Oct 8 2021

Insurance Law – 10/8/2021

PANDEMIC UPDATE

New Trial Court Opinions

Judge Bough, whose ruling in Studio 417 at the outset of the COVID BI litigation gave a surge of optimism to policyholders, has denied an insurer’s motion for summary judgment in K.C. Hopps, Ltd. v. The Cincinnati Ins. Co., No. 20-437 (W.D. Mo. Sept. 21, 2021) and ordered the case to trial. In denying Cincinnati’s motion, the District Court declared that whether Kansas or Missouri law applied, there remained a possibility that the presence of virus particles had physically contaminated the insured’s restaurants. In keeping with the Eighth Circuit’s recent opinion in Oral Surgeons, the court found that lost business income due to shut-down orders was not a basis for coverage but did not preclude the possibility that COVID virus particles had actually contaminated the insured’s property, which had not been pleaded in Oral Surgeons, Despite the absence of evidence confirming that presence of virus particles on these premises, the court found that expert testimony submitted on behalf of the insured created at least a factual issue precluding summary judgment on this point. The court also rejected Cincinnati’s argument that the restaurants had not suffered any actual damages, inasmuch as they had received pandemic relief grants from the federal government that exceeded their claimed lost income. The court found that the PPP funds were loans with specific conditions and not income. As a result, the court ordered a trial on the issue of whether virus particles physically contaminated the insured’s premises and what damages may have resulted from that contamination.

A federal district court has ruled in Packachoag Acres Day Care Center v. Philadelphia Ind. Ins. Co., No. 20-40083 (D. Mass. Sept. 24, 2021) that the COVID virus did not cause “direct physical loss” to the insured’s property. Further, Judge Hillman declared that the policy’s virus exclusion would apply anyway, holding that the insured’s regulatory estoppel argument was not supported by Massachusetts law.

Appellate Activity

The U.S. Court of Appeals for the Ninth Circuit, which presently has a full third of all pending federal COVID appeals, issued three rulings last week sustained trial court victories for insurers and rejecting policyholder arguments that “direct physical loss” encompasses loss of use or that virus exclusions may be avoided on the basis of “efficient proximate cause” or regulatory estoppel arguments.

In Mudpie, Inc. v. Travelers Casualty Insurance Company of America, No. 20‑16858 (9th Cir. Oct. 1, 2020), the court declared that in light of cases such as the California Court of Appeals ruling in MRI Healthcare, “direct physical loss” only occurs if "property had suffered a distinct, demonstrable physical alteration. It was not triggered merely because the property was no longer suitable for its intended purpose." The court declined to follow the federal district court's decision in Total Intermodal, which has been widely discussed in the federal district courts pending in California, observing that its job was to follow the guidance of state courts and the Total Intermodal was, in any event, not inconsistent with MRI Healthcare. In any event, the court held that any coverage that might otherwise have arisen was subject to the policy's virus exclusion rejecting the insured's argument that the COVID-19 virus was not the efficient cause of the insurance economic losses.

In another California case, the court held in Selane Products Inc. v. Continental Cas. Co., No. 21‑55123 (9th Cir. Oct. 1, 2021) that the inclusion of a microbe exclusion in the policy did not imply that damage from microbes fell within the policy’s insuring agreement. The court also sustained the California District Court's exclusion of various bits of extrinsic evidence submitted by the insured in opposition to Continental Casualty's motion to dismiss.

In Chattanooga Professional Baseball LLC v. National Casualty Company, No. 21‑17422 (9th Cir. Oct. 1, 2021) (unpublished), the court issued a memorandum opinion upholding an Arizona District Court's determination that business income losses suffered by minor league baseball teams were subject to a virus exclusion in the subject policies. In keeping with its analysis in Mudpie, the court held that the insureds in this case had failed to show that the need for governmental action or the failure of major league baseball to supply them with players existed for reasons independent of the pandemic. Finally, the court refused to avoid the virus exclusion on the basis of “efficient proximate cause” or regulatory estoppel. Of the ten states whose law was at issue, the court found that only West Virginia had adopted “regulatory estoppel and that even the West Virginia Supreme Court's decision in Joy Technologies, on which the insured's regulatory estoppel argument, hinged was distinguishable because the allegations presently being made by the insurers were not inconsistent with earlier statements to insurance regulators concerning the scope of this exclusion.

Insurers also prevailed in Santo’s Italian Café v. Acuity Ins. Co., No. 21-3068 (6th Cir. Sept. 22, 2021). The Sixth Circuit that the State of Ohio’s shut down orders did not result in “direct physical loss” to the insured’s restaurant. The court declared that : “The restaurant has not been tangibly destroyed, whether in part or in full. And the owner has not been tangibly or concretely deprived of any of it. It still owns the restaurant and everything inside the space. And it can still put every square foot of the premises to use, even if not for in-person dining use.” Describing “direct physical loss” as the “North Star” of the policy’s coverage provisions, the court held that “It pays little heed to these omnipresent words in the policy, if not erases them, to construe them to cover business losses generated by a statewide shut-down order.” Having concluded that there was no claim of “direct physical loss” at issue, the court declined to rule on the applicability of the virus and “ordinance or law” exclusions, although it suggested that the virus exclusion would preclude coverage even though there might be an issue with the “ordinance or law” exclusion.” The court concluded with these observations:

That leaves a hard reality about insurance. It is not a general safety net for all dangers. If risk is not having money when you need it, insurance is one answer to perilous events that could prompt a sudden drop in revenue. Fair pricing of insurance turns on correctly accounting for the likelihood of the occurrence of each defined peril and the cost of covering it. Efforts to push coverage beyond its terms creates a mismatch, an insurance product that covers something no one paid for and, worse, runs the risk of leaving insufficient funds to pay for perils that insureds did pay for. That is why courts must honor the coverage the parties did—and did not—provide for in their written contracts of insurance.

In light of its ruling in Santos, the Sixth Circuit issued a short opinion the following day vacating Henderson Road Restaurant Systems v. Zurich American Insurance Company, 2021 WL 168422 (N.D. Ohio January 19, 2021), one of the cases that policyholder have increasingly relied on in their briefing in these cases. In granting Zurich's petition for interlocutory review, the court found that there was a substantial difference of opinion as to the correctness of the District Court's opinion given its holding in Santos.

Meanwhile, the First Circuit heard argument this week in Legal Seafoods v. Strathmore Ins. Co., the first COVID case to be filed in New England and now the first to be argued on appeal. Arguing on behalf of the restaurant chain, which for years has lured diners with the slogan “If it isn’t fresh, it isn’t Legal,” Hunton Andrews’ Michael Levine urged the court to ignore contrary case law from around the country on the basis that the insureds in those cases had alleged that their losses were caused by governmental shutdown orders. Justice Singal challenged Levine aggressively on this issue, pointing out that the restaurants had continued to operate for some time, even after virus particles were alleged to be present.

Finally, the Supreme Judicial Court of Massachusetts, having recently exercised direct appellate review to consider Judge Sanders' ruling in Verveine, Inc. v. Strathmore Ins. Co.. has issued a request for amici to brief the meaning of "direct physical loss," the scope of civil authority coverage and the applicability of the policy's viruis exclusion.

Other Developments

Leading policyholder counsel continue their campaign to discredit statements in Section 148:46 in Couch on Insurance that many courts have recently relied on to support findings that “direct physical loss” requires actual physical injury to property.

The October 2021 issue of The New Jersey Lawyer features an article by MM’s Michael Aylward and Mariel Mercado-Guevara discussing the evolution of the COVID-19 BI coverage controversy in the Garden State.

OTHER CASES OF CONSEQUENCE

SIXTH CIRCUIT           D&O/Qui Tam (KY)

In a case arising under Kentucky law, the Sixth Circuit has ruled that a health services conglomerate was not entitled to D&O coverage for legal expenses incurred in responding to governmental subpoenas arising out of a sealed qui tam action. In Springstone, Inc. v. Hiscox Ins. Co., No. 20-6014 (6th Cir. Sept. 17, 2021), the Court of Appeals found that (1) the claim was filed six months prior to the inception of the Hiscox policy at issue and therefore did not meet the policy’s “claims made” requirements; (2) nor had the insured identified any specific individual that it was required to indemnify as required for Coverage B and (3) the policy excluded claims for non-monetary relief.

EIGHTH CIRCUIT           Household Member Exclusions/Public Policy (MN)

The Eighth Circuit has declined to invalidate “household members” exclusions in Minnesota. In Godfrey v. State Farm Fire & Cas. Co., No. 19 – 3731 (8th Cir. Aug. 24, 2021), the court held that a Minnesota District Court did not err in giving effect to household member exclusions in a case in which a woman made claims under homeowners and umbrella insurance policies for injuries suffered when she was thrown from the family speed boat. The court declined to find that such conclusions were contrary to Minnesota public policy or that it should erect a public policy to invalidate such exclusions where the Minnesota Supreme Court had declined to do so in the past. Finally, the court declined to certify this issue to the Minnesota Supreme Court declaring that it did "not present a close question of state law."

TENTH CIRCUIT           First Party/Appraisals (CO)

The U.S. Court of Appeals for the Tenth Circuit has ruled that an appraisal provision in a commercial property policy allowed the appraisers to determine whether a covered loss had occurred, not just the amount of the loss. In ruling that Travelers had erred in refusing to go forward with an appraisal of hail damage to the insured’s property unless the insured first agreed that the appraisal would not determine the cause of loss, the court declared in Bonbeck Parker LLC v. The Travelers Ind. Co. of America, No. 20-1192 (10th Cir. Oct. 1, 2021) that “the disputed policy provision allows either party to request an appraisal on “the amount of loss,” a phrase with an ordinary meaning in the insurance context that unambiguously encompasses causation disputes like the one here. And contrary to Travelers’ view, giving effect to this meaning aligns both with other related policy language and with the appraisal provision’s purpose of avoiding costly litigation.”

NORTH CAROLINA           Privacy/BIPA/Statutes Exclusion

A federal district court has ruled in Massachusetts Bay Ins. Co. v. Impact Fulfillment Services, Inc., No. 20-026 (M.D.N.C. Sept. 24, 2021) that liability insurers had no duty to cover a law suit in which the plaintiff alleged that the insured violated the Illinois Biometric Information Privacy Act by using their fingerprints as part of its payroll time-keeping procedures. In granting the insurers' Motion for Judgment on the Pleadings, Judge Osteen ruled that the BIPA claims were subject to an exclusion in the primary policy issued by Massachusetts Bay and the Hanover American umbrella policy for the violation of statues involving "recording and distribution of material or information." The court held that the principle of ejusdem generis allowed it to find that the principles underlying BIPA were similar to those guiding the Fair Credit Reporting Act, one of the statutes identified in the exclusion. The court also took note of Hartford Cas. Co. v. Greve, 2017 WL 5557669 (W.D.N.C. Nov. 17, 2017), in which another North Carolina court had applied this exclusion to alleged violations of the state’s Driver's Privacy Protection Act. In this case, Judge Osteen found that the language of the exclusion in barring losses arising out of the collection and dissemination of information is consonant with BIPA's prohibition against “collection and disclosure of biometric identifiers and biometric information." While acknowledging that the Illinois Supreme Court had reached a contrary conclusion in West Bend Mutual Insurance Company v. Krishna Schaumburg Tan, the court observed that the exclusion at issue in Krishna Schaumburg did not contain the third paragraph referencing the Federal Credit Reporting Act and declared that it was not obliged to follow Illinois law in light of North Carolina authority as exemplified by Greve.

OTHER DEVELOPMENTS OF NOTE

Inside the Insurance Industry

Arthur J. Gallagher Co. reports that there has been a significant jump in cyber premiums in recent weeks.

Swiss Re estimates that its losses from Hurricane Ida may exceed $750 million and that industry-wide carriers may owe as much as $30 billion.

Shannon Doherty, raven-haired actress who set hearts aflutter 3 decades ago when she starred as bad-girl Brenda Walsh in Beverly Hills 90210, received an accolade of a different sort from a Los Angeles jury last week in the form of a $6.3 million judgment against State Farm based upon the insurer's claimed bad faith in adjusting a 2018 claim for fire damage to her home in Malibu.

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