Apr 29 2022

Insurance Law - Week of April 29, 2022


When the history of the COVID legal wars is someday written, April 21-22 may well be marked as the beginning of the end or at least the end of the beginning. Last week, two state supreme courts, two intermediate appellate courts and several federal circuit joined the emerging consensus that such cases should not go forward. Notably, all of these opinions were unanimous—to date, there has not been a single dissenting opinion from state or federal courts of appeal.

In Verveine Corp. v. Strathmore Ins. Co., SJC-13172 (Mass. April 21, 2022), the Supreme Judicial Court of Massachusetts declared that "direct physical loss of or damage to property" requires some "distinct, demonstrable, physical alteration of the property." The court ruled that this conclusion was supported by both the language of the policy as well as other policy provisions such as the "period of restoration." Importantly, the court declared that this conclusion did not rest on whether a virus particle was present on the premises. The court also distinguished between the presence of particles that penetrate surfaces and cause lasting damage with cases involving the "evanescent presence of a harmful airborne substance that will quickly dissipate on its own or surface-level contamination that can be removed by simple cleaning and that does not physically alter or affect property." "While saturation, engraining or infiltration of a substance into the materials of a building or persistent pollution of premises requiring active remediation efforts is sufficient to constitute 'direct physical loss of or damage to property,' evanescent presence is not." Furthermore, the court declined to find that the presence of a virus exclusion in one policy and its absence in another implied a design that the other policy cover virus losses.

Verveine is likely to result in several favorable rulings from the U.S. Court of Appeals for the First Circuit, which had stayed consideration of numerous Massachusetts appeals pending the outcome of the SJC’s deliberations. Of the eleven federal circuits, only the D.C. Circuit and the First Circuit have yet to issue a COVID ruling to date.

In a pair of opinions, the Iowa Supreme Court ruled last week that COVID-19 does not result in "direct physical loss." In Wakonda Club v. Selective Insurance Company of America, No. 21-0374 (Iowa April 22, 2022), the state Supreme Court sustained a trial court's declaration that a Des Moines country club was not entitled to coverage, declaring that equating "loss of use" with “direct physical loss” would render the "physical" term in the policy superfluous. The court also declined to find coverage on the basis of the insured's claimed "reasonable expectations" declaring that "whether or not a layperson would understand the difference between 'loss' and 'damage,' there was no representation in this case that would have created an expectation on the part of the insured that it was insured for 'all risks' to their property. Relying on Wakonda, the court also issued a short opinion in Jesse's Embers, LLC d/b/a Jesse's Embers v. Western Agricultural Ins. Co. d/b/a Farm Bureau Financial Services, Case No. 21-0623 (Iowa April 22, 2022) declaring that more than mere loss of use was required to provide "direct physical loss" and that the insured could not recover on a theory of reasonable expectations where it had failed to make a threshold showing that there were any circumstances attributable to its insured that had fostered coverage expectations or that the policy was such that an ordinary layperson would misunderstand its coverage."

Citing the California Court of Appeal’s 2021 ruling in Inns by the Sea, the Ninth Circuit has affirmed a lower court’s ruling denying coverage to a group of strip clubs and “adult superstores.” In Rialto Pockets, Inc. v. Beazley Underwriting, Ltd., No. 21-55196 (9th Cir. April 20, 2022)(unpublished), the court ruled that mere loss of use of the insured’s facilities due to governmental stay-at-home did not cause “direct physical loss.”

Insurers also obtained two more wins in California’s intermediate appellate court last Friday. In sustaining a trial court’s demurrer without leave to amend for claims by one of California’s largest talent agencies, the Second District ruled in United Talent Agency v. Vigilant Ins. Co., B314242 (Cal. App. April 22, 2022) that “temporary loss of use of a property due to pandemic-related closure orders, without more, does not constitute direct physical loss.” In one of the first rulings to directly address the much-ballyhooed policyholder counter-attack on key language in the Couch on Insurance treatise that many courts have relied on to defeat these claims, the Court of Appeal reaffirmed Couch and distinguished older California cases such as Hughes as involving losses where “the risk was inextricably linked to the insured property.” The court also joined Inns by the Sea in finding that even if virus particles were present on the insured’s property, they were short-lived and easily eradicated and therefore could not have caused “direct physical loss.”

A day earlier, a separate division of the Second District ruled in Musso & Frank Grill, Inc. v. Mitsui Sumitomo Ins. Co., B310499 (Cal. April 21, 2022) that “loss” has the same meaning in an exclusion as it does in a policy’s insuring agreement and rejected the renowned L.A. eatery’s claimed reasonable expectation of coverage. The court ruled that coverage would, in any event, be negated by the policy’s virus exclusion. In a footnote, the Court of Appeal also took note of the devastating financial impact that requiring insurers to bear responsibility for these unanticipated risks would have on the insurance industry.

Insurers also obtained another favorable ruling in the Eighth Circuit last week. In Monday Restaurants v. Intrepid Ins. Co., No. 21-2462 (8th Cir., April 22, 2022.), the court held that in light of its 2005 opinion in Pentair and more recent rulings such as Oral Surgeons, the Missouri insureds in this case had failed to show that their property had suffered any "direct physical loss of or damage to property" as "neither business alleges COVID-19 was physically present on its premises or that anything physical happened to its property."

The Seventh Circuit heard argument last week in Windy City Limousine Company, LLC v. Cincinnati Financial Corp., No. 21-3296. The justice reportedly quizzed the insured’s counsel as to why they should reinstate his client’s claims, having only recently rejected similar claims in East Coast Entertainment of Durham LLC v. Houston Cas. Co., No. 21-2947 (7th Cir. April 12, 2022)


D.C. CIRCUIT           Reinsurance/Cut-Through Claims

The D.C. Circuit has ruled in Vantage Commodities Financial Services I, LLC v. Assumed Risk Transfer PCC, LLC, No. 21-703 (D.C. Cir., April 22, 2022) that an insured could not pursue “cut-through” claims against reinsurers and the Willis brokerage. In ruling that Vantage had no direct right of recovery against its captive insurer's reinsurers, the D.C. Circuit held that the reinsurers had not created a direct contractual relationship with Vantage by providing it with credit binders nor had they dealt directly with Vantage or, otherwise, treated Vantage as if it were directly insured by them. The court, likewise, rejected Vantage's effort to recover from various Willis brokers, holding that claims of negligence, professional negligence and damage and undertakings are barred in the District of Columbia by the "economic loss doctrine.’

CALIFORNIA           “Occurrence”/Lead

Only weeks after a federal district court ruled in McKesson that opioid claims against a product manufacturer alleged only intentional acts for which coverage is barred by Section 533, the California Court of Appeal has now ruled in Certain Underwriters at Lloyd's London v. Conagra Grocery Products Company, A160548 (Cal. App., April 19, 2022) but the same applies to a lead paint manufacturer. In Conagra, the First District rejected Conagra's argument that Section 533 applies to willful acts of "the insured" and should therefore not apply to it as the corporate successor of the original insured W.P. Fuller and Company Paint Manufacturer and not Conagra itself. The Court of Appeal distinguished between instances of vicarious liability, where California courts have declined to give effect to Section 533, and situations involving mergers or corporate acquisitions, where the corporation is unnoticed that it is purchasing the liabilities of the acquired entity. The court therefore declined to accept Conagra's argument that the underlying rationale of Section 533 to deter willful misconduct should not be implicated unless the insured was personally at fault. The court also rejected Conagra's argument that the promotional efforts for which Fuller had been held liable were too attenuated to satisfy the court direct causal relationship" and "close temporal connection" between the willful act and the resulting injury required by Section 533. As had the court in McKesson, the Conagra court further ruled that the California Supreme Court's "occurrence" analysis in Ledesma did not require coverage here, inasmuch as the holding in Ledesma was based upon the employer's commission of an independent negligent conduct (negligent hiring) that did not exist here. The court also rejected Conagra's contention that Section 533 could only apply if it was established at Fuller's management had the required knowledge and expectation of damage. Rather, the court ruled that "the underlying litigation established that Fuller – the corporate entity – had actual knowledge of the harms associated with lead paint when it promoted lead paint for interior residential use. We have already concluded that this actual knowledge finding necessarily means Fuller acted with knowledge that lead paint was "substantially certain" or "highly likely" to resolve in the hazard found to exist in the underlying litigation and, therefore, established the willful act to trigger Section 533 prohibition against insurance coverage.

FLORIDA           Daubert

The Florida Court of Appeal ruled in State Farm Mut. Auto Ins. Co. v. All X-Ray Diagnostic Services, No. 3D21-0063 (Fla DCA3 April 6, 2022) that a trial judge erred in awarding PIP benefits and, in particular, failed to properly apply Daubert when it excluded an affidavit from State Farm’s expert on the “reasonableness” of the medical charges and procedures at issue as presenting improper “opinion testimony.”


Industry News

W.R. Berkley announced this week that its net income in the first quarter of 2022 was up 157.3% from the year before along with a 17% increase in net premium to $2.41 billion. The Company's combined ratio also improved to 87.8% compared with 90.1% for the same period n 2021.

Opioid Claims

Johnson & Johnson has reportedly agreed to pay the State of West Virginia $99 million to settle allegations that it caused or contributed to the opioid epidemic in the Mountain State.

Litigation Funding News

The federal district court in Delaware has adopted a standing order requiring disclosure of third party litigation funding agreements in pending cases.

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