Ida will be somewhere between $17 and $25 billion.

Sexual Abuse Update

USA Gymnastics is reportedly negotiating a $425 million settlement of claims arising out of sexual assaults committed over the years by team doctor Larry Nassar.

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